HomeMy WebLinkAbout10238-06-2019 - 2019-06-11 - Informal Report�•''"��; • ••• � �-� �� , �. � � �,,;
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This informal report is intended to provide the Mayor and City Council with a
received on bonds issued under the City's 2019 Debt Plan. A summary of th
agencies and corresponding credit drivers are shown in more detail below. Th
included for review to provide additional detail.
Backqround
summary of the ratings
e rating actions by the
e rating reports are also
As part of our 2019 debt plan the financing team has been meeting with rating analysts from Moody's,
Fitch, Standard & Poor's and Kroll over the past several weeks. The City sought ratings for the following
upcoming bond sales: Series 2019 General Purpose Bonds, Series 2019 Tax Notes, and Series 2019
Water & Sewer Revenue Bonds. The presentation this year focused on historical and projected financial
performance, the economy, operating highlights, and pension reform.
Overview of Ratinq Oufcomes
Moodv's
` GO Ratinq — Affirrned rating of Aa3; revised outlook to `stable' from `negative'
"The city of Fort Worth, TX's (Aa3 stable) credit profile continues to be constrained by a high unfunded
pension liability and weak annual pension contributions, despite reform. Given contributions that are
insufficient to amortize the slightly reduced unfunded pension liability, the liability will grow absent strong
asset performance or additional pension reform and higher contributions beyond those already approved.
However, the credit profile is supported by the city's substantial financial resources to afford increasing
pension costs due to strong economic growth, as well as the legal ability to reform benefits further, and the
demonstrated political will to both exercise this legal right and to increase contributions. Further, the city's
conservative budgeting and capital planning practices amid growth have led to increasing and consistently
healthy operating reserves, and a relatively manageable debt burden on par with peers."
"The stable outlook reflects our expectation that the city's financial profile will remain healthy over the near
term, supported by a strong management team able to leverage the revenue growth for the city to absorb
increased pension costs with continued capital investment and higher service demands commensurate
with a growing population. "
Factors that could lead to an upgrade:
• Considerable corporate investment and job creation with the city limits
• Material reduction to unfunded pension liabilities and more rapid amortization
• Moderation of fixed cost burden
Factors that could lead to a downgrade
• Further material increases in the pension burden
Significant increase in debt profile
Poor financial perFormance leading to a significant decline in reserves
Trend of declining assessed values
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
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Water Ratinq — Affirmed rating of Aa1 with a`stable' outlook (no change)
Key Credit Strengths:
Large service area that extends well beyond city limits; growing customer base
Strong fiscal management and capital planning
Healthy debt service coverage and low direct debt profile
Key Credit Challenges:
• Below median liquidity for the rating category
• Weak legal provisions
"The stable outlook reflects our expectation the system's strong fiscal management and proactive planning
practices will continue in the near term, including implementation of timely rate adjustments to maintain
steady debt service coverage and healthy system liquidity amid increasing operating and maintenance
expenditures, including rising pension costs allocated to the system. "
Factors that could lead to an upgrade:
• Sustained trend of building and maintaining liquidity at high levels
• Improved legal provisions for the bonds
• Upgrade of the city's GOLT rating
Factors that could lead to a downgrade:
• A material decline or sustained weak liquidity relative to peers
• Weak financial performance leading to a reduction in debt service coverage
• Significantly increased leverage
• Rating downgrade of the city's general obligation bonds, coupled with clear linkage between the
financial stress of the city related to pension funding with the financial health of the system
Kroll
GO Ratinq — Assigned and affirmed rating of AA+; revised outlook to `positive' from 'stable'
Kroll was added in 2018 to assist us in telling our story in a more effective way. We were specifically
interested in how they have historically framed local government pension discussions and how they could
assist the City in this communication. Highlights from the Kroll report, which are representative of many of
the other comments from the other firms, include the following:
Key Credit Strengths:
• Strong financial management policies and an experienced, effective management team.
• Robust economic growth is supported by a diverse, growing tax base, and low unemployment
rates.
• Strong financial reserves and liquidity, and conservative budgeting practices.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
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June 11, 2019
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Key Rating Concerns:
• Ability to absorb increasing pension contributions while maintaining financial strength.
• The reliance on sales tax for operations exposes the revenue base to economic fluctuations;
deviation from the City's practice of conservative budgeting would increase credit risk.
Drivers for Rating Change:
• Sustained financial performance despite any economic downturns (+)
• Successful transition to new pension contributions without impact to the City's strong financial
position (+)
• City management's ability to adapt to the new property tax levy limitation without significant impact
to operations (+)
• Economic decline which causes a significant reduction in tax revenues (-)
"The Positive Outlook reflects KBRA's recognition of the City's robust and growing resource base,
continued strong financia! profile and implementation of pension reforms. KBRA expects the City wil!
manage the increased pension contributions and maintain its strong financial position. KBRA will monitor
the pending state legislation to restrict property tax levy growth, and management's response to operate
within the possible new constraints."
S&P
GO Ratinq — Assigned and affirmed AA rating, with `stable' outlook (no change)
The rating reflects S&P's view of Fort Worth's:
• Adequate economy, with access to a broad and diverse metropolitan statistical area (MSA);
• Very strong management, with strong financial policies and practices under our Financial
Management Assessment (FMA) methodology;
• Weak budgetary performance, with operating deficits in the general fund and at the total
governmental fund level in fiscal 2018;
• Very strong budgetary flexibility, with an available fund balance in fiscal 2018 of 16% of operating
expenditures;
• Very strong liquidity, with total government available cash at 85.8% of total governmental fund
expenditures and 10.Ox governmental debt service, and access to external liquidity that we
consider exceptional;
• Very weak debt and contingent liability profile, with debt service carrying charges at 8.6% of
expenditures and net direct debt that is 122.1 % of total governmental fund revenue, as well as a
large pension and other postemployment benefits (OPEB) obligation. We recognize the city has
made revisions to its pension plan, however, it will take time to determine whether those recent
changes will sufficiently address the obligation; and
• Strong institutional framework score
"The stable outlook reflects our view that the city will likely continue to see strong economic growth and
taxable value gains due to its participation in the Dallas-Fort Worth MSA. The outlook a/so reflects our
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
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T'o the Nlayor and �ernbers of the Cify Council June 11, 2019
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�dq`,� a� SUBJECi': FINAL RESULiS OF RATIIVG OUTCOIVIES ON BONDS WITFiIN THE
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�° �" 5 ` 2019 DEBT PLAN
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view that the city`s recent pension modifications show that otficials are committed to reducing the plan's
significant net pension liability through a combination of contribution increases, benefit changes, and
actuarial assumption changes, which may ease long-term budgetary pressures, even though these
pressures wil/ likely persist, or potentially worsen, during the two-year outlook period. The full effect of the
recent changes is not known at this time, but we do not expect these changes to improve the net pension
liability or the p/an's funded status during the outlook period. At this time, we do not expect to change the
rating within the next two years.
Downside scenario
Assuming all other rating factors remain stable or improve, if the city's recent pension modifications do not
show progress towards making the ADC, or if the net pension liability continues to grow after the recent
actuarial changes are incorporated, we could lower the rating. We could a/so lower the rating if continued
contribution increases further pressure the cify's budgetary performance that causes a reduction in its
budgetary flexibility or budgetary performance, or a revision in our view of the city's long-term financial
planning as reflected in our FMA.
Upside scenario
While we recognize that the city has made modifications to its pension, we do not expect a material
improvement in the funded status of the plan, and we do not expect the city to make the full ADC during
the two-year outlook period. However, we could raise the rating if there were a significant improvement in
the pension funded status, and the city begins making its ADC, without reserve levels deteriorating, and
the city experienced continued economic improvement that results in economic metrics that are
comparable with those of higher-rated peers, assuming all other rating factors improve or remain stable. "
Water Rating — Affirmed rating of AA+ with a`stable' outlook (no change)
"The stable outlook reflects our expectation that Fort Worth's willingness to adjust rates, including passing
through wholesale cost pressures, will be key to rating stability. The city's continued economic growth and
diversity, limiting cyclicality from sectors such as energy and commodities, as well as a housing market
that we do not view to be in a bubble, are factors that enhance rating stability, in our opinion.
Upside scenario
Given that the pension reform measures have only recently been implemented and that it could be some
time before the overal/ funding levels materially improve, a`AAA' rating is not likely within our two-year
outlook horizon. Still, a higher rating would be predicated, in large part, on sustained improvement in
addressing the pension liability while still maintaining strong operations and similar financial capacity.
Downside scenario
Downward pressure on the rating would most likely come from scenarios such as an increased reliance on
the utility's surplus net revenues by the general government either for either subsidizing general fund
operations or to shore up fiduciary funds beyond even that for which the system is responsible. A
downgrade could also follow a sharp increase in debt if Fort Worth were to receive a consent decree or
other /arge-sca/e requirement, or evidence of what we would view as deferred maintenance or deferring
on key decisions that could help sustain the current financial profile."
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
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SUBJECT: FINAL RESULiS OF F2ATING OUT'CONIES ON BONDS WITFiIN THE
2019 DE�I" PLARI
GO Ratinq — Assigned and affirmed rating of AA+, with a`negative' outiook (no change)
"The rating reflects Fitch's expectation of strong operating performance through the economic cycle, as
well as solid economic and revenue prospects. Fitch maintains the Negative Rating Outlook to analyze
over the coming review cycle the impact of recent pension reforms on both expenditure flexibility and
operating performance. "
Water Ratinq — Assigned and affirmed Water's rating of AA with a`stable' outlook (no change)
Key Rating Drivers:
• Stable financial performance; Improving liquidity
• Average direct debt;
• Increased capital spending
• Sound revenue defensibility
• Wholesaler pressures
• Large and diverse service area
Next Steps
The city will continue with the plan of finance of the 2019 debt plan and related bond sales with final
closings scheduled on July 16'n
Senate Bill 2— Moodv's Sector Comment
in addition to the rating reports, a Moody's commentary discussing property tax reform passed by the
Texas legislature has been provided. Senate Bill 2 is anticipated to take effect on January 1, 2020, which
Moody's believes will limit revenue-raising flexibility resulting in negative credit implications for the bulk of
local governments.
If you have any questions, please call Kevin Gunn, Interim Chief Financial Officer, at 817-392-8517.
David Cooke
City Manager
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
U.S. PUBLIC FINANCE
CREDIT OPINION
30 May 2019
Contacts
Denise Rappmund +1.214.979.6865
VP-Senior Analyst
denise.rappmund@moodys.com
Gera M. McGuire +1.Z14.979.6850
VP-Sr Credii Officer/Manager
gera.mcgu ire@moodys.com
CLIENT SERVICES
Americas
Asia Pacific
Japan
EMEA
1-212-553-1653
852-3551-3077
81-3-5408-4100
44-20-7772-5454
Fort Worth (City of) TX
Update to credit analysis fol�owing revision of outlook to
stable
Summary
The city of Fort Worth, TX's (Aa3 stable) credit profile continues to be constrained by a
high unfunded pension liability and weak annual pension contributions, despite reform.
Given contributions that are insufficient to amortize the slightly reduced unfunded pension
liability, the liability will grow absent strong asset performance or additional pension reform
and higher contributions beyond those already approved. However, the credit profile is
supported by the city's substantial financial resources to afford increasing pension costs due
to strong economic growth, as well as the legal ability to reform benefits further, and the
demonstrated political will to both exercise this legal right and to increase contributions.
Further, the city's conservative budgeting and capital planning practices amid growth have
lead to increasing and consistently healthy operating reserves, and a relatively manageable
debt burden on par with peers.
On May 29, 2019 we affirmed the city's GOLT rating at Aa3 and revised the outlook to stable
from negative.
Exhibit 1
Total balance sheet leverage remains high following pension reform
800 %
700 %
600%
500%
400 %
300%
200%
10D%
0%
■ Nel direct debl ■Adj, Net Pension Liahility ■Adj. Net OPEB Liability
9/30/2016 9/30/2017 12/31/2016
Pension measuremenl date
Source: Moody's investors service, ciry's audited financial reports and actuarial reports
Credit strengths
» Large and growing tax base
» Regionally significant economy
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12/31/2018
(aRer changes)
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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
» Trend of operating revenue growth; healthy operating reserves
» Legal flexibility to reform pension benefits and programs prospectively
Credit challenges
» Large unfunded pension burden
» High fixed costs
Rating outlook
The stable outlook reflects our expectation that the city's financial profile will remain healthy over the near term, supported by a
strong management team able to leverage the revenue growth for the city to absorb increased pension costs with continued capital
investment and higher service demands commensurate with a growing population.
Factors that could lead to an upgrade
» Considerable corporate investment and job creation within the city limits
» Material reduction to unfunded pension liabilities and more rapid amortization
» Moderation of fixed cost burden
Factors that could lead to a downgrade
» Further material increases in the pension burden
» Significant increase in debt profile
» Poor financial performance leading to a significant dedine in reserves
» Trend of dedining assessed values
This publication does not announce a credit rating actien For any credit ratings referenced in this publication, pfease see the ratings tab on thz issuer/entity page on
wevNtmoodys.com For the most updated credit raiin� ac.tion information and rating history.
