Fitch Ratings downgrades the following Robstown, Texas (the city)
limited tax bonds:
--$390,000 limited tax general obligation (LTGO) refunding bonds, series
2003 to 'BB+' from 'BBB';
--$905,000 combination tax and limited pledge revenue certificates of
obligation (COs), series 2003 to 'BB+' from 'BBB'.
The Rating Outlook is Stable.
The GO and COs are secured by an annual property tax levy limited to
$2.50 per $100 taxable assessed valuation (TAV). The COs are
additionally secured by a de minimis pledge of net revenues of the
city's utility system.
KEY RATING DRIVERS
RECENT SIGNIFICANT FINANCIAL DECLINE: The downgrade reflects recent
significant and unexpected fiscal deterioration, with reserves
essentially depleted in fiscal 2014 and expected fiscal 2015 deficit
operations leading to a negative general fund ending balance.
ADDITIONAL NEAR TERM PRESSURE: Current projections call for continued
financial strain in the near term, including the fiscal 2016 budget
indicating a smaller, but still negative general fund ending balance.
Financial control and reporting weaknesses increase the potential for
worse than projected operating results.
FINANCIAL CONTROL CONCERNS: City finances have been challenged by
weakness in the city's internal controls, which resulted in a partial
missed interest payment in 2012. Management has taken some steps to
improve accounting practices, but internal controls deficiencies
continue to be cited in the city's audit and have contributed to recent
SALES TAX VOLATILITY: The general fund relies on economically volatile
sales taxes for operations, and prior years' receipts featured notable
fluctuations. Fiscal 2014 finances were weakened by sales tax revenues
that declined more sharply than expected, reflecting a stronger than
anticipated negative impact from oil price declines.
LIMITED ECONOMIC BASE: The local economy is limited, with a
concentration in the cyclical oil and gas sector. Income and wealth
levels are below average.
HIGH DEBT BURDEN: City debt levels are high, particularly relative to
the tax base. Debt levels should remain high, as amortization is
average, though no additional debt issuance is currently planned.
FURTHER FINANCIAL DETERIORATION; INADEQUATE RESPONSE TO DEFICIT:
Further, significant financial deterioration, including a larger than
expected fiscal 2015 deficit and significantly weakened liquidity will
lead to further downward pressure on the rating. Failure to address
budget imbalance and return to a positive general fund ending balance in
a timely manner would also result in downward rating pressure.
CONTINUED INTERNAL CONTROL PROBLEMS: An inability to implement fiscal
controls, leading to improvement in financial operations and reporting,
could also have a negative impact on the rating.
INCREASED DEBT BURDEN: A significant increase to the city's already high
debt burden could also lead to downward pressure on the rating.
Robstown is located in Nueces County, about 15 miles northwest of
downtown Corpus Christi. The 2014 population of 11,657 represents a
decline of about 8% since 2000, although recent years' population
figures have remained essentially flat.
RECENT SIGNIFICANT DECLINE IN FINANCES
Following a trend of financial stabilization (including operating
surpluses in fiscal years 2012 and 2013), fiscal 2014 saw a sharp
decline, with a general fund deficit of $713,826 (7.5% of spending)
resulting in a reduction in the unrestricted balance to $6,221 (about
0.1% of spending) from $720,047 (8.3%) in fiscal 2013. The fiscal 2014
amended budget had suggested balanced operations, with general fund
revenue growth of about 9% projected.
Estimates at the end of the fiscal year still indicated positive
operations and a modest surplus, evidence of the city's challenged
financial controls and reporting. Revenue projections were not
adequately updated to reflect much weaker than expected actual revenue
performance, driven by larger than budgeted sales tax declines and
smaller than budgeted property tax increases. Fiscal 2014 general fund
revenues declined by nearly 2% and despite lower than budgeted spending,
the year ended with a deficit.
The city is moderately reliant on economically volatile sales taxes,
which made up 31% of general fund revenues in fiscal 2014. This revenue
stream performed well in recent years due to economic activity from
energy exploration in the area, but dipped sharply when oil prices
collapsed in 2014. Fiscal 2014 sales tax revenues were budgeted to
decrease by about 6%, but actual performance was worse (down 15%),
reflecting a larger than expected impact from the oil price decline.
Property taxes make up about 20% of general fund revenues. While overall
general fund property tax revenues grew in fiscal 2014 (up 1.1%), actual
collections were more than 18% below the amended budget figure.
Management attributes the shortfall to a combination of budget
misstatements and weaker actual collections.
Fitch views a healthy fund balance as a necessary mitigant to the city's
small overall budget size and exposure to economically sensitive sales
taxes, a portion of which are derived from cyclical oil and gas
activities. The recent depletion of reserves and uncertainty regarding
replenishment significantly weaken the city's credit profile.
CONTINUED FINANCIAL WEAKNESS
Management currently projects a fiscal 2015 general fund deficit of
about $1.3 million, which would result in a negative general fund ending
balance of about $1.3 million or -12.7% of spending. Fiscal 2015
estimates include flat revenues (0.6% decline versus fiscal 2014 actual
revenues) and about 5% expenditure growth, driven in part by debt
service needs due to the impact of fiscal 2014 debt issuance payments.
