Texas special purpose districts' financial performance did not deteriorate despite recession, report notes

The financial performance of special purpose districts rated by Moody's in Texas - usually municipal utility districts, water control and improvement districts, and public utility districts - did not deteriorate following September 11, 2001 and the succeeding national recession, primarily due to the residential nature of the districts.


Dallas, Jan. 30, 2004 -- The financial performance of special purpose districts rated by Moody's in Texas - usually municipal utility districts, water control and improvement districts, and public utility districts - did not deteriorate following September 11, 2001 and the succeeding national recession, primarily due to the residential nature of the districts.

Generally, these districts are bolstered by several credit positives, including unlimited taxing capability and favorable levels of reserves.

"Although home foreclosures and business closings have occurred, districts have not experienced a significant decrease in revenues or drawn on cash reserves to supplement declining property tax revenues," says Moody's analyst Jody Savant, who authored the report.

Moody's currently maintains an average investment grade Baa2 rating on nearly $1.1 billion in bonds from Texas special purpose districts. These districts are created by the private real estate development community to facilitate development within a city's extraterritorial jurisdiction or, in certain limited instances, within city limits.

The primary sources of revenue for these districts include ad valorem taxes and water and sewer fees. In general, most districts levy a tax rate higher than the majority of Texas cities. At the district's inception, a higher tax rate is necessary due to the limited amount of development generating property tax revenues.

"As the assessed valuation grows and when full build out approaches, the tax rate has typically declined to a level more comparable with a city," says Savant.

The ad valorem tax rate levied by the districts is comprised of an operations and maintenance tax and an interest and sinking fund tax (i.e. debt service). The tax for operations and maintenance purposes is voted on as to whether this tax will be limited or unlimited, with the majority of districts imposing a tax limit. The interest and sinking fund tax, which is pledged for repayment of general obligation bonds issued, is without legal limitation as to rate or amount.

"Overall, we view this unlimited taxing capability as a credit positive," notes Savant.

On an overall basis, Moody's believes that districts maintain ample levels of reserves in both the general and debt service funds. Of the districts rated by Moody's, approximately 80% maintain general fund balances in excess of 50% of annual general fund revenues. Although the actual dollar amounts in some instances are small, the fund balance provides financial flexibility to cover a considerable portion of yearly expenditures, excluding debt service.

"We believe, as with any general obligation issuer, that favorable levels of general fund reserves is a credit positive when determining the bond rating," says Savant.


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