� 30 hlay 2019 Fort Wortli (City ofj TX: Update to credit analysis following revision of outlook to stable
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE I
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Key indicators
Exhibit Z
Fc�[Worth(Qcyo`)TX ZOtd 20i, 201ii ?Ul7 2015
Economy/Tax Base
Total Full Value ($000) $44,265,768 $47,075,950 $49,667.064 $54,517J29 b61,244,653
Population 778,573 796,614 F315,930 835J29 848,860
Full Value Per Capita $56,855 $59.095 $60,872 $65,2E30 $72,149
Median Family Income (% of US Median) 93.4% 94.4 % 94.9% 94.3% 94.3%
Finances
Opera[ing Revenue (b000) $681,592 $743,301 $7D,094 $780,172 $817,711
Fund Balance(5000) $126,351 $164,767 $135,100 $178,465 $190,871
Cash Balance ($000) $112,283 $130.023 $722,175 $172,276 �,188,303
FundBalanceasa%ofRevenues 18.5% 22.2% 18.6% 22.9% 23.3%
Cash Balance as a% of Revenues 16.5 % 17.5% 16.8% 22.1 % 23.0%
DebdPensions
Net Direc[ Debt ($000) $862,243 8812,433 $834J96 $794,634 $769,819
3-Year Average of Moody's ANPL (3000) $2,183,532 $2.389,366 $2,652,562 53,160,829 $3,506,795
Net Direct Debt / Operating Revenues (x) 1.3x l.lx l.lx 1.Ox 0.9x
NetDirectDebt/FuIlValue(%) 1.9% 1J% 1.7% 1,5% 1.3%
Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 3.2x 3,2x 3.6x 4.1x 4.3x
Moody's - adjusted Net Pension Liability (3-yr average) to Ful I Value (%) 4.9% 5.1% 5.3 % 5.8% 5.7°/o
Cash and fund balances indude the general fund, debt service fund and crime mntrol and prevention fund
Source: Moody's Inves[ors Service, ciry'saudited financial repons
Profile
The city of Fort Worth is located in Tarrant (Aaa stable), Denton (Aaa stable), Parker, Johnson and Wise counties covering 345 square
miles in the western portion of the expansion Dallas-Fort Worth metroplex. The city's estimated population as of 2019 was 848,860,
and is the 13th largest city in the U5.
Detailed credit considerations
Economy and tax base: large metropolitan tax base in north Texas will continue to grow
The city of Fort Worth will continue to see assessed value growth over the near term, driven by the strong economy fueled by in-
migration and ongoing residential, commercial and industrial construction. The city's tax base is large at $67.8 billion as of fiscal
Z019, and has exhibited strong average annual growth of 9.8% over the past five years, with additional growth projected for fiscal
zOzO value. Despite a robust employment base, residential assessed value (AV) has been expanding at a faster pace than commercial
development, contributing to a very diverse tax base. The top ten taxpayers accounted for a low 5.6% of the fiscal 2018 AV.
The city is a regionally significant economic center, serving as the western anchor point to the larger Dallas-Fort Worth metroplex, and
is positioned to continue to see economic growth due to favorable demographic trends and a tight labor market. Major employers
indude American Airlines Inc. (Ba1 stable), which is building a new headquarters in the city, and Lockheed Martin Corporation (Baa1
stable). However, residents and commuters have an array of employment options in the city, induding military, government, healthcare
and education, manufacturing, transportation and warehousing, and energy. City officials continue to target corporate economic
development to generate high paying jobs within the city. As of March 2019, the city's unemp�oyment rate was down to 3.6% and is
about on par with the state unemployment level over the same period. At the same time, the labor force has continued to grow, up
over 18% since 2013 per the Bureau of Labor Statistics. With growth and a tight labor market, median income has been rising in the
city, at 94.3% of the US median as of 2017, up from 89.8% since the 2010 census, as per ACS.
Moody's Economy reports as of May 2019 that the western portion of the metro area, induding Fort Worth, will grow at an above-
average pace over the near term given defense and other manufacturing expansion, particularly military aircraft, as well as ongoing new
3 30 May 2019 Fort �Vorth (City ofJ TX: Update to [redit anafysis foLlowing revision of outlook to stable
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANC
construction. Longer term, high population growth, a diversified manufacturing base, and lower business and living costs within the
metroplex point to above-average gains.
Financial operations and reserves: healthy operating reserves to continue supported by strong underlying economy
Despite increasing pension costs, the city's financial profile will remain stable over the near term with conservative and strategic
management and the ability to �everage the strong economic growth in the city. On May 25, 2019, the Texas legislature approved
the Texas Property Tax Reform and Transparency Act which is expected to be signed into law any day. Post approval by the Governor,
Fort Worth, and most other governmental units in the state, will face limited financial flexibility in setting a property tax rate. The
restriction, which can be overridden by citizens in a mandatory election, restricts rate setting to a maximum of 3.5% additional
operating revenue on existing properties. Previously the limit was 8% with a voter petitioned election required to potentially roll back
portions levied over the effective 8% limitation. Given the city's current growth trends, the reduced abifity to raise property taxes is still
consistent with its general fund forecast which assumes property tax growth of 4% annually. The city's general fund forecast assumes
new construction values add 0.5% to property taxes annually.
In fiscal 2018 (ending September 30), strong sales tax receipts and other revenue sources above budget, combined with conservative
budgeting of expenditures, led to a substantial $17.3 million general fund surplus. At year end fiscal 2018, the available fund balance
was $137.2 mil�ion, a healthy 20% of general fund revenues. In fiscal 2019 the city approved a balanced budget, though revenues are
trending higher than the budget projections. Sales taxes are up 6.1% year over year, while the budget projected a 2.9% increase.
Moody's considers the city's operating funds to indude the general fund and debt service fund, as well as the crime control and
prevention district (CCPD), which supports a material amount of annual public safety expenditures and is funded by a 0.5% city-wide
sales tax. As of fiscal 2018, the combined operating funds reported an available fund balance of $190.9 million, a healthy 23.3°/o of
operating revenues.
Property taxes are favorably the city's largest source of operating revenues, and tend to be less susceptible to economic cydes. As of
fiscal 2018, property taxes accounted for 54.3% of general fund revenues, and 57% of combined operating revenues, followed by sales
tax at 23% and 28.3%, respectively. Favorable economic trends have fueled strong operating revenue growth. Over the past five years,
property taxes have increased an average 5.5% and sa�es taxes have increased an average 6%. The city is forecasting using an assumed
4% annual increase to both revenue sources through Z026, which is in part tied to a goal to continue to lower the tax rate over the
medium term, adhere to the pending change in law that will take affect on January 1, z020 and conservative projecting. The city's
property tax rate is high relative to peers in Texas, with an all-in rate of $7.85/$1000 of AV in fiscal 2019, down from $8.05 in fiscal
2018. The city started lowering the rate in 2017 amid strong growth, as well as a desire to remain competitive for business attraction.
Of this rate, $630/$1000 supports the general fund while $1.55 is dedicated to general obligation debt.
LIQUIDITY
The city's liquidity position is expected to remain stable over the near term. Liquidity in the general fund increased to $135.9 million in
fiscal 2018, or 19.8% of general fund revenues. Cash and investments in the combined operating funds increased to $188.3 million, or
a healthy 23°/o of operating revenues.
Debt and pensions: high balance sheet leverage driven by pension burden
The city's direct debt burden is expected to remain relatively low and manageable in the near term despite additional debt planned
to support capital investment throughout the city. As of the most recent bond sale, the city had $883.9 mi�lion oF net direct debt
outstanding, induding $829.4 million of GOLT debt. The city's net direct debt burden represents a manageable 1.3°/o of the 2019 full
value and indudes GOLT debt, capital leases and other guaranteed obligations. The net direct GOLT debt induded in the debt burden
calculation is net of $3 million backed by the solid waste system. The city plans to continue to phase in debt authorized under the
2018 bond package over several years. With tax base growth to continue over the near term, the net direct debt burden is expected to
remain in line with historic levels.
DEBTSTRUCTURE
Given the city's practice to issue new debt with a twenty year amortization and level annual principal, the overall debt profile pays off
quickly with 75.8% retired within ten years.
d 30 May 2019 Fort Worth (City of) TX: Update to credit analvsis followine revisinn nf nnrinnl< rn ctahla�
DEBT-RELATED DERIVATIVES
The city is not a party to any derivative agreements.
PENSIONS AND OPEB
Despite recent reform, the city's pension burden and high fixed costs continue to be the primary weakness of the credit profile. The
pension burden was reduced by a small amount in the current fisca� year post-pension reform, though is expected to continue to
grow due to persistently weak annual contributions. The city council approved benefit reductions and increased city contributions
in December 2018, which was followed by a favorable vote of the employees to raise their contributions. However, following
negative investment returns in 2018, the impact of the benefit reductions on the unfunded pension liability was muted. Increases
to contributions are positive, and favorably the city induded additional automatic increases to the city and employees if the current
contributions fal� below the actuarial�y determined employer contribution (ADEC). However, the automatic increases are projected to
be triggered as soon as they are allowed, starting in 2022, and remain over the actuarially projected 44 year amortization period.
Absent another round of benefit reductions, or consistently high investment returns, contributions will need to increase to amortize the
unfunded liability. Unique relative to many other large city peers in the state, the city maintains local control to adjust pension benefits
and increase employers contributions, and therefore can remain nimble going forward if further reforms are required to maintain
solvency of the pension fund�. The city exercised this authority several times in recent history, having reduced benefits to employees on
a prospective basis in 2011 and 2014.
As of fiscal 2018, the city's adjusted net pension liability (ANPL), net of support from the water and sewer enterprise of approximately
13°/o, was $3.7 billion, which represented an elevated 449% of operating revenues and 6°/o of the fisca� 2019 full value of the tax base.
With the reforms put in p�ace, the ANPL is projected to decrease to $3.4 billion, which wou�d be induded in the city's fiscal 2020
audited financial statement. Based on the city's strong revenue growth trajectory, we expect the slightly reduced ANPL would represent
a moderated but high 350-400°/o of operating revenues.
The ANPL had been increasing annually, up from $2 billion in fiscal 2012 for comparison, as earnings have fallen below the assumed
7.75% discount rate of the plan up until 2017, and contributions have fallen short of what is needed to prevent the liability from
growing, or "tread water". Favorably, the pension board reduced the assumed rate of return to 7%, from the higher 7.75°/o, in 2019.
While earnings in 2017 were strong at 14.6%, the fund experienced a loss of 3.6% in 2018. Earnings over the past five years have
averaged 4.5%, compared to 7.6% over the past ten years.
In fiscal 2018, the city contributed $81.2 million to the plan, net of enterprise support, which fell be�ow the "tread water" indicator by
a sizeable S29 million, or 3.6°/o of 2018 operating revenues. The "tread water" indicator shows a contribution level that would prevent
the liability from growing, based on reported assumptions from the city's actuarial valuation report, induding the previously assumed
7.75% rate of return, which is high and above the assumed rate for many of the largest plans in the country. The board's recent
reduction of the assumed rate of return to 7% is more in line with large plans. Assuming a tread water calculation at the reported GASB
rate of 5.1% (a blended yield incorporating the pre-reform asset depletion of the fund), the tread water gap balloons to $126.7 million,
or a large 15.5% of operating revenues.
Post-reform, we expect that the tread water gap will persist, pointing to continued growth in the unfunded liability. The city will be
increasing its contribution to the fund by 4.5% of payroll, back-dated to December 2018. The city's total contribution will approximate
24.5% of payroll. Starting in Ju�y 2019, emp�oyees will commence phased increases over the next two years, in total ranging from
1.1-4.4% of pay. It is the city's goal to amortize the unfunded liability over 30 years, based on reported assumptions, which was not
accomplished through the current reform. This was in part due to the investment losses in 2018, but also the board's decision to reduce
the assumed rate of return to a more realistic 7%. Per the reform package, starting in fiscal 2022, if the actual contribution has fallen
below the ADEC for Z years, the contributions are to automatically increase by 2%, split 60/40 to the city and employees, and another
2%, for a maximum of 4% the following year if conditions are not met. The city's actuary has reported that in the coming year, the
contribution will fall short of the ADEC by 7% of payroll, or $33.7 million. In the coming few years, we project the underfunding relative
to the tread water indicator (net of enterprise support) will be approximately $50-$60 million or about 6-7% of projected operating
revenues.
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
The city provides post-employment health care benefits and death benefits (OPEB) to retirees, established under legal authority of
the City Charter. Benefits are administered by the city and funded on a pay-as-you-go basis. The city subsidizes premiums in full for
employees hired before October 1988 and in part for those hired prior to January 2009. No subsidy is provided for employees hired
after January 2009, though they may enroll in the healthy plan. In fiscal 2018, the city's OPEB contributions were $26.6 million, or
3.3°/o of operating revenues. At year-end, the net OPEB obligation was $883.3 million, $753.1 million of which was governmental, or
0.9 times operating revenues.
Indusive of debt service, actual pension contributions and OPEB, the city's fixed costs are elevated at 26.2% of operating revenues in
2018, and will increase given planned augmentation of city contributions. If the city were contributing to the pension fund at a"tread
water" level, assuming a 7.75°/o previous discount rate, fixed costs would increase to 29.II°/o of operating revenues, and a significant
41.7% of revenues at the GASB rate as reported. Post-reform, fixed costs at the actual pension contribution are projected to total
about 27.5% of operating revenues, compared to 34.2% of operating revenues assuming a payment at tread water.
