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MOODY'S ASSIGNS A1 RATING TO THE CITY OF GATESVILLE'S (TX) $8 MILLION TAX AND UTILITY SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, TAXABLE SERIES 2011

12 Sep 2011

A1 RATING ASSIGNMENT AND AFFIRMATION AFFECTS APPROXIMATELY $13 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT ISSUE

Municipality
TX

Moody's Rating

ISSUE

RATING

Tax and Utility System Surplus Revenue Certificates of Obligation, Taxable Series 2011

A1

  Sale Amount

$8,005,000

  Expected Sale Date

09/13/11

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Sep 12, 2011 -- Moody's Investors Service has assigned an A1 rating to the City of Gatesville's (TX) $8 million Tax and Utility System Surplus Revenue Certificates of Obligation, Taxable Series 2011. In addition we have affirmed the A1 rating on the city's outstanding parity debt affecting approximately $13 million. Proceeds from the sale of the bonds will be used to make capital improvements for the city's utility system.

SUMMARY RATINGS RATIONALE

The certificates are secured by a continuing and direct annual ad valorem tax levied against all taxable property in the city within the limits prescribed by law. The certificates are additionally secured by a pledge of the surplus revenues of the city's waterworks and sewer system, subordinate to maintenance and operation expenses of the system as well as the system's debt service. The rating reflects the city's modestly sized tax base that has demonstrated a recent history of contraction, a trend of healthy financial operations marked by a somewhat narrow cash position, and an affordable debt profile that includes a significant amount of self supporting debt.

STRENGTHS

Trend of stable financial operations

WEAKNESSES

Recent taxable value contraction on a modestly sized tax base

Somewhat narrow cash position

DETAILED CREDIT DISCUSSION

RECENT TAXABLE VALUE DECLINE PRESSURES AN ALREADY MODEST TAX BASE

The City of Gatesville is located approximately 87 miles north of Austin (Aaa/stable outlook), 130 miles of Dallas/Fort Worth and 35 miles west of Waco (Aa2). Gatesville is the county seat and principal commercial center of Coryell County (no general obligation bond rating), with an economy based on a combination of retail, agriculture and manufacturing. The city has institutional presence with the largest employer in the area being the Texas Department of Criminal Justice employing approximately 2,738 individuals. Residents within the area work within the justice system or in the nearby military installation of Fort Hood.

The city's tax base remains modest with taxable values averaging 0.4% in growth annually over the past five years, despite a negative trend in recent times. Following the revaluation of property within the city that yielded double digit growth between fiscal years 2004 and 2007, taxable values declined sharply by 8.4% in fiscal year 2008 before increasing by 19.8% in 2009. Officials attribute the decline to exemptions given to businesses, while increases are attributed to the appraisal district revaluating property within the city. Since then, taxable values have shown a negative trend in line with similar trends in the national economy with a decline of 3.4% in fiscal year 2010, and 3.1% in 2011, resulting in a total value of $276.5 million. The decline in 2011 was despite a new construction value of $1.9 million. Minus the new construction, taxable values would have declined by 3.7%. Certified values for fiscal year 2012 indicate a subsequent decrease of 0.6% to $275 million. Despite the decline, officials believe the city remains a favorable location that will continue to attract retail and other business opportunities. As such, they expect that taxable values will increase between 2% - 3% annually in the near to intermediate term. The top ten taxpayers account for 15% of fiscal year 2012 valuation. Officials report that majority (9 of the 10) are currently expanding and no downsizings are expected in the intermediate to long term. Moody's believes the city will continue to benefit from the stabilizing presence of the justice system in the area, and provide retail opportunities for residents within the area and surrounding communities.