Fiscal 2015 general fund spending included about $700,000 for debt
service, which is expected to be covered by an increase in the debt
service property tax rate in fiscal 2016.
The current fiscal 2016 budget is balanced, aided by an annual transfer
from the city's utility funds of about $960,000. A recently approved
additional utility transfer of about $700,000 is expected to reduce the
general fund ending deficit balance to about $331,000 or -3.7% of
Management has indicated that additional revenue and/or expenditure
measures are being considered to further shore up operations. The fiscal
2016 budget assumes a 10.4% decline in expenditures, driven largely by
reduced public works spending and cuts in administrative costs.
DEFICIENCIES IN FINANCIAL REPORTING PRACTICES
Recent annual audits featured unqualified opinions. However, the city's
auditor has cited several deficiencies regarding internal controls. The
city pointed to these deficiencies as the cause of a 12-day delay in a
small portion of the Sept. 1, 2012 interest payment (less than 5% of the
total $165,384 payment).
Despite new procedures to address the internal control concerns, these
deficiencies were again cited in the city's fiscal 2014 audit and
certainly have contributed to the ongoing financial stress. Management
has indicated that additional efforts are being made to improve
financial controls and reporting.
INCREASED RELIANCE ON UTILITY SYSTEM REVENUES
The city's combined electric, water, and gas utility system supports
general city operations through annual transfers. The transfer totaled
$785,000 in fiscal 2014 or 8% of general fund revenues. The transfer
totaled $725,000 for fiscal 2015, with another $120,000 added for budget
stabilization. The standard transfer is budgeted at about $960,000 for
fiscal 2016, plus the additional for budget stabilization that was
The standard monthly transfers were initiated to support the fiscal
health of the city and are annually appropriated in the system's budget.
The transfers are made per a memorandum of understanding (MOU) between
the city and the system that expired in 2013. The city reports that it
is working on a renewal of the MOU.
The system demonstrates adequate capacity for continued general fund
assistance due to its limited debt obligations and positive operating
margins that produced over $2 million in net revenues after debt service
and city transfers, in fiscal 2014. Continued utility fund support of
the general fund, beyond an amount commensurate with administrative
costs and/or a payment in lieu of taxes or franchise fee, is an ongoing
LIQUIDITY SUPPORTED BY UTILITY FUND
The city does not currently produce annual cash flow estimates. General
fund liquidity levels have been low in recent years, and management
initially projected a potential need to borrow about $250,000 for cash
flow needs in fiscal 2016. The recently approved additional transfer
from the utility system eliminated this need. Should cash flow needs
arise later in the year, management has indicated that borrowing would
be from utility system available revenues.
HIGH DEBT BURDEN; INCREASING BUT MANAGEABLE OVERALL CARRYING COSTS
The city's overall debt levels are high on a per capita basis ($5,785
for fiscal 2014) and extremely high as a percentage of market value
(15.5%). Debt levels should remain high as amortization is average
(about 50% in 10 years). No additional near-term debt issuance is
planned. The city's annual debt service as percentage of governmental
spending is midrange, at about 8% in fiscal 2014, but will increase
significantly in fiscal 2015 (estimated at 15%) reflecting the impact of
2014 sales tax, CO and GO borrowings.
The city's pension plan is provided through the Texas Municipal
Retirement System and was 88% funded as of Dec. 31, 2013. Other
post-employment benefits are limited to supplemental death benefits
totaling one year of salary. Total carrying costs for debt service and
pensions were manageable at about 11% of governmental fund spending in
fiscal 2014. Increased debt service levels in fiscal 2015 will increase
total carrying costs, but the level is expected to remain manageable,
estimated at 18% for fiscal 2015.
Robstown's local economy is limited, with a concentration in the energy
sector. The city benefits from its location at the intersection of two
major gulf coast surface, port, and rail corridors. While the economy
has benefited from the drilling activity in the Eagle Ford shale, a
large oil and gas shale formation that reaches just north of the city,
recent declines in oil prices have negatively affected the industry in
the area and, as a result, city tax revenues.
City employment figures are unavailable. The Nueces County July 2015
4.9% unemployment rate represents a decline from 5.4% a year prior, and
is close to the comparable state rate (4.6%) and below the comparable
national (5.6%) average. City income and wealth indicators are well
below average, and the city's poverty rate is about double the U.S.
The city's tax base has seen recent continued expansion, with annual TAV
growth averaging about 9% for fiscal years 2014 through 2016. Some of
this growth was likely driven by inherently cyclical oil and gas
activity, which could moderate with continued sector weakness. The city
is seeing some additional economic development activity, including the
construction of an 83-store outlet mall expected to be completed by 2016.
Additional information is available on www.fitchratings.com
Fitch recently published an exposure draft of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015). The draft includes a number of proposed
revisions to existing criteria. If applied in the proposed form, Fitch
estimates the revised criteria would result in changes to fewer than 10%
of existing tax-supported ratings. Fitch expects that final criteria
will be approved and published by Jan. 20, 2016. Once approved, the
criteria will be applied immediately to any new issue and surveillance
rating review. Fitch anticipates the criteria to be applied to all
ratings that fall under the criteria within a 12-month period from the
final approval date.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, National
Association of Realtors.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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