Management and governance: high institutional framework score
The city operates under a council/manager form of government where the mayor and eight councilmembers are elected to two year
terms. The city's management practices indude formal financial policies and comprehensive budgeting and forecasting.
Texas Cities have an Institutional Framework score of Aa, which is high. Institutional Framework scores measure a sector's legal ability
to increase revenues and decrease expenditures. Property taxes, one of the sector's major revenue sources are subject to a cap, which
cannot be overridden. However, the cap of $25 per $1,000 of assessed values, with no more than $15 allocated for debt, still a�lows for
significant revenue-raising ability. Unpredictable revenue ffuctuations tend to be minor, or under 5% annually. Across the sector, fixed
and mandated costs are generally greater than 25°/o of expenditures. Texas is a Right to Work state, providing significant expenditure
cutting ability. Unpredictable expenditure fluctuations tend to be minor, under 5°/o annually.
30 hlay 2019 Fort Worth (City ofJ TX: Update to credit analysis foltowine revision of o�tlool< to stablc
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Rating methodology and scorecard factors
The U� Local Govemrr�ent General Ob�ieation Ratin� Methodolo�v indudes a scorecard, a too� providing a composite score of a loca�
government's credit profile based on the weighted factors we consider most important, universal and measurable, as well as possible
notching factors dependent on individual credit strengths and weaknesses. Its purpose is not to determine the final rating, but rather to
provide a standard platform from which to analyze and compare local government credits.
Exhibit 4
Fort Worth (City of), TX
Fon wonn �cicy on rx
RaHng Factors
Economy/Tax Base (30%) �'�
Tax Base Size: Full Value (in OOOs)
Full Value Per Capita
Median Family Income (% of US Median)
Notching Factors:�Z�
Regional Economic Center
Finances (30%)
Fund Balance as a% of Revenues
5-Year pollar Change in Fund Balance as °/a of Revenues
Cash Balance as a% of Revenues
5-Year pollar Change in Cash Balance as % of Revenues
Management (20%)
Institutional Framework
Operating History: 5-Year Average of Operating Revenues / Operating Expenditures
Debt and Pensions (20%)
Net Direct Debt / Full Value (%)
Net Direct Debt / Operating Revenues (x)
3-Year Average of Moody's Adjusted Net Pension Liability / Full Value (%)
3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues (x)
Notching Factors:�`�
OtherAnalyst Adjustment to Debt and Pensions Factor (specify): High tread water gap/negative cash flow in pension fund to
persist despite reforms, high fixed costs
Standardized Adjustments [3]: Unusually strong or weak security features: Secured by statute
Measure Score
$67,762,925 Aaa
$81,685 Aa
94.3% Aa
Up
23.3% Aa
0.3% A
23.0% Aa
0.2% A
Aa Aa
1.Ox A
1.3% Aa
1.1x A
5.2% Baa
4.3x Baa
Scorecard-Indicated Outcome
Assigned Rating
[1] Economy measures are based on data from the most recent year avaifable.
[2] Notching factors are specificafly defined in the US Local Govemment General obligation Debt methodology dated December 76, 2016.
[3] Standardized adjustments are outfined in the GO Methodology Scorecard Inputs Updated for 2019 publication.
Source: For[ Worth's audited /inanciaf statemenu, US Census Bureau, Moody's Investors Service
Endnotes
Down
Up
Aa3
Aa3
1 The city's Employees' Retirement Fund of the City of For�t Worth (f WERF) is comprised of two separate single-employer defined benefit plans for
membership: the city of Fort Worth employees benefit plan ("city ptan") and the Retirement Fund employees plan ("staff p(an"). The FWERF, and city plan,
were established by city ordinance on September 12,1945. The pension plans are administered by a 13-member board of trustees, comprised of four active
members, three retired members and six trustees appointed by the city council. The board governs investments of the plan, though the city is responsible
for benefit offerings and contribution percentages, with employee approval required to increase employee contributions.
7 30 May 2019 Fort U/orth (City of) TX: Update to credit analysis followinR revision of outtook to stable
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
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30 May 2019 Fort Worth (City of) TX: Update to credit analysis foIlowing revision of oirtloolc to stabte
MOODY'S INVESTORS SERVICE U.S. PUBLIC fINANCE
Contacts
Denise Rappmund +1.214.979.6565
VP-SeniorAna(yst
denise.rappmund�amoodys.com
Gera M. N1cGuire
VP-Sr Credit Officer/
Nlanag2r
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CLIENT SERVICES
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852-3551-3077
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INVESTORS SERVICE
9 30 May 2019 Fort Worth (City of) TX: Update to credit analysis following revision of outlook to stabte
U.S. PUBLIC FINANCE
CREDIT OPINION
30 May 2019
Contacts
Denise Rappmund +1.214.979.6£365
VP-Senior Analyst
denise.rappinund@moodys.com
Ge�a P�1. MlcGuire +1.214.979.6350
VP-Sr Qedit Officer/Nianager
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CLIENT SERVICES
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�t=}-20J772-Sa54
Fort Worth (City of) TX Water �. Sew. Ent.
Update to credit analysis
Summary
The city of Fort Worth Water and Sewer Enterprise, TX (Aa1 stab�e) is a regiona� treated water
and wastewater service provider that benefits from its large and economically vibrant service
area in the western Dallas-Fort Worth metroplex. The system exhibits strong management
practices induding multi-year capital planning and annual rate increases, healthy debt seivice
coverage levels, and a low debt profi�e. The system's revenue bonds are in part constrained
by relatively weak legal provisions and below-median though improved and adequate system
liquidity. The system has a manageable level of exposure to the city's unfunded pension
liability.
Exhibit 1
Improved unrestricted system liquidity expected to stabilize at current level
180 days
160 days
140 days
a 120 days
x
0 700 days
� j 80 days
>.
Q 60 days
40 days
20 days
days
2014 2015
Sou�ce: hloody's Investo�s Service, ciryaudited financial reports
2016 2017 2018
Credit strengths
» Large service area that extends well beyond city limits; growing customer base
» Strong fiscal management and capital planning
» Healthy debt service coverage and low direct debt profile
Credit challenges
» Below median liquidity for the rating category
» Weak legal provisions
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Rating outlook
The stable outlook reflects our expectation the system's strong fiscal management and proactive planning practices will continue in the
near term, induding implementation of timely rate adjustments to maintain steady debt service coverage and hea�thy system liquidity
amid increasing operating and maintenance expenditures, including rising pension costs allocated to the system.
Factors that could lead to an upgrade
» Sustained trend of building and maintaining liquidity at high levels
» Improved legal provisions forthe bonds
» Upgrade of the city's GOLT rating
Factors that could lead to a downgrade
» A material dedine or sustained weak liquidity
» Weak financial performance leading to a reduction in debt service coverage
» Significantly increased leverage
» Rating downgrade of the city's general obligation bonds
Key indicators
Exhibit 2
Fo; c UVorth (Ci�y o�) TX Wa�er & Se.v. Enl.
System Characteristics
Asset Condition (Net Fixed Assets / Annual Deprecia[ion) 35 years
System Size - 0&M (in $OOOs) $256,898
Service Area Wealth: MFI %of US median 94.32%
Legal Provisions
Rate Covenant (x) 1.00
Debt Service Reserve Requirement No DSRF (Baa and Below)
Management
Rate Management Aa
Regulatory Compliance and Capital Planning Aa
Financial Strength
Operating Revenue ($000)
System Size - O&M ($000)
Net Revenues($000)
NetFunded Deb[($000)
Annual Debt Service ($000)
Annual Debt Service Coverage (x)
Cash on Hand
Debt [o Operating Revenues (x)
Source: Moody's Inves[ors5ervice, ciryaudited financial reports, bond documen[s
ZO 1 �1
$361,979
$226,719
$149,699
$881,173
$90,664
1.7x
100 days
2.4x
�015
$389,205
$253,114
$150,683
$1,066,520
$94,878
1.6x
99 days
2.1x
ZOio
$417,299
$252,486
$171,651
$756,866
$90,488
2.Ox
118 days
1.8x
2i)17
$425,615
$243,721
$196,539
$795,142
$92,571
2.1 x
141 days
1.9x
This publication does not announce a credit rating action. Por any credit ratings referenczd in thiz publication, plea;e see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating ac[ion information and rating history.
2018
$468,171
$256,898
$234,675
$808,235
$96,230
2.4x
157 days
1.7x
2 3o May 2019 Fort Worth (City of) TX U/ater & Se�v. Ent.: Update to credit analysis
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Profile
Fort Worth is located in Tarrant (Aaa stable), Denton (Aaa Stable), Parker, Johnson (Aa2) and Wise counties. The city's water
department provides water and wastewater services to residential, commercial, industrial and wholesale customers. The department
serves a growing population of approximately 1.3 million people within the city of Fort Worth and 32 surrounding communities.
Detailed credit considerations
Service area and system characteristics: regional water provider with growing customer base
The system's diverse and predominantly residential customer base will remain stable over the near term. The system provides water
and wastewater services to residential, commercial and industrial customers within the city of Fort Worth (Aa3 stable), as well as
surrounding areas within Tarrant County on a wholesale basis. The system currently has 32 wholesa�e contracts for water and 23
wholesale contracts for wastewater service. Raw water is obtained from the Tarrant Regional Water District ("TRWD"; Aa1 stable). The
system operates five water treatment plants with a total capacity of 500 million gallons per day (MGD), compared to average daily
usage of 194 MGD in fiscal 2018 and peak usage of 359.8 MGD. The city anticipates expansion of the system will be needed in 2028.
Wastewater from the city and 23 surrounding communities is conveyed and treated at the system's Village Creek Water Redamation
Facility or two wastewater treatment plants operated by the Trinity River Authority. The Village Creek Plant has a permitted treatment
capacity of 166 MGD and treated an average flow of 117 MGD in 2018. The city has built into the five year capital improvement plan
funding allocation for a new wastewater treatment plant to accommodate growth on the west side of town. This project is anticipated
to commence in 2023.
The system's customer base is diverse. The 10 largest water customers accounted for $11.6 million in annual revenue and 4.8% of total
water usage in 2018. The 10 largest wastewater customers accounted for $9.6 million in revenues and 5°/o of total wastewater usage
in 2018. Residential customers accounted for 32.3% of total water sales and 45.7% of wastewater sales in 2018. Wholesale water sold
accounted for 36.6% of total water volume in 2018, and 16.5% of wastewater flows.
According to 2017 American Community Survey estimates, the city's wealth levels were near average with median family income
equivalent to 94.3% of the US. However, the system's large service area, which extends beyond Fort Worth, is an important
consideration and offsets the below average wealth. The enterprise has been continuing to further water conservation efforts while
increasing rates to offset decreases in consumption and continue to meet operating and capital needs of the system. Favorably, rates
charged by the system to retail customers is affordable relative to peers in the metro area, and the city is able to pass on higher O&M
costs to wholesale customers in the broader service area.
Debt service coverage and liquidity; healthy debt service coverage and improved system liquidity
Annual rate increases are expected to provide steady financial metrics in the near term, including stable system liquidity. The system
has a history of rate increases and a stable trend of increasing revenues to keep pace with growing expenditures. Fiscal 2018 revenues
increased 13% from the prioryear, which induded 3.5% and 3% rate increases to water and sewer, respectively, bringing gross
revenues to $491.6 million. After operating expenditures net of depreciation, net revenues of $234.7 million resulted in overall debt
service coverage of a healthy 2.5 times.
The system utilizes long-term forecasting and revenue assumptions. Year-to-date performance in 2019 (through March) remains
favorable relative to the budget—while revenues are projected to be slightly below budgeted amounts, expenditures are projected
to be 4.4% below budget largely from a credit expected from TRWD, Net revenues for debt service is projected to be slightly below
2017 results, though maintain healthy debt service coverage. While the city did not need to pass rate increases in z019, management
anticipates future annual rate increases in the near term to offset increasing operating costs and cash-funded capital, and to maintain
cash reserves as part of the system's long-term financial plan.
LIQUIDITY
At fiscal year-end 2018, liquidity has continued to improve and was up to 157 days of expenses, Per the fund's policy, the minimum
reserve level is 6z days and though management expects to maintain unrestricted cash worth at least 150 days of expenses through
2024.
30 May 2019 Fort U/orth (City ofJ TX Water & Sew. Ent.; Update to credit analysis
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Debt and legal covenants: low debt profile and weak legal provisions
Following the 2019 bond sale, the system wi�l have $834.8 million in outstanding parity debt and an additional $39.9 million in
outstanding subordinate lien bonds. Payout is average with 57.2% of principal retired over the next 10 years. The system's debt
to revenues ratio at 1.7 times in fiscal 2018 is at the median for the rating category. The five year CIP plan calls for $1.1 billion in
investment into the system, approximately 63% of which is planned to be debt funded and the remaining 37°/o will be cash funded.
Despite the plans for additional borrowing, we expect the system's debt profile relative to revenues will remain below 2 times given the
relatively above average pace of principal retirement and ongoing rate increases expected.
LEGAL PROVISIONS
Legal provisions for the bonds are weaker than traditionally seen among utility revenue bonds, though adequate given the strong
management of the system. The city has covenanted to fix, establish, maintain and co�lect such rates, charges and fees for the use and
availability of the system at all times as are necessary to produce gross revenues and other pledged revenues sufficient (1) to pay all
current operating expenses, (2) to produce net revenues for each fiscal year at least equal to the annual debt service requirements. The
additional bonds test states that net revenues for the preceding fiscal year, or for twelve consecutive months out of the fifteen months
immediately preceding, must be at least equal to 1.25 times average annual debt service and 1.1 times maximum annual debt service.
