Fitch Ratings affirms the ratings on the following Princeton, Texas
--$1.12 million series 2007 general obligation (GO) refunding bonds at
--$7.75 million series 2007 combination tax and surplus revenue
certificates of obligation at 'A-';
The Rating Outlook is Negative.
The bonds and COs are direct obligations of the city payable from ad
valorem taxes limited to $1.50 per $100 of taxable assessed valuation
(TAV). The COs are further secured by a pledge of surplus net revenues
of the city's water and sewer system.
KEY RATING DRIVERS
DIMINISHED RESERVES: The Negative Outlook reflects the trend of
operating deficits in recent years, culminating in a negative general
fund balance at the close of fiscal 2011. Although unaudited, the city
reports a fiscal 2012 net operating surplus which reduces the negative
reserve position, and hopes to restore a positive fund balance in fiscal
INCREASED TAX RATES: The fiscal 2013 budget includes an increased ad
valorem tax rate (the first since fiscal 2009) to increase funding for
maintenance and operations; increased water service rates are also
included in the budget.
SLOWED TAX BASE GROWTH: The region's pre-recession residential
construction boom generated significant appreciation in Princeton's
largely residential tax base, although growth in the city's TAV has
slowed considerably in the past several years as the housing market
ABOVE AVERAGE DEBT: Princeton's moderately high overall debt reflects
the historically rapid growth needs of the city and local school
district, offset to some extent by above average income levels.
WHAT COULD TRIGGER A RATING ACTION
FUND BALANCE ADEQUACY: The city's inability to replenish unrestricted
general fund balances to levels that provide adequate operating
flexibility and financial cushion likely would result in negative rating
NORTH DALLAS SUBURBAN COMMUNITY
Princeton's population almost doubled over the past decade as the
residential construction boom moved north from Dallas into Collin
County. Although development slowed in 2008, the city's population
continued to grow at an average rate of more than 5%, with many
residents commuting to Dallas and nearby suburbs for employment.
The city's tax base fared relatively well throughout the recession, with
double digit growth rates giving way to small incremental gains in TAV
as development slowed over the past three years. Fiscal 2012 TAV totaled
$284 million, essentially unchanged from the prior year. Residential
property comprised 67% of fiscal 2012 market value, with commercial &
industrial property contributing 12%.
Officials believe that the city's affordable and available land, as well
as public investment in regional roadway projects, utility / municipal
infrastructure, and local school district facilities positions the city
for future growth. The city expects the nearly completed expansion of
Highway 380 (to four lanes) through the city's downtown to further
benefit local merchants. Fitch notes that the addition of retail
business in fiscal 2011, as well as increased fiscal 2012 permitting
activity likely will contribute to further gains in the district's tax
base and sales tax collections.
FINANCIAL DEFICITS & GROWTH CHALLENGES
The city's revenues have been absorbed by spending to meet pent up
growth-related needs over the past five years, as reflected in recurring
deficits through fiscal 2011. These losses brought the unrestricted
general fund balance to negative $254,000 (3% of general fund
expenditures and transfers out). The fiscal 2011 net deficit of $4.2
million (50% of spending and transfers out) resulted primarily from a
transfer ($3.8 million) of bond proceeds to the capital projects fund
for city infrastructure improvements.
Unaudited fiscal 2012 results indicate a $205,000 net operating surplus
due to higher revenues and cost controls; the improvement is expected to
shrink the unrestricted general fund balance deficit to negative
$39,000. Contributing to higher revenues were sales tax collections (up
21.6% year-over-year), higher permit revenues, a modest increase in ad
valorem tax receipts, and the benefit of a one-time $159,000 FEMA grant
for the fire department. The operating surplus was aided by a
centralized requisition approval process implemented by the new city
manager which helped to rein in spending.
The city projects a fiscal 2013 general fund operating surplus similar
to that estimated for fiscal 2012, which Fitch considers feasible based
on the budget's conservative assumptions, sales tax trends, the
increased ad valorem tax rate, and continued cost controls. Fitch notes
the city's ad valorem tax rate is above average for Texas
municipalities, which could limit further increases.
ABOVE AVERAGE DEBT
Overall debt is above average at 5.2% of market value despite state
support for overlapping school district debt and support for direct city
debt by the utility system. GO debt amortization remains below average
with 36.8% of principal scheduled for repayment within 10 years. The
city does not expect to issue debt in the near term.
Ongoing support from the utility fund for a portion of the city's GO
debt service has pressured utility fund balances over the past several
years. Fitch notes that a series of water and sewer rate increases has
improved the ability of the utility system to make these GO debt
transfers. Management reports that rate sufficiency is reviewed each
year, and that there are no planned rate increases beyond fiscal 2013,
except for pass-through costs.
The city's pension plan is provided through the Texas Municipal
Retirement System, a multiple employer public employee retirement
system; the city's plan had a fiscal 2011 funded position of 88%, based
on the TMRS investment rate assumption of 7%.
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, Zillow.com,
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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