Fitch Ratings affirms the following Mineral Wells, Texas' (the city) outstanding general obligation (GO) and limited tax notes:
--$875,000 GO refunding bonds series 2011 at 'AA-';
--$155,000 limited tax notes series 2011 at 'AA-';
The Rating Outlook is Stable.
SECURITY
The GOs and limited tax notes are payable from a direct annual ad valorem tax levied, limited to $2.50 per $100 assessed valuation, against all taxable property within the city.
KEY RATING DRIVERS
SOLID GENERAL FUND RESERVES: Prudent fiscal management is evidenced by proactive maintenance of high unrestricted general fund reserve levels, which help to mitigate tax base concentration concerns.
WATER SUPPLY SITUATION CURRENTLY STABILIZED: City and area utility officials have acquired sufficient near-term water supplies for city residents in the wake of the expected depletion of the city's primary water source as a result of an ongoing severe drought.
LIMITED, CONCENTRATED TAX BASE: The city's top ten taxpayers comprise over 20% of the total tax base, dominated by oil/gas interests. The single largest taxpayer, a field services company, comprises 6%. Any impact from recent energy sector price swings may be mitigated due to the predominance of natural gas within the region.
RELIANCE ON SALES TAXES: Economically sensitive sales taxes are the dominant revenue stream, and they are showing generally positive although somewhat volatile annual improvement following recessionary declines.
PROXIMITY TO DALLAS/FT.WORTH (DFW) METRO: The city benefits from its proximity to the DFW metro area.
MODERATE DEBT BURDEN: Overall debt is high relative to market value though the direct debt payout rate is rapid and total carrying costs are moderate. Pension liabilities are well-funded.
RATING SENSITIVITIES
MAINTENANCE OF SOUND FINANCIAL CUSHION: The town's continued ability to maintain a strong financial cushion is fundamental to the rating and acts as an important mitigant to inherent revenue volatility and the limited economic base.
CREDIT PROFILE
Mineral Wells is located about 45 miles west of Fort Worth (GOs rated 'AA+'; Stable Outlook by Fitch) within the Barnett Shale natural gas basin. The city's population of nearly 17,000 has remained flat in the past decade.
SOLID FINANCIAL RESERVES MAINTAINED
Cost controls and curtailed pay-go capital spending during the recent recession allowed the city to maintain structural balance and further add to its ample reserves. Fiscal 2013 general fund expenditures did grow by a large 13% as the city restored certain previously cut services, awarded a 3% pay hike, and increased pay-go for one-time capital outlays. The fiscal 2013 audit still posted essentially balanced results despite a 2.5% decline in sales tax receipts. The unrestricted general fund balance totaled $4.8 million in fiscal 2013, equal to a high 48% of spending, well in excess of its 16% - 25% fund balance policy.
Fiscal 2014 results are projected to further add to fund balance reserves, aided by greater than budgeted revenues and favorable expenditure variances. The adopted fiscal 2015 budget is balanced. Per the city's practice, the budgeted sales taxes equal actual collections during the previous year. Receipts are up 10% for the first quarter of fiscal 2015, and lead management to expect better than balanced results for the year. A modest 1/8% of the general fund's 1.5% sales tax was reallocated to the city's 4(B)economic development corporation (EDC or the corporation), but the revenue loss was more than offset by a shift in the property tax rate to O&M from debt service.
Sales taxes comprise the largest revenue source, averaging almost 40% of general fund revenues, exposing the city's operations to economic cyclicality. This revenue source has fluctuated in recent years as evidenced by a 7.6% decline in fiscal 2011. Given the city's concentrated tax base and relatively high reliance on economically sensitive revenues, the maintenance of solid fund balance reserve levels is an important credit consideration.
CITY RESPONDS TO NEAR DEPLETION OF WATER SUPPLY
The city and the local water district have taken action to ensure sufficient near term water supplies remain available for municipal use in the wake of the near depletion of its primary water source, Lake Palo Pinto. The city remains under Stage 3 water restrictions due to the prolonged drought which has caused water levels in Lake Palo Pinto to decline significantly. The lake is projected to become an unusable water supply by July 2015 if not replenished by significant rainfall.
In response, the Palo Pinto County Municipal Water District No. 1 (the district) secured water rights for raw water from the Brazos River for three to five years. This water will require reverse osmosis (RO) treatment by the district at a cost of up to $6 million for a temporary RO unit. To defray the district's higher treatment costs and water rights expenses, the city increased residential water rates by a large 50%-60% effective Jan. 1, 2015. In dollar terms, the monthly water bill for 5,000 gallons will increase from the current modest level of $18 to a still manageable $27. These rates will go back down once RO treatment is no longer necessary.
Long-term water supply adequacy will be developed by the district for the benefit of the city. The state of Texas has issued a draft permit for the construction of the Turkey Peak Reservoir, which ultimately would approximately double the district's reservoir capacity.
HIGH DEBT BUT MODERATE CARRYING COSTS
Overall debt ratios, inclusive of special assessment debt, are moderate at $2,325 per capita but elevated relative to market value at 5.5%. The city's fiscal 2015 total tax rate of $0.51 per $100 TAV is well below the $2.50 levy limit. Direct debt amortizes rapidly, with all GO debt maturing in fiscal 2016.
The city is in the preliminary planning stages for a possible GO bond election in 2016 for up to $10 million. The city's modest overall tax rate and the imminent final maturity of current GO debt provide ample flexibility for its debt plans. The city's EDC is also planning to issue up to $4 million in sales tax revenue bonds as part of a $55 million renovation of the historic Baker Hotel. Voters approved the reallocation of 1/8% from the general funds 1% sales tax to the corporation for this project.
Mineral Wells' pension plan is administered through the Texas Municipal Retirement System (TMRS) and is adequately funded at 88% as of Dec. 31, 2013, based on the TMRS investment rate assumption of 7%. Other post-employment benefits (OPEB) are also provided by the city through TMRS and pay-go is nominal for these benefits, which may be terminated by city council. The unfunded actuarial accrued liability (UAAL) for pension was $3.2 million as of Dec. 31, 2013 and represented a nominal percentage of the city's market value. Total carrying costs for debt service, pension, and OPEB were moderate at 14% of general government expenditures in fiscal 2013.
LIMITED ECONOMIC BASE
Mineral Wells is the largest city and principal commercial center in Palo Pinto County and located in the Barnett Shale, the second largest producing onshore natural gas field in the U.S. The economic base is limited but relatively stable. Throughout the last decade, growth in the oil and gas services and mineral extraction added concentration to the city's tax base that had historically included a more diverse manufacturing component. The top 10 taxpayers comprise about 21% of the total tax base with a single taxpayer, BJ Services Company (a subsidiary of Baker Hughes Inc.), accounting for 6%. The economic impact of falling oil prices is still unfolding within the city, but it may be limited due to the dominance of natural gas in the region; natural gas exploration in this area declined sharply after gas prices plunged in 2008-09.
In Sept. 2013, CCA closed its detention facility and laid off 250 people. The facility remains vacant although CCA is current on its property taxes. As the city's largest water customer, the loss of CCA led the city to increase its water rate by 10% for 2014.
The area appears to have fared better than the state and U.S. with lower unemployment levels during the recession. As of Nov. 2014, the county unemployment rate of 4.2% remained slightly below the state's 4.6% and well below the 5.5% U.S. rate. Wealth levels are low at 69% of the state median household income (MHI) and 67% of the U.S. MHI.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria'(Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978853
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