There is not a debt service reserve established for the bonds, though improving system liquidity is considered healthy and adequate.
DEBT-RELATED DERIVATIVES
The system does not have any variable rate debt and is not a party to any interest rate swaps or other derivative agreements.
PENSIONS AND OPEB
The system contributes to a single-employer defined benefit pension plan (the "city plan") administered by the Employees' Retirement
Fund of the City of Fort Worth for employees of the system. In fiscal 2018, the system contributed $9.7 million to the City Plan, which
accounts for 10.4% of the city's total contribution of $93.6 million to the plan and 2°/o of the system's 2018 operating revenues. The
system's 10.4% share of the total adjusted net pension liability (ANPL) of the city plan equates to $380.2 million as of fiscal 2018,
or 0.8 times revenues. In December Z018 the city council approved pension reform, which induded benefit reductions and increases
to city contributions; employees approved increases to their contributions in February Z019. Implementation of the reform occurs in
July z019. The city's contribution to the plan is projected to continue to fall below the actuarially defined contribution rate, as well as
our calculated "tread water" level, which measures the annual government contribution required to prevent the reported net pension
liability from growing under reported assumptions. A contribution amount equal to the projected 2019 tread water �evel, post-reform,
would increase the system's contribution to approximately $16.7 million, representing 3.3% of fiscal 2018 operating revenues. The city
has incorporated increases to pension contributions in the five year financial forecast for the uti�ity system, and corresponding rate
increases needed, which range from a manageable 2.9% to 5.5% annually from 2020 through 2024. There was no rate increase in fiscal
2019.
Management and governance: strong fiscal management and robust capital planning
The system exhibits strong fiscal management, demonstrated by appropriate and timely rate setting measures, prudent and
conservative budgeting and forecasting of revenues, as well as maintenance of multiyear planning. In addition to the �iquidity goal, the
system has a goal to maintain a minimum leve� of working capital in the enterprise funds equal to three months of regu�ar, on-going
operating expenses (induding transfers out). The system also has a goal of a minimum level of working capital in enterprise funds equal
to three months of the amount being paid in debt service payments for the subsequent fiscal year. Rate adjustments must be approved
by city council.
The system's water department consists of three separate functions: water, wastewater and redaimed water, each of which have
several divisions responsible for specific areas. The water department is responsible for providing safe, dean drinking water to city
residents and customer cities. The wastewater department collects, monitors, treats and processes domestic and industrial waterborne
waste from the city and other contracting communities. The redaimed water department provides highly treated effluent from the
city's water reclamation faci�ity to wholesale and retail redaimed water customers for nonpotable uses such as irrigation and industrial
water coo�ing towers.
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REPORTNUMBER 1178494
30 May 2019 Fort Worth (City of) TX Water & Sew. Ent.: Update to credit analysis
Contacts
Denise Rappmund +1.21d.979.6865
VP-SeniorAnalyst
denise.rappmund@inoodys.coin
�
MOODY'S
INVESTORS SERVICE
Gera M. I�IcGuire
VP-Sr Credit Officer/
Mana�er
gera.mcguirei�Umoodys.com
CLIENT SERVICES
+1.21�.979.6850 Americas
Asia Pacific
Japan
EMEA
1-212-553-"1653
852-355'I-3077
II1-3-540F3-4100
44-20-"1772-5454
6 30 May 2019 Fort Worih (City ot) TX Water & Seev. Ent.: Update to credit analysis
KR�LL �ORlD
RATING AGENCY
Pub{ic FQnance
Local Gov't GO Rating Report
City of Fort Vl/o�-th, TX
Assigned Rafiing(s) Outlook
General Purpose AA+ Positive
Bonds, Series 2019
Tax Notes, Series 2019 AA+ Positive
Affirmed Rating(s) Outlook
General Purpose AA+ Positive
Bonds, Series 2018
Tax Notes, Series 2018 AA+ Positive
Methodoloqv:
.;I?.... �,��� -: _�,�V�:'i�:�17-;"�`�. �;�� Y`�}c'��z;i-,CbfO���r
Analvtical Contacts:
Patricia McGuigan, Director
(646) 731-3350
rr�ai_ii�,r�- — �
Justin Schneider, Senior Analyst
(646)731-2453
William Cox, Senior Managing Director
(646)731-2472
Rafiing Summary: KBRA's rating action reflects the City's
strong financial management policies and practices, strong
management, and strong financial performance and liquidity.
Economic growth is vibrant, fostering improvement in the
resident wealth profile. Debt levels are moderate and
amortization is very rapid. Recent pension reforms will help
contain the liability growth trajectory. Fixed costs should remain
manageable.
Fort Worth is the 15th largest City in the nation by population
and among the fastest growing of the nation's top cities,
Employment gains have kept pace with the brisk population
growth, and the notably low unemployment rate is lower than
the state and nation, Poverty rates have fallen and are now
lower than the state average, although per capita income lags
the state. One focus ofthe City's recently released strategic plan
is attracting high wage job growth. The City's tax base is diverse
with no dominant taxpayers. The full value (FV) per capita is
almost $70,000, which KBRA views as moderate. Approximately
60% of the tax base is residential, which is on the high side
among the larger cities in the state, Several large development
projects located across the City are fueling tax base growth,
including the 26,000 acre mixed use Alliance Texas
development and the Rock Creek Ranch mixed-use project with
a new 80 acre campus for Tarleton State University. American
Airlines' new 300-acre corporate headquarters is nearing
completion and Facebool< recently opened a large $1 billion data
center.
KBRA views the City's governance and management structure as strong based on its comprehensive financial
management policy statements, formal budget process, multi-year financial forecasting and multi-year capital planning.
The City's economic development strategic plan, aims to enhance the City's status, regionally, nationally and globally.
Additionally, the City benefits from a tenured, experienced leadership team,
KBRA views the City's financial performance as strong reflecting a trend of healthy operating surpluses and strong
General Fund reserves. The vibrant financial results reflect the City's adherence to formal fiscal policies, conservative
budgeting and fiscal monitoring practices. The primary General Fund revenue sources are property taxes and sales
taxes, accounting for 59% and 25% of FY Z018 revenues, respectively. Since 2010, sales tax revenue has averaged
5.8% annual growth, and has consistently outperformed budget.
KBRA views Fort Worth's debt burden as moderate, and debt service accounts for 11.0% of FY 2018 general government
expenditures which KBRA also views as moderate. Debt is very rapidly amortized, with 78% maturing in ten years. The
City maintains a formal five-year capital improvement plan (CIP) which is updated annually. The FY 2019-2023 CIP
totals $1.7 billion, with the largest component of the CIP for water improvements to address system growth,
rehabilitation, and mandates, Water project funding is primarily generated through water enterprise revenue bonds and
pay-go funding. In May 2018, a$399.5 million bond election was overwhelmingly approved by voters, providing the
general purpose bond authority needed for the five years of the capital improvement program.
The City's pension plan ($3,1 billion net pension liability) has a low funded ratio due in part to a historically high
investment rate of return assumption, and then subsequent lowering of the investment rate. To address the
underfunding, created a second benefit tier. These measures were not sufficient and in December 2018, the City council
approved modifications to help contain the growth trajectory and increased required contributions by both the city and
employees. Fixed costs are expected to increase but given the city's resource base, KBRA expects payments to be
manageable. KBRA views the City's OPEB liability as moderate. Total fixed costs, including direct debt service, the actual
pension contribution and pay-go OPEB cost was a manageable 20% of FY 2018 governmental expenditures.
The Positive Outlook reflects KBRA's recognition of the City's robust and growing resource base, continued strong
financial profile and implementation of pension reforms. KBRA expects the City will manage the increased pension
contributions and maintain its strong financial position, KBRA will monitor the pending state legislation to restrict
property tax levy growth, and management's response to operate within the possible new constraints.
May 21, 2019
KROLLBOND
RA71NG AGENCY
Key Rating Strengths
� Strong financial management policies and an experienced, effective management team,
m Robust economic growth is evidenced by a diverse, growing tax base, and low unemployment rates.
a Strong financial reserves and liquidity, and conservative budgeting practices.
Key Rating Concerns
e Ability to absorb increasing pension contributions while maintaining financial strength.
o The reliance on sales tax for operations exposes the revenue base to economic fluctuations; deviation from the
City's practice of conservative budqetinq would increase credit risk.
� - . -
• Sustained financial performance despite any economic downturns.
• Successful transition to new pension contributions without impact to the City's strong financial position. +
• City management's ability to adapt to the new property tax levy limitation without significant impact to
operations.
e Economic decline which causes a significant reduction in tax revenues.
Key Ratios
Population Growth, 2010-2018
C ity 17 J%
State 12.1%
Top 10 Taxpayers as % Total AV
Annual change in Market Value, 2010-2019
Unassigned General Fund Balance as % Expenditures
Overall Debt as % Full Market Value
Debt Payout, Ten Years
Fixed Costs as % Expenditures, FY 2018
5.6%
5.1%
17.4%
4.6%
78.0%
20.2%
City of Fort Worth, TX Page 2 May 21, 2019
KROLLBOND
RATING AGENCY
Rating Determinants (RD)
1. Management Structure and Policies AAA
2. Debt and Additional Continuing Obligations AA
3. Financial Performance and Liquidity Position AAA
4. Municipal Resource Base AA+ (revise from AA
RD 1: Management Structure and Policies
KBRA views the City's governance and management structure as very strong. The City's detailed Financial Policy
Statements, which document a policy framework for fiscal decision mal<ing, is an important contributor to the strong
governance profile. A comprehensive budget process, active financial monitoring, defined reserve policies for all City
fund groups, long term financial planning and conservative constraints on use of excess reserves are some of the
hallmarks of the City's strong management practices. Fort Worth recently released its first economic development
strategic plan, aimed at enhancing the City's economic profile. The City's municipal services include public safety,
highways and streets, solid waste, public health, public works, recreation, municipal airports, and water and wastewater
systems.
City Organization
The City operates under a Council/Manager form of government. The City council is comprised of the mayor and nine
council members, all elected for two-year terms. The mayor is elected at large, and the nine other council members are
elected by district. The mayor and council appoint the City manager, as well as the City attorney, City secretary and
City auditor and the municipal judges. A special election on May 7, 2016 amended the City charter. Proposition 2
increases the number of council members to 11 from nine, beginning with the first election following the 2020 census.
The City benefits from a highly experienced leadership team. The City manager, David Cooke, joined the City five years
ago, having previously been the county manager of Wake County, NC, another region of the nation with strong growth
and a tradition of strong public finance management. The City's Interim Chief Financial officer, Kevin Gunn, was
appointed in October 2018, and most recently had served four years as the City's IT Director.
State Staiutory Framework
The state constitution limits the ad valorem tax rate to $2.50 per $100 of taxable assessed value; and the City's home
rule charter limits the tax rate to $1.90. In addition, the city must annually calculate its "rollback rate", the rate that
will produce last year's maintenance and operation levy from this year's values (adjusted for additions) multiplied by
1.08 plus a rate to cover this year's debt service. If the adopted rate exceeds the rollbacl< rate, voters may petition for
an election on the tax increase.
The current tax rate is $0.785, providing the City ample taxing capacity within the statutory and charter real property
tax rate limit; giving the City financial flexibility should unanticipated needs occur. In addition, 10.3% of the City's FY
2019 operating millage is for pay go financing, providing additional operating millage capacity should the rollback millage
become a constraint. The City has lowered the tax rate for the past four years, made possible by strong growth in the
tax base.
Under state statutes, the local sales tax rate is limited to 2%. The City levies 1% for the general fund, 0.5% for a crime
prevention and 0.5% is dedicated to the transit authority. The 0.5% for crime prevention was approved by voters for a
five-year period ending September 30, 2020 and the City anticipates seeking a renewal. There are no state or local debt
limit laws, except to the extent that the tax rate limitation poses a constraint.
Financial Management Policies and Procedures
KBRA believes the City has strong fiscal management and control practices, that are supported by formal financial
policies, The City provides transparent disclosure of financial policies in the annual financial report and budget document,
which highlight the City's prudent management of financial resources. Pursuant to the City's adopted financial
management policy statements, the City will maintain a minimum unassigned general fund balance of 10% of regular
ongoing operating expenditures, with a goal of two months (16.67%) of regular ongoing operating expenditures.
Notably, the City maintains fund balance policies on all fund types, including a policy for each individual fund within the
special revenue funds, enterprise funds and internal service funds.
When reserves exceed the requirement, allowable uses of any year end excess reserves are stipulated in the policy, and
include: funding of liabilities with a priority given to items that reduce future financial pressure, for pay-go financing,
one-time expenditures, or new programs, provided a multiyear financial projection is evaluated.
Budget Process
The annual budget process begins in the Spring of the preceding year, with the council subsequently establishing goals
for the executive staff. In compliance with the City charter, the City manager must submit to the City council a
recommended balanced budget that provides a complete financial plan for all City funds, on or before August 15th of
City of Fort Worth, TX Page 3 May 21, Z019
KRaLLBOND
RATING AGENCY
each year. The City charter further requires the budget show comparative figures for actual and estimated income and
expenditures of the current fiscal year and actual income and expenditures of the preceding fiscal year. The budget is
required to be adopted by the City council at least ten days after the first publication of the appropriations ordinance.
