Fitch Affirms Various Round Rock, TX Ratings; Outlook Stable
AUSTIN, Texas -- March 26, 2013
Fitch Ratings has taken the following rating actions on the city of Round
Rock, Texas's (the city) bonds:
--$6.6 million in outstanding hotel occupancy tax (HOT) revenue refunding
bonds, series 2007, affirmed at 'A+';
--$17.8 million in outstanding Round Rock Transportation System Development
Corporation senior lien sales tax revenue refunding bonds, series 2006,
affirmed at 'AA'.
The Rating Outlook is Stable.
The HOT revenue bonds are secured by hotel occupancy tax revenues, less the
local tourism component, levied within the city of Round Rock, as well as any
amounts and investments on deposit in the revenue fund. The city continues to
levy the maximum allowable 7%. Hotel owners remit revenues directly to the
city on a quarterly basis. Pursuant to city ordinance, the greater of a) 1% of
the cost of the room or b) $292,632 (adjusted annually by 3% on a compounded
basis) must be used by the city for advertising and promoting programs to
attract tourists and convention delegates and does not constitute part of the
The sales tax revenue bonds are secured and payable from a first lien on a
one-half-cent sales tax levied within the city, the proceeds of which are
dedicated for streets, roads, and other transportation-related purposes.
KEY RATING DRIVERS
AMPLE COVERAGE BY CONCENTRATED REVENUES: Pledged revenues continue to provide
strong coverage for the respective securities, although high taxpayer
concentration remains for each. The rating differential reflects the narrower
revenue base of the HOT bonds.
SALES TAX'S ONGOING RECOVERY: Sales tax revenue growth remains sluggish after
posting recessionary losses. Fitch notes the conservative projections in the
current year budget.
HOT REVENUES GROWING: Pledged hotel tax revenues continue to recover from
recession-induced declines. Year-to-date receipts show a surge in collections.
CONCENTRATED EMPLOYMENT WITHIN SOUND ECONOMY: The city's economy is strong
although somewhat concentrated with employment increasing to meet population
STRONG FINANCIAL PROFILE: Financial management remains strong with consistent
positive results and robust fund balances.
ABOVE-AVERAGE SALES TAX DEPENDENCE: The city's dependence on sales tax
revenues for operations makes it susceptible to economic fluctuations.
HIGH DEBT; RAPID PAY-OUT: The city's overall debt levels remain elevated.
Total carrying costs, including pension and OPEB costs, is above average but
this is due in part to rapid principal amortization. The city does not plan to
issue any additional sales tax or HOT bonds.
PLEDGED REVENUE DECLINES: Large and sustained declines in pledged revenues
could lead to negative rating pressure. Significantly adverse effects from the
proposed leverage buy-out of Dell, in the form of notable sales tax declines,
would likely lead to negative rating pressure given the sales tax
concentration from Dell.
CONTINUED STRUCTURAL BALANCE: Fitch views maintenance of the city's strong
financial position as critical given its exposure to economically sensitive
GROWTH PRESSURES: The city will be challenged to address increasing
infrastructure needs as the population continues to expand without undue
HOT Revenues Provide Solid Coverage
Debt service coverage on both types of special tax bonds remains healthy
although pledged revenues have weakened in recent years. HOT revenues have
almost recovered to pre-recession levels after experiencing a sizeable
cumulative 22% decline in fiscal years 2008-2010. Revenue collections grew by
a cumulative 19.8% in fiscal years 2010-2012 and receipts through the first
quarter of fiscal 2013 are up a large 31.8%. This surge is partly attributed
to the recent relocation of Emerson Process Management's world headquarters to
Round Rock, for which the city agreed to guarantee 10,000 hotel nights for the
company's global workforce. Coverage of maximum annual debt service (MADS) was
a solid 2.6x for fiscal 2012. Significant concentration among top taxpayers
remains, with the top hotel taxpayer accounting for 19% of total revenues and
the top five accounting for 47% of total revenues during fiscal 2012. Legal
provisions are adequate including a cash funded reserve and 1.4x MADS coverage
needed to issue parity debt.
