Excellent bond ratings translate to lower interest payments

S&P Global rated all of the City of Round Rock’s upcoming property tax-backed debt issuances with an AAA long-term rating, the highest possible, citing the City’s “very strong” management and “strong” budget performance in conjunction with Central Texas’ “very strong” economy.

S&P Global upgraded the rating for the Round Rock Transportation and Economic Development Corporation’s (RRTEDC) sales tax-backed debt issuance to AA- from A+, which will result in significant interest savings. The RRTEDC is a seven-member board that promotes economic development in the City through transportation projects and other projects as allowed by state law. One-half cent of City sales tax goes directly to the Type B Corporation to fund economic development projects in the City.

On April 22, the Round Rock City Council approved a series of debt issuances for transportation, economic development and fleet purchases.

“These rating upgrades really do help our taxpayers,” Mayor Craig Morgan said. “It’s like your credit card interest rate and your credit score. A better credit rating gets you a lower interest rate.”

For example, the rating upgrade for the sales tax-backed debt will save the City more than $200,000 in interest payments, said Garry Kimball of Specialized Public Finance, the City’s financial advisor.

According to S&P Global’s analysis, the ratings for the property tax-backed issuances reflect its opinion of Round Rock’s:

  • Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA)
  • Very strong management, with strong financial policies and practices
  • Strong budgetary performance, with operating results that S&P Global expects could weaken in the near term relative to fiscal 2020, which closed with an operating surplus in the general fund and a slight operating surplus at the total governmental fund level in fiscal 2020
  • Very strong budgetary flexibility
  • Very strong liquidity

In its credit overview, S&P Global cited Round Rock’s access to Austin, multiple colleges and high-tech industries, and a large, educated workforce that remains attractive to businesses and individuals alike, resulting in ongoing economic growth.

“The local economy has remained resilient throughout the pandemic,” the report stated. “Sales tax revenue grew in 2020 despite losses from various establishments during mandated business closures.”

Highlights of Round Rock’s “very strong economy” include a projected per capita effective buying income of 121 percent of the national level; 6.3 percent growth in the city’s market over the past year to $15.6 billion in 2021; and a 2.8 percent weight-averaged unemployment rate of the metro counties in 2019.

The report continues: “Despite the COVID-19 pandemic, the local economy has not experienced any notable contraction. In fact, growth has continued and includes Kalahari Resorts, an African-themed resort with a convention center, hotel, spa, multiple dining and entertainment options and a waterpark. The resort, located on 352-acres, opened on time late last year, despite the pandemic and bookings at the hotel are continually climbing, especially as the COVID-19 restrictions have been lifted. … There are also five hotels being constructed in the city, among them an Embassy Suites Hotel and Conference Center. Other upcoming developments include two new manufacturing facilities later this year and an expansion of Amazon in Round Rock with a new delivery station. In addition, a camouflage manufacturer for the defense industry will relocate to the city from Maryland and will supply the new Army Futures Command in Austin.”

The S&P analysis also cited the City’s “very strong management,” with “strong financial policies and practices.” One of the strengths of S&P’s assessment of the City’s financial policies and practices is its historical trend analysis and regular budget-to-actual updates provided to the City Council.

“Management uses conservative revenue and expenditure assumptions based not only on trend analysis, but also on economic modeling from internal and external input from external expert consultants,” the report states. “The city monitors and reports its budgetary performance, including year-to-date actual results against budgeted, and investment portfolio on a quarterly basis to the city council.”

Regarding the City’s “strong budgetary performance,” the report noted “the city had surplus operating results in the general fund of 8.9% of expenditures, and slight surplus results across all governmental funds 0.9% in fiscal 2020. … Despite limited disruption to the local economy resulting from COVID-19 to date, officials took a very conservative approach to the city’s 2021 budget assumptions. The adopted budget was balanced, with a $5 million reduction in general fund expenditures, and the city expects to end the year within budget, although it will likely transfer a portion of excess reserves for one-time capital projects or to reduce debt.”

The report continues: “We expect Round Rock’s strong tax base growth and increasing sales tax collections will allow the city to generate sufficient revenues to continue funding its growing budget. Given strong revenue growth and conservative budgeting practices, we expect Round Rock will continue posting better-than-budgeted results, supporting our view that the city’s budgetary performance is strong.”

For the sales tax-backed issuances, S&P Global said the rating upgrade “reflects consistent growth in sales taxes that we believe will continue to provide strong coverage.”

Key considerations include:

  • The local economy’s strength and continued expansion, accompanied by positive annual growth in tax collections
  • A strong assessment of the sales-tax revenue stream that it generally believes is subject to moderate-to-low levels of historical volatility
  • General creditworthiness that it believes does not constrain the credit strengths of the pledged tax revenue structure
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