The City manager is responsible for maintaining a balanced budget at all times,
Strategic Planning
Among the fastest growing of the nation's 20 largest cities, Fort Worth embarked on its first economic development
strategic plan, released in December 2017. The plan is aimed at enhancing the City's status, regionally, nationally and
globally by focusing on emerging opportunities, better capitalizing on manufacturing and healthcare expertise,
leveraging existing international assets and taking a more aggressive stance to capture a greater share of high profile
corporate expansions within the region. The project consulting team includes TIP Strategies, Inc, and the plan outcomes
focus on high-wage job growth, more commercial/industrial tax base growth, attention to high growth businesses, and
a commitment to "quality of place". The plan process involved asking stakeholders "What does economic success look
like in Fort Worth?"; and the plan outlines specific initiatives as well as performance metrics.
Labor Relations
The City reports having favorable relations with employees. Police civil service employees receive increases in
accordance with the police meet and confer agreement, which has a term of June 1, 2017 through September 30, 2020,
and a one-year evergreen period. Fire civil service employee salaries are in accordance with the fire collective bargaining
contract, expired September 30, 2018, with a one-year evergreen. Negotiations for a new fire agreement are actively
underway, and ratification is anticipated prior to the evergreen. The City's salary schedules are detailed in an annual
report; employees will receive adjustments to their pay based on their individual job performance using the City's pay
for performance program.
Based on the foregoing, KBRA views the City of Fort Worth's governance and management structure and policies as
consistent with a AAA Rating Determinant rating. This rating level reflects the City's adherence to formal fiscal policies,
maintenance of prudent reserve levels, and existence of a formal CIP along with active economic development strategic
planning.
RD 2: Debt and Additional Continuing Obligations
KBRA views the City's debt and additional continuing obligations as moderate, which is notable given the City's
exceptionally rapid population growth. The City's use of pay go financing, practice of rapid debt repayment and
management of other continuing obligations have all served to contain the long-term liability profile. The City is currently
addressing pension reform, and implementation of solutions is expected in the near term.
Overall Direct and Overlapping Debt
KBRA views Fort Worth's debt burden as moderate. The City has no variable rate debt and no exposure to derivative
products such as swaps. KBRA views the City's debt amortization as very rapid with debt service quickly deescalating
after MADS ($119.1 million) in 2020 (see Figure 1).
FIGURE 1
Pro Forma General Purpose Debt Service
$iao,oao
sizo,000
��oo,oao
aso,aoo
$60,000
$40,000
$20,000
$-
1�
.�
�;_
� �
`I` � ■
A ■ • ■
�
� � ■
■ ■ �
�� ti� ti� titi ti� tia tih ti� ti� ti$ ti� 3� �ti �ti �� �a 3y �� 3� �� ��
tio tio tio ,yo ,yo ,�o tio tio ,yo tio tio tio ,yo ,yo tio ,yo tio tio tio ,�o ,yo
Outstanding Debt Service ■ General Purpos2 Bonds Szries 2019 � Tax Notes Series 2019
Source: CIty of Por[ Worth
With the current offering, the City will have $655.5 million in direct debt outstanding. The City does have approximately
$89 million in self-supporting debti not included in the direct debt calculation. This equates to manageable levels of
1 Self-supporting debt includes Car Rental Tax Obligation,
Obligations, Crime Control and Prevention District Obligations
City of Fort Worth, TX
Parking Obligations, Culture and Tourism Obligations, Solid Waste
Page 4
May 21, 2019
�CROLL BOND
RATING AGENCY
overall debt per capita at $3,968, and overall debt as a percent of full market value at 4.6%. The City's direct debt
service paid as a percentage of total governmental expenditures in FY 2018 as moderate (See Figure 2) Fort Worth's
direct debt includes general obligation bonds, tax notes, and certificates of obligation (which are non-voted).
FIGURE 2
0
ICBFBA Metric Ratio
Overall direct and indirect debt per capital $ 3,968
Overall debt as % of full market value of propertyl 4.6%
Debt amortization within 10 years 78.0%
Debt amortization within 20 years 100.0°/o
Direct de6t service as a% of total governmental expenditures 11.0%
Source: Fort Worth CAFR, Official Statement.
' Includes Series 2019 issuance. With special assessment debt, special tax revenue debt
and Tarrant Regional Water District Obligation included, debt per capita and debt per FMV
ratios are $4,460 and 5.1%, respectively.
Capital Improvement Plan (FY 2019-2023)
The City of Fort Worth maintains a formal five-year capital improvement plan
(CIP). The FY 2019-2023 CIP totals $1,7 billion, including $471 million budgeted
for FY 2019. The largest component of the CIP is water improvements ($1.0
billion) to address system growth, rehabilitation, and mandates. Water project
funding is primarily generated through revenue bonds and pay-go funding. On
May 5, 2018 voters approved a general obligation bond referendum of $399,5
million by favorable margins, The authorization is expected to satisfy almost all
general purpose bond funding needs for the CIP,
FIGURE 3
FY 2D19-2023 CIP
��io
0
. Aviatlon
Public Events
!9°/a General
Employee Retirement Fund s,o,o_, t` S°"d"'a�E
The City maintains the City of Fort Worth employees benefit plan (the City `��,. �Stormvaater
plan), a defined benefits plan. Assets of the City plan and the Retirement Fund �` •�faC2f
` : �,._zoio
employees plan (the staff plan, which is relatively small) are comingled for 4�io
investment purposes, but the staff plan is otherwise wholly governed and
maintained outside of the City. The City plan was established by City ordinance, Source:Ci2yofFortLYoKhfY2019-2023L7P
both plans are governed by state statute and are administered by the thirteen-
member retirement fund board of trustees (the board). Seven of the board members are elected by plan members. The
mayor and City council appoint five City residents and also designate the City's CFO as board members. Adoption of
benefit changes and setting of contribution rates are determined by the mayor and the City council.
The City's pension plans provide retirement, disability, and death benefits to all employees of the City, except elected
officers and non-salaried appointed members of administrative boards and commissions, part-time, temporary and
contract employees, and employees paid in part by another governmental agency. As oF January 1, 2019, City plans
membership totaled 11,547, including 6,589 actives (57% of inembership),
Pension Changes
The City's pension plans currently have a low funded ratio, largely due to a historical high assumption for the investment
rate of return relative to actual investment performance. The assumed rate of return is set by the pension board. To
address the underfunding, the investment assumption was lowered, and a second benefit tier created. These measures
were insufficient and in December 2018 the city council voted for further reforms, which were subsequently approved
by employees. In brief, reforms include eliminating service credits for future accruals of sick leave and major medical
leave and eliminating cost of living adjustments for service credits earned on or after July 20, 2019. These modifications
reduced the unfunded accrued liability by $144.3 million. The total net pension liability is $3,1 billion. Most significantly,
employees and the city agreed to larger pension contribution rates to bring down the unfunded liability,
The City, and employees, contribute a fixed percentage of payroll. The City's contribution rate has been below the
actuarially determined contribution (ADC) and the shortfall in the contribution has been widening, In FY 2018, the City's
actual pension contribution was $93.5 million, which represents a low 71.0% of the ADC ($131.8 million). In FY 2015,
the City met 94% of the ADC. As a result of the December Z018 pension modifications, the City's contribution rates are
increasing as shown in the figure below.
City of Fort Worth, TX Page 5 May 21, 2019
KROLLBOND
RATING AGENCY
FIGURE 4
Cify Pension Confribution Rates
% of Payroll
Group Current Rate Effective IWaximum Raie,
Rate 7/2019 With Risl< Sharing
Police I 20.46% I 24.96% I 27.36%
Non-Police � 19.74% I 24.24% I 26.64%
Source: City of Forth Worth Series 2019 preliminary official statement
Employee contributions are also increasing. Under the 2019 modifications, general employee contributions will increase
to 9.35% in )uly 2019 (from 8.25%), and police increases over three years to 13.53% (from 8.73%).
The pension modifications include automatic risk sharing contributions: if the ADC is greater than actual contributions
for two or more consecutive years, then contributions increase 2% per year with a cap of 4%. The risk sharing increases
are shared 60% employer and 40% employee, which is the historical overall proportional sharing of funding. The
mechanism is expected to take effect in 2022, and the maximum contribution by the city for police officers will be
27.36%, with police officers contributing a maximum of 14.73%,
The plan actuary prepared an initial assessment of the modifications, and assuming a 7.5% discount rate and the 2017
valuation results, plan funding is expected to be achieved over 30 years. However, subsequently to that report, the
pension board further reduced the discount rate assumptions to 7.0% and the fund, like many pension funds, suffered
losses in the 4th quarter of 2018 (see KBRA's research titled, . . _. . . _.. �_ _ . .= ; _'). As
a result, the City now estimates that the full funding will occur over 44 years without taking into consideration any
outside gains in assets in 2019. Enactment of the pension modifications required majority approval of all employees,
not just voting employees. KBRA believes that the proactive efforts of city's strong leadership team were key to the
achievement of the successful vote.
Pension Liability
Based on GASB 67 reporting requirements, the FY 2018 the net pension liability totaled $3.1 billion (governmental and
enterprise activities). The plan net position as a percent of the total pension liability was a low 42.4%. The plan's
underfunding is largely due to investment experience, as the investment assumption had been as high as 8.5%. In each
of the years 2011, 2013 and 2016 the investment rate assumption was reduced by .25%, bringing the investment
assumption to 7.75%. The blended rate (used to discount future liabilities) was 5.35% in fiscal 2018, with the crossover
date (estimated plan depletion) occurring in 2042.
The City's Net Pension Liability (NPL), having grown in recent years, is by various measures high compared to other
large cities (see figure 5). KBRA acknowledges the importance of the GASB NPL reporting standards, especially because
of the transparent and consistent measurement they bring to the important issue of unfunded pension liabilities.
However, our analysis of the issue does not stop at the point of observing and rank ordering NPL ratios. Instead, when
we observe an NPL that is relatively outsized or trending negatively, KBRA analyzes the context in which the NPL has
evolved in that community, the willingness and ability to address the underlying issues, and the ability of the municipality
to afFord solutions. In the case of Fort Worth, KBRA notes three positive characteristics; (i) the NPL will decline next
year as a result of the new pension modifications and its increased contribution requirements, (ii) the City is very
conservative in managing its other direct debt obligations with 78% of debt amortizing within 10 years, (iii) the City has
strong budget and economic ability to afford its increased pension contributions.
City of Fort Worth, TX Page 6 May 21, 2019
� ■ � KROLL BOPlD
' RATING AGENCY
FIGURE�S
Long Term Liabiliti2s PerFull Mar!<et Value
zo.00�io
is.00�io
lo.ao�io
I ,,
� � ! ''
s.00�ia
o ���� � �.I I �� ��� �I� ��I� .1 � ._�' 1�� �.I� ..I���' 111�� .�I '
a.ao io ���
���,'c ��c� �i�\e� oa�'o J`'�oc e�Q•�,\a oec\+ �,�c\° ��'�j° a��a� �y�'•c ��`'Go Qa�o o��'�c
F�� �e� yPc Gr• �o ��aa �r Pc a O O p- �ac �\ �\,c
�.° Q'c c�c `' c P
�a
■ Net Pension Liability ■ �irect Debt
■Total Direct and Overlapping Debt � NPL+Direct Debt+Overlapping Debt
Souce: 201ft City CAFRs
* 20i7 CAFR was used
KBRA believes the City's tax base has ample capacity to meet all of its credit and pension obligations. The City operates
within its taxing limits, and KBRA estimates the City has the capacity to meet its pension obligations. Doing so, of
course, would need to be considered in the context of all other tax increases for rapidly growing school districts, other
infrastructure investments and taxpayer service demands.
OPEB Liabilities
The City has actively managed its OPEB liability exposure, and KBRA views the related long-term liability as moderate.
Depending on when an employee was hired and their years of service, the City will pay all or none of a retiree's
healthcare premium costs. Employees hired on or after January 1, 2009, pay the full premium, but may participate in
the plan upon retirement. All retirement eligible employees are eligible for health care coverage benefits; the normal
retirement age is 65 with five years of credited service, The City has actively managed OPEB liabilities by containing
benefit eligibility, creating an OPEB trust, performing a dependent benefit audit and instituting cost-effective health plan
changes, The City maintains an OPEB trust, which reported a 2018 FYE fiduciary net position of $68.8 million. City
officials indicated to KBRA that the trust assets are not anticipated to be utilized until benefit payments peak.
In FY 2018, the City contributed $26.6 million for retiree healthcare. The net OPEB liability reported in the City's FY
2018 CAFR, was $883 million, The discount rate used in computing the plan liability was 3,53%.
In FY 2018, total fixed costs (debt service, the total pension actuarially determined contribution and the OPEB
contributions), represent 20.2% of total general government expenditures,
Based on the foregoing, KBRA considers Fort Worth's debt and continuing obligations profile as being consistent with an
AA Rating Determinant rating. This rating level reflects the City's rapid debt repayment, moderate debt service levels
as well as the need to establish a sustaining funding mechanism of the pension plan.