Solid Coverage of Sales Tax Bonds
Pledged sales tax revenues remain sluggish after decreasing by over 10% in
fiscal 2009. Year-to-date fiscal 2013 collections are flat compared to the
previous period. MADS coverage of the senior lien bonds remains robust at 3.5x
based on audited fiscal 2012 revenues. The city has a significant amount of
state infrastructure bank (SIB) loans which have a subordinate lien on the
sales tax. Including MADS for both liens, all-in coverage equaled 2.4x. Legal
provisions are adequate requiring 1.4x MADS coverage to issue parity debt and
1.0x average annual debt service (AADS) coverage to issue subordinate debt.
The debt service reserve was fulfilled by a surety from MBIA.
Sound Economy Expanding Rapidly
Located north of Austin, the city's economy is strong with significant retail,
healthcare and educational sectors. The corporate headquarters of Dell
Computer Corporation (IDR rated 'BB+' by Fitch) is located within the city,
serving as the city's top employer with a high 19% of total city employment,
according to most recent audited data. Several hospitals and healthcare
facilities are located in the city including Texas A&M University System
Health Science Center's clinical campus. The campus opened at the end of
calendar 2009 providing clinical training for medical students and has since
been joined by additional higher educational facilities, a nursing college and
a community college campus, which both opened in 2010. The city also has a
sizeable retail sector centered around the Round Rock Premium Outlets, which
is fully occupied and may be expanded. Population growth has been substantial
since 1990 with an estimated 69% population increase since 2000. However,
employment has largely increased to meet population gains over time. The 4.9%
unemployment rate for December 2012 declined notably from a year prior and
remains sizably below state and national levels. Wealth levels are above
Strong General Fund Operations
Financial management remains strong, evidenced by the city's consistent
operating surpluses, robust fund balance levels and adherence to conservative
fiscal policies. Fiscal 2012 ended with a $6.1 million surplus which, after a
$9 million non-recurring transfer out, brought the unrestricted fund balance
to a high 45.8% of spending. The city's fiscal 2013 budget is balanced,
conservatively based on a moderate 5.2% decline in sales taxes.
Sales Tax Concentration on Dell Inc.
The city remains heavily dependent on the 1.5-cent portion of the sales tax
that is available for operations, as it accounts for roughly half of all
general fund revenues. A significant portion of those sales tax revenues stem
from a revenue sharing agreement between Dell and the city whereby sales tax
revenues generated by taxable computer sales within the state are shared
between the two based on a percentage of total tax revenues. As sales tax
revenues increase or decrease, the amount shared with Dell moves accordingly.
For the fiscal 2013 budget, Dell is expected to account for $15 million or 33%
of all sales tax revenues. Notably, any Dell sales taxes in excess of this
amount are transferred to a separate capital projects fund. Such transfers
have totaled 8.5%-12% of general fund spending since fiscal 2008. The
self-financed capital projects fund totaled $36 million, equal to a large 45%
of general fund spending in fiscal 2012. The city's goal is to reduce its
operational reliance on Dell's sales tax revenues to 20% by 2017. The city has
recognized the cyclicality inherent with computer-related sales tax revenues
and has set aside the first year's sales tax collections attributable to Dell
sales as a hedge against future year cyclical downturns.
High Debt Levels; Rapid Pay-Out
Overall debt levels remain elevated. The current five-year capital improvement
plan (CIP) totals $216 million. Transportation projects make up the majority
of needs (44%) followed by general improvements (30%). The city council may
consider seeking voter authorization for general obligation bonds this
November. Pension and OPEB obligations appear well-managed, resulting in
moderate carrying costs of 7% of total spending in fiscal 2012. Including GO
bonds, sales tax bonds, and HOT bonds, the total carrying cost is high at
26.2%, due partly to the rapid combined principal amortization of 74% in ten
Impact of Proposed Dell Buy-Out Uncertain
The potential impact of the proposed leveraged buy-out of Dell is uncertain.
Dell's taxable sales, which contribute significantly to the city's operations,
could be affected adversely if the proposed buy-out leads to curtailed
manufacturing and sales activity. In the event Dell's manufacturing levels
decline significantly, the employment impact to Round Rock's Dell campus may
be somewhat mitigated by the significantly reduced level of manufacturing
remaining at this campus. Fitch will monitor the outcome of any buy-out on the
city's property tax base as well. The LBO transaction is expected to close
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
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, and National Association of Realtors.
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
U.S. Local Government Tax-Supported Rating Criteria
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