S&P Bond Rating Increased to AA+

Posted by April Reiling on Apr 02, 2014
Tags: Business, Community, Economic Development, Government, Town News, Transparency

The Town of Trophy Club's Standard & Poor's (S&P) AA bond rating was upgraded to AA+, enhancing the Town's credit and financial profile.The improved bond rating speaks volumes about the Town's fiscal policies and practices, management of public monies and strong financial profile. The AA+ rating indicates that an obligor has VERY STRONG capacity to meet its financial commitments.

S&P provided the following rationale:

The rating reflects our opinion of the town's following credit factors, including its:

  • Very strong economy,
  • Very strong budgetary flexibility,
  • Adequate budgetary performance,
  • Very strong liquidity,
  • Strong management conditions,
  • Very weak debt and contingent liabilities, and
  • Strong Institutional Framework.

Very strong economy
We consider Trophy Club's economy very strong. With a population estimate of 10,500, Trophy Club is an affluent, primarily residential community located along State Highway 114, about 25 miles northeast of downtown Fort Worth and 27 miles northwest of downtown Dallas. Per capita effective buying income equals 186% of the national level. Market value equals more than $118,000 per capita.

While the town is undergoing some commercial development, high-end, single-family residential homes that range in price from $200,000 to more than $1 million primarily make up its property tax base. Trophy Club has experienced healthy growth due to the expansion of the Dallas-Fort Worth Metroplex and the availability of professional jobs in areas immediately surrounding the town. Its population has increased by 65% since the 2000 U.S. Census to its current estimate. Taxable assessed value has increased by 50% over the past five fiscal years to $1.18 billion in fiscal 2014.

Very strong budgetary flexibility
We consider budgetary flexibility very strong. Year-end general fund balances have exceeded Trophy Club's formal minimum reserve policy of 30% of expenditures over the past several fiscal years, and there are no plans to spend down general fund reserves below its policy. Audited fiscal year-end 2012 available general fund balance equaled $3.35 million, or 49% of expenditures. Unaudited fiscal 2013 results indicate a reduction of fund balance due to a nonrecurring defeasance of debt that resulted in year-end available general fund balance of $2.63 million, or 35% of expenditures. Town officials expect to end fiscal 2014 with a $200,000-$300,000 increase to year-end general fund balance.

Adequate budgetary flexibility
We consider budgetary flexibility adequate. After netting out nonrecurring expenses and transfers, Trophy Club reported a 10% general fund surplus and a 1% total governmental funds deficit at fiscal year-end 2012. Property taxes generated 51% of general fund revenue, and they have demonstrated healthy growth. Unaudited fiscal 2013 results indicate a 3.1% general fund surplus and a 2% total governmental funds deficit, both of which are net of nonrecurring expenditures.

Very strong liquidity
We consider Trophy Club's liquidity very strong, indicated by fiscal year-end 2012 unrestricted cash and cash equivalents equal to roughly 38% of total governmental fund expenditures and roughly 300% of annual debt service. We believe Trophy Club has strong access to external liquidity, indicated by its frequent GO debt issuances over the
past decade.

Strong management conditions
We believe Trophy Club operates under strong management conditions due, in large part, to a Financial Management Assessment (FMA) of "good" under our FMA methodology, indicating financial practices exist in most areas but that governance officials might not formalize or regularly monitor all of them. The town recently adopted a debt management policy and a formal minimum general fund balance policy of 30% of expenditures. Other key practices include management's:

  • Revenue and expenditure assumptions based on two years to three years of historical data,
  • Monthly budget and investment holding updates to the town council with an investment policy that follows the Texas Public Funds Investment, and
  • Five-year capital improvement plan that management updates annually.

Very weak debt and contingent liabilities
We consider Trophy Club's debt and contingent liabilities profile very weak due, in large part, to direct debt equal to more than 120% of fiscal 2013 total governmental fund revenue; in addition, we understand the town plans to issue additional debt. Annual debt service equals roughly 12% of total governmental fund expenditures. Town officials could approach the electorate within the next two years for a roughly $11.7 million GO bond authorization to build a new town hall and police station.

Trophy Club provides pension benefits through the Texas Municipal Retirement System, a multiemployer, defined-benefit pension plan. While the town has made its annual required contribution (ARC) to the plan over the past several years, including $526,301 in fiscal 2013, the plan was just 71% funded as of the 2012 actuarial valuation, up from 62% in 2009. It is our expectation that the funded ratio will likely increase as Trophy Club continues to fund the ARC. The town provides retiree health benefits, which it funds through pay-as-you-go financing; this equaled $4,094 in fiscal 2013. The town's combined pension and other postemployment benefits contribution equals 4.4% of total governmental fund expenditures.

Strong Institutional Framework
We consider the Institutional Framework score for Texas towns strong.

Outlook
The stable outlook reflects Standard & Poor's opinion that Trophy Club will likely maintain its strong financial profile and very strong economic indicators. We could lower the rating if either the strong financial profile or very strong economic indicators were to experience a material deterioration. We believe the town's elevated debt and additional capital needs will likely continue to constrain the rating. While we do not expect it to occur within the next two years, we could eventually raise the rating if the town were to reduce overall debt while maintaining its economic and financial profile.