RD 3: Financial Performance and Liquidity Position
KBRA views the City's financial performance as strong, with a trend of healthy operating surpluses and healthy General
Fund reserve levels, with additional reserves and liquidity across all City operations. These financial results reflect the
City's conservative budgeting and fiscal monitoring practices,
The General Fund is the City's primary operating fund and the focus of KBRA's financial performance analysis. The City
budgets on a cash basis of Generally Accepted Accounting Principles (GAAP) and the budget document is a complete
financial plan for all City funds. The City manager may transfer budgeted amounts within a fund, while revisions altering
total appropriations requires approval by the City council. The City's fiscal year ends September 30. Financial forecasts
that evaluate budget performance, are published twice per year, in March and July,
In addition to the general fund, other sizable components of governmental operations are the debt service fund, the
crime and control prevention district fund (which receives a dedicated portion of the local sales tax), and the culture
and the tourism fund (which receives hotel tax collections). The City maintains a sizable internal service fund (ISF),
which is reimbursed by the other funds for services reported in the ISF. Management and reporting of equipment, capital
project design, and healthcare costs are handled via the ISF, enabling the City to centralize and better leverage
resources. The FY 2019 ISF adopted budget is $148 million, relative to the general fund budget of $731 million.
City of Fort Worth, TX Page 7 May 21, Z019
KROLLBOND
RA71NG QGENCY
The two-primary general fund revenue sources are property
taxes and sales taxes. Property taxes are collected by the county
and remitted to the City as they are collected. Sales taxes,
collected by the state, are remitted monthly. Dependence on
sales tax can pose financial vulnerability given the exposure to
economic volatility; however, the local sales tax does not apply
to motor vehicle sales or motor fuel sales, thus moderating
economic fluctuations. Since 2010, the sales tax revenue has
averaged 5.8% growth, and in each year actual collections out
performed budget.
The sales tax rate totals 8.25%, with 6.25% the state share and
2% representing the local share. In Fort Worth, as is typical of
large cities in the state, the local sales tax rate levied is the
maximum rate allowed under state law. Of the 2% local tax rate,
0.5% is dedicated to crime control (reported in a special revenue
fund of the City). In addition, 0.5% is dedicated to the Fort
Worth Transit Authority (FWTA), a separate entity from the City.
FIGURE 6
�ee�eral Fui�� i��v�r�ue, �Y 201�
Licen�•es and Fines and
o� FOTFEItIII"E�� 1°ro
Permits, 3 ro _,I I _ _ Other'�, 2°0
Charges for_ _ �
Sen,�ices, � ��
�
Francnise Fees, ,��
s��a ';�
General Prop�rty
Taxes, 59%
Sales Tax�s,
2s°�o �
FY 2018 Financial Results �- - _
Fiscal 2018 closed with a$17.3 million general fund increase in
fund balance and maintenance of strong reserves. Year end
balances are historically robust. FY 2018 results reflect favorable � OfherLocalTaxa , RevEnus from Use ofP4orteysnd Fro}rerty,
variances to budget on both revenues and expenditures, Sales Invzstarrantlncum��'t�c�)y3nf��overnmantal,GasLeasesart�
tax revenues were the largest contributor to positive budgetary Royaltias, Other, artd �andributdons
performance, with collections exceeding budget by $2.8 million �ource: CiEyofFort4'�orth,Fr2oiscaf�
(1.8% positive variance from budget). General Fund revenue
growth was a vibrant 6.4%, favorably outpacing the 4.4% expenditure growth.
FIGURE %
General Fund Revenues And Expenditures ('000)
2018 2017 2016 2015
Revenues
General Property Taxes $ 371,832 $ 345,657 $ 324,654 $ 308,037
Sales Taxes $ 157,369 $ 148,365 $ 138,497 $ 138,358
Franchise Fees $ 51,934 $ 50,078 $ 49,031 $ 53,129
Charges forServices $ 18,185 $ 19,349 $ 21,039 $ 10,919
Otherl $ 35,058 $ 32,719 $ 36,695 $ 32,267
Total Revenues $ 634,378 $ 596,168 $ 569,916 $ 542,710
Expenditures
GeneralGovernment $ 63,718 $ 59,937 $ 57,274 $ 100,387
Public Safety $ 419,515 $ 395,236 $ 381,237 $ 341,817
Culture and Recreation $ 60,911 $ 61,166 $ 60,747 $ 56,673
Urban Redevelopment and Housing $ 35,921 $ 38,584 $ 35,767 $ 17,023
Othe� $ 35,201 $ 35,623 $ 30,707 $ 33,149
Total Expenditures $ 615,266 $ 590,546 $ 565,732 $ 549,049
Surplus (Deficit) from Operations $ 19,112 $ 5,622 $ 4,184 $ (6,339)
Total Other Financing Sources (Uses) $ (1,860) $ (2,094) $ 3,176 $ 44,858
Net Changein Fund Balance $ 17,252 $ 3,528 $ 7,360 $ 38,519
Unassigned Fund Balance $ 107,272 $ 93,601 $ 68,436 $ 84,280
Unassigned Fund Balance as a% of
General Fund Expenditures 17.4o/o 15.8% 12.1% 15.4%
Source: City of Fort Worth Audited Financials
i Includes Other Local Taxes, Licenses & permits, Fines & Forfeitures, Revenue from Use of Money and Property,
Investment Income, Intergovernmentaf, Gas Leases and Royalties, Other, Contributions.
2 Includes Highways & Streets, Health & Welfare, Debt Service, Capital Outlay. Debt Service is largely reported in the Debt
Service Fund
The unassigned general fund balance levels have consistently met or exceeded the City's required minimum fund balance
policy of 10%, as reflected in the table above. In FY 2018, unassigned general fund balance grew to $107.3 million, or
17.4% of General Fund expenditures which KBRA views as strong.
City of Fort Worth, TX Page 8 May 21, 2019
KROLLBOND
RA71NG AGENCY
Frr,iiuF R
2019 Budget
The City currently estimates it will close the year with another operating surplus. Favorable sales tax performance and
conservative expenditure budgeting are expected to enable a$5 million operating surplus. The FY 2019 general fund
budget, totals $731,2 million and refiects a 7.7% increase over the FY 2018 adopted budget, The budget lowers the
property tax rate, increases cash funding of capital projects, increases pension funding and contains no use of reserves
to balance operations; KBRA views the City's budgeting practices as very strong. The budget includes compensation
increases for police of 3.1% plus steps, and a 3% cost increase for general employees under a pay for performance
program. In addition, pay go capital spending increases by $3.8 million.
Robust sales tax revenue growth is expected to continue, and the budget conservatively assumes 5,5% growth. Sales
tax growth has been fueled by construction activity and population growth, The property tax roll increased 10.9%,
enabling a two cent per $100 of assessed valuation reduction in the
property tax rate (to $,785 per $100). This is the city's third consecutive FIGURE 9
year of a reduction in the property tax rate, and is an effort to contain the
tax burden and enhance the City's competitive position for commercial Sizable Capital Paygo From Property Taxes
development. The City reported to KBRA that as tax increment districts ��+erall FY 2019 Tax Rate: $,735 per $100 AV
expire, and taxing levy is freed up, the City will continue to ursue r
p I'�Ebi$zNILz, I
property tax rate reductions. Currently there are 12 active increment i o.iss i
districts in the City, which capture approximately 4% of the base (based �
on City participation).
The City budgets at a 98.5% collection rate of its property tax levy. In a opE�ano�5, I
sign of fiscal discipline and prudent planning, the City allocates a portion d=dicatedto
of the real property tax levy for pay go capital financing, a practice KBRA pa''g°,o.ossi'
views favorably,
KBRA notes the proposal in the state legislature to limit property tax levies —
in Texas b reducin the ermitted ad'usted lev �Operation5,0.56s�
Y 9 P J y growth for operations
to 3.5% from the current 8% and requiring voter approval to override the
limit. The growth limit is adjusted to exclude new property values, and
voted debt is excluded from the tax rate calculation. In FY 2019, Fort �cu�re:FY20i9CltyofFortWorthBudget
Worth's operating tax rate was 94% of its rollback rate (net of the debt rate), evidencing some ability to operate with
a more constrained multiplier. Further, over 10% of Fort Worth's levy for operations is used for pay go capital funding.
This affords the City additional options should a lower multiplier become enacted.
City of Fort Worth, TX Page 9 May 21, 2019
�w�ce: c.iry or rorc wo�tn aud�ted financials
� Includes Taxes Receivables, Loans Receivables, Interest Receivables, Due from Other Funds, Inventorles,
Advances to Other Funds, Prepaids, Deposits, and Other, Long-Term Loans Receivable
Z Includes Construcfion Payable, Escro�v Accounfs Payable, Accrued Interest Payable, Other, Due to Other
Funds, Advances from Other Funds, Unearned Revenue
KROLLBOND
RATING AGENCY
Liquidity Position
KBRA views the City's liquidity position as strong as evidenced by robust year end balances. The FY 2018 governmental
funds cash totaled $847 million, with an additional $57 million held in the Internal Service Funds. The governmental
funds cash represents 236 days cash on hand at the close of FY 2018, which KBRA considers very strong. The strong
liquidity position precludes the need for cash ffow borrowing.
Based on the foregoing, KBRA views Fort Worth's robust reserves, history of favorable budgetary performance and
strong liquidity as being consistent with a AAA Rating Determinant rating.
RD 4: Municipal Resource Base
KBRA views the City's resource base as very strong and diverse. Incorporated in 1873, the City of Fort Worth is
approximately 350 square miles and is the county seat of Tarrant County.
The City is 15th largest City in the United States and the 5th largest in Texas with a population of 876,060. The City's
population has grown 45% since 2005 and 18% since 2010, growth rates that outpace both the state and nation. The
City expects the population to grow by another 60% reaching approximately 1.4 million by 2045, The Dallas-Fort Worth-
Arlington metropolitan had the largest growth rate among metropolitan areas in the nation between 2017 and 2018.
Due to its rapid population growth, the City has embarked on various projects to meet service needs. In July of 2018
the 1.6 billion I-35W project was complete which expanded the highway's capacity to 132,000 vehicles daily from
110,000. The City is also adding two additional fire stations to support the strong growth in the City. In addition, the
City, which has approximately 70,000 acres of developable land, is seeing large scale development of both residential
and commercial properties. The City's resource base is further supported by tourism. According to the Fort Worth
Convention and Visitors Bureau more than 6.5 million people annually visit the City, generating approximately $1.6
billion in annual economic impact and supporting more than 143,000 jobs.
FIGURE ZO
2017 Age 2017
2017 Chg from Chg from Population with Chg from 2017 Poverty Chg from 2017 Income Chg from
Population 2010 Dependency Z0102 B.A.Degree or 2010� Level 20102 percapita 2010
Ratio
higher
Fort Worth 876,060 17.7% SII.6% -0.3 29.7% 3.6 12.9% -5.0 $28,174 24.6°/a
Tal'rant 2�054,475 13.0% 60.2% 1.6 31.4°/o 2.8 11.6% -2.9 $31,221 20,8%
Texas 28,304,596 12.1% 62.0% 1.6 29.6% 3.7 14.7% -3.2 $29,525 23,7%
United States 325,719,178 5.3% 63.1% 1.3 32.0% 3.8 13.4°/o -1.9 $32�397 24.3%
Folt Worth as % NA 97.3% 94.6% 111.2% 90.2%
of Tarrant
Folt Worth as % NA 94.5% 100.3a/o 87.8% 95.4°/o
of Texas
Fort Worth as % NA 92.8% 92.8% 96.3% 87.0%
of United States
Sou�ce: U.S. Census Bu�eau is used as the sou�ce in order to provide a consistent comparison among different units of gove�nment.
i Age dependency ratio is the sum of the populafion under 18 yrs and over 65 yrs divided by persons age IS to 64 yrs.
2 Yea� over year change shown as nominal change in percentage points.
Tax Base and Demographics
The City's full market value (FMV) continues to exhibit strong with a sizable 10.5% increase from 201$ to $75.9 billion
in 2019 (see figure 11). Pursuant to state law, taxable property is appraised at market value. The City's tax base is
largely residential and in 2019, single and multi-family properties represent 61.8% of the City's FMV followed by
commercial/industrial properties at 32.6%. Residential growth has outpaced commercial/industrial growth. In 2010
single and multi-family properties made up approximately 51,9% of FMV. The 2019 FMV per capita ($86,663) continues
to increase, as FMV has increased at a greater year over year rate than the population growth rate.
City of Fort Worth, TX Page 10 May 21, 2019
KROLLBONO
RATIh1G AGENCY
FIGURE 1 �
Full Market Value History
�
so,000
�
� �o,000
�
60,000
50,000
40,000
30,000
20,000
10, 000
.
2010 ZO11 2012 2013 2014 2015 2016 2017 2015 2019
Source: City of Fort Worth General Purpose Refunding and Improvements Bonds, Series
2013 and General Purpose Bonds, Series 2019 OfFcal Statements
The City's top 10 taxpayers increased slightly from last year, This increase was driven by Facebook, which is associated
with Winner LLC, opening over a billion-dollar data center in Fort Worth, Nonetheless, the City's top ten taxpayers
remain diverse at 5.6% (see Figure 12). The City's property tax is collected by Tarrant County and since 2010 current
property tax collections have been high, averaging over 98%. In FY 2018, the current property tax collection rate
continued to be high at 97.9%.