STABLE HISTORY OF FINANCIAL MANAGEMENT; NARROW CASH POSITION WITH SIZABLE RECEIVABLE DUE FROM THE UTILITY FUND

Moody's believes the city's financial management has been stable exhibiting operating surpluses that have surpassed the modest deficits recorded over the past two years, although the cash position remains narrow. In fiscal years 2007 and 2008, favorable operations resulted in operating surpluses of $460,000 and $214,000 increasing the total fund balance to $1.4 million (a favorable 32.8% of fiscal year 2008 General Fund revenues). In fiscal years 2009, and 2010, the city completed capital projects that were funded with grant revenues. The revenues were repaid on a reimbursement bases with monies being realized after the close of the fiscal year. As such, during the two year timeframe, the city exhibited operating deficits of $85,000 and $57,000 resulting in a total General Fund balance of $1.3 million (33.7% of fiscal year 2010 General Fund revenues). The fund balance includes a narrow cash position ($460,000 in 2010) with a sizable receivable from the utility fund. Prior to fiscal year 2010, the cash position averaged $694,000 between fiscal years 2007 and 2009 as equipment related expenses were fronted by the General Fund. However in fiscal year 2010, the cash position was decreased to $460,000 from $720,000 in the prior year as the city made more improvements to its utility's distribution system in anticipation of the bond project. At the end of the year, the General Fund recorded a sizable receivable of $688,000 from the utility fund which will be realized between the next 18 to 24 months. For fiscal year 2011, officials report that the budget is on track with original projections and expect flat growth in the General Fund by the end of the year, although the cash position is expected to decrease by no more than $50,000 as the utility projects are completed. The fiscal year 2012 budget includes a modest reduction of $330,000 in expenditures and an increase of $130,000 in revenues largely due to a budgeted increase in sales tax collections. The city participates in the state wide Texas Municipal Retirement System (TMRS). Over the past three years, the city has fully contributed its annual pension cost. The city does not offer any Other Post Employment Benefits (OPEB). Although the city's overall financial history remains stable, we believe an erosion of the cash without realizing the receivable could pressure the city's overall financial health. We will continue to monitor the city's financial position relative to similarly rated credits.

Gatesville received majority of its fiscal year 2010 revenues from sales taxes (40.2%) and property taxes (28.1%). In fiscal year 2011, the city levied a total of $3.40 per $1,000 of assessed values, with $2.49 allocated to the General Fund, and $0.91 allocated to debt service. Officials report the current levy is sufficient to fund operations and no increases are expected in the near term. Sales tax collections have historically been strong with fiscal year 2009 being the only year when collections declined over the prior year in the last six years. Over the past five years, collections have averaged 3.6% annually. In fiscal year 2011, the city budgeted for $1.6 million in total collections. Year to date, officials indicate collections are on track with the budget and expect surplus collections between $60,000 - $70,000 at the end of the fiscal year. For fiscal year 2012, officials expect to budget for a 6.7% ($105,000) increase.

MANAGEABLE DEBT PROFILE WITH SIGNIFICANT AMOUNT OF DEBT SUPPORTED BY THE UTILITY SYSTEM

All of the system's debt is fixed rate and the city is not party to any derivative agreements. Following this issuance, the city will have a total of $13 million outstanding in parity debt, and $12.8 million is supported by the Utility Fund. As such the city's debt service tax rate remains unusually low at $0.91 per $1,000 of assessed values in fiscal year 2011. The Utility System continues to demonstrate healthy operations with a solid cash position. In fiscal year 2010, the system had a total of $3.7 million in cash and investments. Payout is slow with 39.5% of principal retired within 10 years. We will continue to monitor the Utility System's operations to ensure healthy operations, and the continued servicing of self supporting debt.

WHAT COULD MAKE THE RATING GO UP

Continued economic development significantly increasing taxable values, strengthened socioeconomic profile

Sustained favorable operations

WHAT COULD MAKE THE RATING GO DOWN

Subsequent and significant taxable value contraction

Erosion of reserves; depleted cash position

KEY STATISTICS:

2011 Full Valuation: $276.5 million

2012 Full Valuation: $275 million

2012 Full Value Per Capita: $17,456

1999 Per Capita Income (as % of TX and US): $11,152 (56.8% and 51.7%)

1999 Median Family Income (as % of TX and US): $36,543 (79.7% and 73%)

Direct Debt Burden (net of self supporting debt): 0.1%

Direct Debt Burden (excluding self supporting debt): 4.7%

Overall Debt Burden (net of self supporting debt): 0.5%

Payout of principal: 39.5%

2010 General Fund balance: $1.3 million (33.7% of General Fund revenues)

General Obligation Limited Tax (GOLT) Debt Outstanding: $13 Million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Adebola Kushimo
Analyst
Public Finance Group
Moody's Investors Service

Michelle Smithen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO THE CITY OF GATESVILLE'S (TX) $8 MILLION TAX AND UTILITY SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, TAXABLE SERIES 2011
No Related Data.
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