FIGURE 1.2
Company
IWinner LLC
American Airlines, Inc
Oncar Electric Delivery Co.
Bell Helicopter Inc.
DDR/DTC City Investments LP
Alcon Laboratories, Inc
Wal-Mart Real Estate Bus
Trust/Stores LLC
AT Industrial Owner
MillerCoors
Carlyle/Cypress West 7th LP
Source: Clty of Fort Worth
Nature of Property
Data Center
Airlfne
Utility
Helicopter
Real Estate
Optics Mfg.
Retail & Distribution
W arehouse/Distributlon
Distillery
Real Estate
2019
Taxable
Assessed
Valuation
$1,054,627
$578,376
$460,659
$372,731
$261,580
$253,307
$244,972
$215,604
$173, 943
$162,300
�3,778,099
Percentage of
Total Taxable
Assessed
Valuation
1.6%
0.9%
0, 7%
0.6°/a
0.4%
0.4%
0.4°/a
0.3%
0. 3%
0.2%
5.6%
City of Fort Worth, TX Page 11 May Z1, 2019
KROLLBOND
RATING AGENCY
The City's wealth levels are slightly lower than the State and national average. Income per capita is growing at a slightly
greater rate than the State and nation at 24.6% (see Figure 10). However, the City's wealth levels are in line with the
largest cities in the State (see Figure 13).
FIGURE I.3
�
City Population Per Capita Poverty Unemployment
Income Rate 2017 2018 Mar-19
Houston 2,313,230 $ 31,175 20.6% 4.9% 4.2% 3.7%
San Antonio 1,511,913 $ 24,625 17.3% 3.5% 3.3% 3.1%
Dallas 1,341,103 $ 32,114 18.5% 3.9% 3.7% 3.4%
Austin 950,714 $ 40,323 13.1% 3.0% 2.7% 3.0%
Fo�t Worth 876,060 $ 28,174 12.9% 3.9% 3.6% 3.6%
EI Paso 683,583 $ 21,908 19.3% 4.4% 4.1% 3.7%
Arlington 396,407 $ 25,807 15.7% 3.8% 3.5% 3.2%
Corpus Christi 325,600 $ 27,593 15.5% 5.3% 4,6% 4.2%
Plano 285,312 $ 46,412 5.1% 3.5% 3.3% 3.1%
Laredo 261,935 $ 16,880 27.2% 4.2% 3.7% 3.8%
Source: U.S Census � Bureau of Labor Statistics
March 2019 are Preliminary
Economic Development Activitie§
Population has grown by approximately 18% since 2010, and as the population has grown so has the economic
development in the City. Alliance Texas, a 26,000-acre master-planned, mixed use community development project,
located in northern Fort Worth, has added an estimated $69 billion in economic impact over its 28-year-old history, as
reported in the City's FY 2018 Annual Report. In 2018, the development added more than 2,400 jobs and now has over
470 companies with employment of nearly 48,000. Other developments in the City include a new 80-acre campus for
Tarleton State University opening in fall 2019 with an expected 2,500 students with the ability to serve approximately
9,000 by 2030. Residential developments include, Walsh Ranch, a 7,267-acre development which will have up to 15,000
new homes, and various other mixed-use development projects.
The City's new 14,000 seat Dickies Arena is scheduled to open November 2019, and is expected to host 130 events
annually including of the month-long Fort Worth Stock Show rodeo (which first started in Fort Worth in 1896), the 2022
NCAA men's basketball first and second rounds, the 2020-22 NCAA Women's gymnastics championship, and the 2020-
22 American Athletic Conference men's basketball championships. The arena will have the capacity to accommodate
conventions, exhibit events, business meetings, and private receptions in spaces up to 91,315 square feet. In addition
to the events held inside the arena and the neighboring Will Rogers Memorial Campus's 5.8-acre plaza space can host
outdoor events for up to 3,000 guests.
Since 2010, the number of annual building permits issued in the City has grown by 40% while the estimated value has
increased by over 100% to $3.5 billion in 2018. To keep up with the economic growth, the City's voters approved a
$399.5 million bond package in May 2018 which includes propositions to build and repair roads, new park amenities,
and public safety facility improvements.
Fi�uRe 14
is,aou
14,000
12,000
v 10,000
� � �
�
N 8,000
�
a 6,000 �
4,000
2,000
0
2010
Building Permits
r--' �,
� � �
2011 2012 2013 2014 2015 2016 2017
Source: City of Fort Worth
Issuzd -Estima[zA Valuz
a,soo,000
a
a,000,aoo �
'
0
t
3,500,000 ~
3,000,000
2,5��,a��
2,000,000
1,500,000
1,000,040
500,000
0
2018
City of Fort Worth, TX Page 12 May 21, Z019
F(ROLL BOND
RATING AGENCY
The City is served by Dallas/Fort Worth International Airport ("DFW"), bonds rated by KBRA, which ranked
4th among commercial service airports in enplanements in 2017, behind Hartsfield-Jackson Atlanta International, Los
Angeles International, and Chicago O'Hare International. Total enplanements continue to grow at DFW growing by
22,3% since 2010 (see Figure 15) On December 31, 2018, TEXRaiI opened providing a 27-mile rail line from downtown
Fort Worth through Tarrant County and ending at DFW terminal B, The City projects that the new rail line will attract
8,000 daily riders by the end of the first year and up to 14,000 by 2035, In addition to the City's proximity to DFW, the
City operates three private aviation airports, and is served by six major railroad systems with service to cities such as
Chicago, St, Louis, Little Rock, Dallas, San Antonio and Los Angeles.
FIGURE I.S
N ao,oao
D
� 35,000
= 30,000
F
25,000
20,p00
15,000
10,000
5,000
Dallas Fort Worth International Airport
Total Enplanments
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Saurre: Oallas Por[ Worth International Airporl CAFR
Employment
Since 2010 the City's unemployment rate has been slightly lower than the State's and that trend continued in 2018.
However, preliminary figures from March 2019 show the City's unemployment slightly greater than the State's at 3.6%
compared to 3.5% for the State, KBRA does note, that historically, in March the City has a slightly higher unemployment
rate. The City has seen its employment grow by 25.1% since 2010 which is a greater rate than the state and nation at
18.4% and 12%, respectively. Employment growth has been driven by gains in employment in trade, transportation,
utilities, education and health services, leisure and hospital, and government sectors, which collectively represent 62,1%
of total employment in the Fort-Worth-Arlington MSA (see Figure 17).
FIGURE 16
aso,aoo
��w,aao
350,000
3C0,000
'� 2=0poo
r
& 2C0,000
w
iso,oaa
100,ao0
so,wo
0
Fort Worth Employment vs Unemployment
� I
I
����M ���w�
so,a�o
25,Na
zo,cuo
I5,000
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0
.005 2006 2007 2409 ?009 2010 2013 '.Ul. ?Ol3 2014 Z015 2016 2017 2010
- Fort l'larth Em l0 �m2n[ � F rt\V Ih U I
FIGURE 1%
Employment By Sector
Fort Worth-Arlington Metropolitan Division vs United States
Government
OtherSzrvicas ��.
LeisureandHospitality . .
Education and Heal[h Szrvices _. __ _ __—_.
Professlonal and 6usiness Szrvices . _ ._ . ,
Financial Activities ��
Information � .
Trade, Transportation, and Utilities . _ .
M1lanufacturing .
Plining, Logging, and Construdion �^
OA4b 5.0°s 1U.0% i5.o°/u
■ Fort Worth-Arlington, TX Pletropolitan Division
20.0 % 25.0°S 30.0°,a
United States
p� o or nemyoYrnent Source:Bureauo(La6or5tatistics
Saurce: 9u�eau af La6o� 5ta!!stla
In addition to employment opportunities located in the City, residents of Fort Worth have access to employment markets
in Dallas and Arlington. In 2017, approximately 42.6% of residents work outside of the City with the mean commuting
time of just under 30 minutes. The City's top employers have grown from 12.3% of total employment in FY 2010 to
being 23,4% in FY 2018. Top employers within City limits include the City itself, the American Airlines corporate
headquarters, and National Air Station (NAS) Fort Worth Joint Reserve base. American is scheduled to open their new
1.8 million square foot headquarters in May 2019 and the headquarters on any given day could be home to
approximately 12,000 employees.
City of Fort Worth, TX Page 13 May 21, 2019
KROLLBOND
RA7IPIG AGENCY
Based on the foregoing, KBRA has revised the Rating Determinant rating for the City's municipal resource base to AA+
from AA, recognizing the City's growing and diverse resource base and improving wealth metrics. This rating determinant
rating also reflects the City's wealth levels that are lower than the State and the Nation,
Banicruptcy Analysis
To be a debtor under the municipal bankruptcy provisions of the U.S. Bankruptcy Code (Chapter 9), a local governmental
entity must, among other things, qualify under the definition of "municipality" in the Banl<ruptcy Code, and must also
be specifically authorized to file a bankruptcy petition by the State in which it is located. KBRA has consulted outside
counsel on bankruptcy matters and the following represents our understanding of the material bankruptcy issues
relevant to the City. The City is a political subdivision and municipal corporation of the State of Texas organized and
existing under state law, and thus is a"municipality" as defined under the Bankruptcy Code. In addition, Texas state
law specifically authorizes any municipality in the state that has the power to incur indebtedness through the action of
the municipality's governing body to file a Chapter 9 petition, Thus, the City has the authority under Texas state law to
incur indebtedness and, hence, it is specifically authorized under Texas state law to file a Chapter 9 petition, subject of
course to the further threshold requirements in Federal law (the Bankruptcy Code) for commencement of a Chapter 9
case.
The principal of and interest on the Bonds and the Notes are payable from a direct and continuing ad valorem tax levied
by the City, within the limits prescribed by law, upon all taxable property in the City.
If the City were to file a petition commencing a Chapter 9 proceeding, though Chapter 9 provides for post-petition
recognition of (i) a security interest represented by a pledge of specific special tax' revenues or municipal enterprise
revenues (each "special revenues") and also (ii) a statutory lien on revenues pledged for municipal obligations, in
contrast, the pledge of general ad valorem property taxes for a general purposes obligation of a municipality is not
recognized as a security interest or lien that survives the filing of a petition under Chapter 9. Accordingly, because (a)
the funds pledged to pay the Bonds and the Notes are not from a separate, dedicated source of revenues that meets
the definition of `�special revenues" under Chapter 9, and (b) there is no statutory lien imposed on the pledged ad
valorem tax revenues levied to pay the Bonds or the Notes, holders of the Bonds and the Notes would likely be treated
as unsecured creditors of the City.
Conclusion
KBRA assigns an AA+ rating with a Positive Outlook to the City of Fort Worth General Purpose Bonds, Series 2019 and
Tax Notes, Series 2019 and affirms the AA+ rating and Positive Outlook for the General Purpose Bonds, Series 2018
and Tax Notes, Series 2018.
c0 Copyright 2019, Kroll Bond Rating Agency, Inc., and/or its licensors and affiliates (together, "KBRA"), All rights reserved. All
information contained herein is proprietary to KBRA and is protected by copyright and other intellectual property law, and none of such
information may be copied or otherwise reproduced, further transmitted, redistributed, repackaged or resold, in whole or in part, by
any person, without KBRA's prior express written consent. Information, including any ratings, is licensed by KBRA under these
conditions. Misappropriation or misuse of KBRA information may cause serious damage to KBRA for which money damages may not
constitute a sufficient remedy; KBRA shall have the right to obtain an injunction or other equitable relief in addition to any other
remedies. The statements contained herein are based solely upon the opinions of KBRA and the data and information available to the
authors at the time of publication. All information contained herein is obtained by KBRA from sources believed by it to be accurate and
reliable; however, all information, including any ratings, is provided ��AS IS". No warranty, express or implied, as to the accuracy,
timeliness, completeness, merchantability, or fitness for any particular purpose of any rating or other opinion or information is given
or made by KBRA, Under no circumstances shall KBRA have any liability resulting from the use of any such information, including
without limitation, for any indirect, special, consequential, incidental or compensatory damages whatsoever (including without
limitation, loss of profits, revenue or goodwill), even if KBRA is advised of the possibility of such damages. The credit ratings, if any,
and analysis constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not
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City of Fort Worth, TX Page 14 May 21, 2019
S&P Global
Ratings
www.spglobal.com/rati ngsdirect
RatingsDirect°
������°�e
Fo�t Worth, `Texas; Gene�al Obligation
Primary Credit Analyst:
Stephen Doyle, Dallas (1) 214-765-5886; stephen.doyle@spglobal.com
Secondary Contact:
Andy A Hobbs, Dallas + 1(972) 367 3345; Andy.Hobbs@spglobal.com
Table Oi Contents
.............................................................................................................
Rationale
Outloolc
Related Research
May 24, 2019 1
��z��.�����o
Fort �IlTorth, Texas; Gener°al Obli�ation
US$105.355 mil Gen purp bnds ser 2019 dtd 06/01/2019 due 03/O1/2039
Long Term Rating
AA/Stable
US$8.745 mii tax notes ser 2019 dtd 06/O1/2019 due 03/O1/2026
Long Tenn Rating
Fort Worth GO
Long Term Rating
Rationale
AA/Stable
AA/Stable
New
New
Affirmed
S&P Global Ratings assigned its 'AA' long-term rating to the City of Fort Worth, Texas' series 2019 general purpose
bonds and series 2019 tax notes. At the same times, S&P Global Ratings affirmed its 'AA' long-term rating on the city's
limited tax general obligation (GO) debt outstanding. The outlook on all ratings is stable.
Both the general purpose bonds and the tax notes are payable from an annual ad valorem tax levied, within the limits
prescribed by law, on all taxable properry within the city. The maximum allowable rate in Texas is $2.50 per $100 of
assessed value (AV) for all purposes, with the portion dedicated to debt service limited to $1.50. The city's total tax
rate is well below the maximum, at 78.5 cents, 15.5 cents of which is dedicated to debt service. Based on the
application of our criteria, "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness," published
Jan. 22, 2018, we view the limited-tax GO debt pledge on par with the city's general creditworthiness. The ad valorem
t�es are not levied on a narrower or distinctly different t� base, and there are no limitations on the fungibility of
resources available for the payment of debt service. The series 2019 general purpose bond proceeds will fund capital
projects. The series 2019 tax note proceeds will go toward the purchase of fire safery equipment.
The rating reflects our view of Fort Worth's:
• Adequate economy, with access to a broad and diverse metropolitan statistical area (MSA);
• Very strong management, with strong financial policies and practices under our Financial Management Assessment
(FMA) methodology;
• Weak budgetary performance, with operating deficits in the general fund and at the total governmental fund level in
fiscal 2018;
• Very strong budgetary flexibility, with an available fund balance in fiscal 2018 of 16% of operating expenditures;
• Very strong liquidity, with total government available cash at 85.8% of total governmental fund expenditures and
lO.Ox governmental debt service, and access to external liquidity that we consider exceptional;
• Very weak debt and contingent liability profile, with debt service carrying charges at 8.6% of expenditures and net
direct debt that is 122.1% of total governmental fund revenue, as well as a large pension and other postemployment
www.spglobal.com/ratingsdirect May 24, 2019 2
Summary: Fort Worth, Texas; General Obligation
benefits (OPEB) obligation. We recognize the city has made revisions to its pension plan, however, it will take time
to determine whether those recent changes will sufficiently address the obligation; and
^ Strong institutional framework score.
Economy
We consider Fort Worth's economy adequate. The city, with an estimated population of 848,460, is located in Denton,
Parker, and Tarrant counties in the Dallas-For•t Worth-Arlington MSA, which we consider to be broad and diverse. The
city has a projected per capita effective buying income of 88.6% of the national level and per capita market value of
$79,866. Overall, the city's market value grew by 10.6% over the past year to $67.8 billion in 2019. The
weight-averaged unemployment rate of the counties was 3.5% in 2018.
Fort Worth anchors the Dallas-Fort Worth MSA. The city's local economy remains one of the most robust in the state,
led by health care, professional services, the aerospace and defense-related industries, and construction, all of which
have increasingly offset the region's cyclical energy sector. The city is also host to Texas Christian University, Texas
Wesleyan University, a robust community college system, and other higher education institutions. Fort Worth's
estimated population is 850,000, with a daytime population of more than 1 million, reflecting the employment
opportunities available throughout the city. In our opinion, recent and projected building-permit activity will likely lead
to additional tax-base growth during the next two years. In the long term, we believe the city is well positioned for
further growth due to the significant amount of land that is currently undeveloped, but developable within city limits,
and a larger amount of land that is undeveloped within Fort Worth's extraterritorial jurisdiction.
Population and market value have increased approximately 7.0% and 43.9%, respectively, over the past five years.
Given past trends and forward-looldng expectations, we believe the city's economy will continue to show positive
growth over the next two years, which we view as a credit strength.
Budgetary performance
Fort Worth's budgetary performance is weak, in our opinion. Following our adjustments, the city had operating deficits
of 3.2% of expenditures in the general fund and of 7.5% across all governmental funds in fiscal 2018.
We adjusted for recurring revenues in and out of the general fund and other governmental funds, as well as for capital
outlay expenditures funded through debt proceeds. We also adjusted expenditures to account for the difference
between what the city contributed to its Employees' Retirement Fund and the actuarially determined contribution
(ADC), which amount to an additional $38 million of expenditures in fiscal 2018. In our view, if a local government is
maldng annual contributions to its pension plan that are below actuarially determined levels, budgetary performance is
likely overstated. Subsequently, this led to a net operating deficit of about $21 million in the general fund and $88
million across all governmental funds in fiscal 2018.
Prior to our adjustments, for fiscal 2018, the city posted a surplus in the general fund due to positive sales t� and
property tax growth. More than half (58%) of general fund revenues come from property taxes, while 25% comes from
sales taxes. The positive trends are expected to continue and create an environment that partially offsets the cost
increases associated with its pension plan.
The fiscal 2019 generai fund budget is balanced, with both revenues and expenditures projected to be about $687
www.spglobal.com/ratingsdirect May 24, 2019 3
Summary: Fort Worth, Texas; General Obligation
million (including transfers). Based on year-to-date results, revenues and expenditures indicate a surplus in the general
fund of roughly $5 million. If actuals hold true, Fort Worth could experience a positive net change in fund balance, but
that does not take into account S&P Global Ratings' adjustment for growing pension costs.
The 2019 budget adopted by city officials reflects a 1.5% increase in the city's year-over-year contribution rate to the
ciry's pension fund. We estimate that even with the 1.5% citywide increase nd the additional contributions approved
earlier this year, the city will still experience a contribution deficiency between the ADC and its actual contribution in
the current fiscal year. Officials indicate that contributions to the plan will very likely not meet the ADC for the next
two fiscal years, even when incorporating the additional contribution increases that are set to occur during this time.
Fort Worth is in the planning phases for its fiscal 2020 budget cycle, but will incorporate these increases. The increases
are also included in the city's forward-looking financiai forecasts. For fisca12020, operating results in the general fund
show a$10 million deficit at this time. Relative to the size of the budget, a$10 million deficit is almost breakeven and
projections might prove to be conservative, but the recently approved additional contribution increases will likely
further pressure the budget. As a result, we expect budgetary performance to remain weak over the next two years,
and that performance, before our internal adjustments, will continue to be masked by future underfunding of the ADC.
Budgetary flexibility
Fort Worth's budgetary flexibility is very strong, in our view, with an available fund balance in fisca12018 of 16% of
operating expenditures, or $109.8 million.
Transfers to other governmental funds and enterprise funds, along with the ADC deficiency, are included in the city's
operating expenditures for purposes of our calculations. The city typically transfers funds from its general fund to its
capital project fund annually in order to maintain and invest in Fort Worth's infrastructure. This transfer did not occur
in fisca12018, and we did not adjust for this as we had in previous analyses'.
Fort Worth's available fund balance at year-end fiscal 2018 was nominally the largest over the past six years. On a
nominal basis, the available fund balance increased in fiscal 2018 to $109.8 million (17.8% of unadjusted operating
expenditures), from about $93.6 million (15.8% of unadjusted operating expenditures) in fiscal 2017. Including
adjustments to expenditures, the available general fund balance equates to 16.8% of operating expenditures, a level
that we still consider very strong.
Despite the substantial year-over-year increase in the fund balance in each of the past two fiscal years, we believe Fort
Worth's budgetary flexibility could be pressured if its pension liability continues to grow. Since fiscal 2012, reserves
have been at or below 15% of expenditures until fiscal 2017. For fiscal 2019, projections indicate another addition to
fund balance of about $5 million, which would likely maintain reserves at a level in excess of 15% of expenditures,
which we consider very strong, depending on final operating expenditures. Moving forward, we believe management
will adhere to its formal reserve policy, and that reserves will not decrease below 10% of operating expenditures over
the next two years.
Liquidity
In our opinion, Fort Worth's liquidity is very strong, with total government available cash at 85.8% of total
governmental fund expenditures, and lO.Ox governmental debt service in 2018. In our view, the city has exceptional
www.spgtobal.com/ratingsdirect May 24, 2019 4
Summary: Fort Worth, Texas; General Obligation
access to external liquidity if necessary.
Fort Worth has, in our view, exceptional market access having issued GO, utility revenue, and certificates of obligation
on a frequent basis. The city has four privately placed agreements, with a total par outstanding of about $39 million.
Upon review of the legal requirements, we do not consider the private placements as a contingent liquidity risk, as
there are no permissive covenants, acceleration provisions, or cross-default provisions that could result in an
unanticipated call on liquidity. The city's investments are highly liquid and regarded as cash equivalents in the audit,
and the majority of all investments have a maximum maturity date of five years.
Management
We view the city's management as very strong, with strong financial policies and practices under our FMA
methodology, indicating financial practices are strong, well embedded, and lilcely sustainable.
The budgeting process incorporates an analysis of past trends related to primary revenue and expenditure items.
Budget assumptions do not include making the ADC to the city's pension plan, which we view as a risk and is a
somewhat optimistic view of future expenditures. Management completes a comprehensive review of financial
performance on a monthly basis, and p'rovides semi-annual reports on financial performance to the city council. The
governing body is able to amend the budget at any time with council approval. As part of the budget process,
management produces a five-year financial forecast to illustrate the long-term effect of current-year budget decisions.
The five-year financial forecasts include the city's planned contribution rate increases. Should these contributions fall
short of ineeting the ADC in future years, even with the recent increased contributions from employees and benefit
changes, we may no longer view this as a credible planning tool for long-term financial decision malflng and it couid
affect the FMA. A formal investment policy, focusing on cash management and investment strategy, also exists;
management reports results to the city council quarterly.
Adopted debt policies focus on the rypes of debt instruments officials can use, how much debt they can issue, and
what type of structure they should use. Concerning reserves, the policy states management will strive to maintain an
undesignated general fiuid balance equal to at least 10% of the current-year budget for operating and maintenance
items, with a goal to reach 16% of expenditures. For capital planning, management is required to review its capital
improvement needs and the city's infrastructure status annually. An adopted five-year capital improvement plan is
annually produced, and shows all projects and corresponding funding sources.
Debt
In our view, Fort Worth's debt and contingent liability profile is very weak. Total governmental fund debt service is
8.6% of total governmental fund expenditures, and net direct debt is 122.1% of total governmental fund revenue.
Revenue-backed debt supported through the city's enterprise fund has been adjusted in our direct debt-to-revenue
calculations. Following the sale of the 2019 issuances, Fort Worth will have $369.5 million of authorized but unissued
debt remaining, all of it fr•om its nearly $400 million 2018 bond program that was approved by voters in May of 2018.
Officials anticipate issuing the remaining authorized debt over the next four fiscal years, with an issuance occurring
each year. Given future debt plans, we expect Fort Worth's debt profile to remain very weak during the next two years.
www.spglobal.com/ratingsdirect May 24, 2019 5
Summary: Fort Worth, Texas; Genera( Obligation
Pension
In our opinion, a credit weakness is Fort Worth's large pension and OPEB obligation. We recognize the city has
revised its pension plan, however, it will take time to determine whether those recent changes will sufficiently address
the obligation.
Despite cost-saving pension modifications made in early calendar 2019, we believe Fort Worth's large unfunded
pension liability/poor-funded status, lack of funding discipline, and high actual pension costs as a percent of total
government expenditures wiIl continue to mask the city's budgetary performance and potentially pressure the budget
during the outlook period. We do not foresee material improvements within our two-year outlook horizon. Fort
Worth's combined required pension and actual OPEB contributions totaled 13.6% of total governmental fund
expenditures in 2018. Of that amount, 11.5% represented required contributions to pension obligations, and 2.4%
represented OPEB payments.
The city's agent multiple-empioyer defined benefit pension plan, the Employee's Retirement Fund of the City of Fort
Worth, has experienced a steady decline in funded status since 2010, primarily due to contributions less than the
actuarial recommendations. Contributions to the ciry's pension plan are statutorily defined and have been well below
the ADC in recent years, causing further deterioration of the plan's funded status. As of Jan. 1, 2010, the plan's
actuarial funded ratio was 81.2%. As of the most recent actuarial valuation (Sept. 30, 2018), the plan was extremely
weakly funded on a Governmental Accounting Standards Board (GASB) basis, at 42.9%, with a net pension liabiliry of
$3.1 billion. The city made 71.0% of its ADC in 2018. GASB liabilities were calculated using a single discount rate of
7.75%, which we view as representing a target asset portfolio that contains high market risk. Aside from its pension
benefits, Fort Worth provides certain OPEB for retired employees. As of Sept. 30, 2018, the plan was 7.23% funded
based on a single discount rate of 3.53%. The city discontinued OPEB for employees hired after 2008. At Sept. 30,
2018, the OPEB liability was $883 million, down from $940 million in the previous year.
Recent Modifications
Several years ago, recognizing the long-term liability as an issue, city officials took steps to improve the overall fiscal
health of its pension system. In December 2018, council approved additional changes to the city's pension plan. Plan
members approved these changes in February 2019. In addition, changes were made to the plan's actuarial
assumptions in March 2019. The mayor and city council administer the plan, defining benefits, setting contribution
rates as well as funding contributions. The governing body has the ability to alter benefits, but not increase employee
contributions without a successfizl employee vote. Although we believe these benefit, contribution, and actuarial
changes will better position the city to address its pension liability, we do not expect the plan's funded status to
improve in the near term, and we do not believe the city's contribution costs, as a percent of its total governmental
expenditures, will decline.
The changes approved by members in February 2019 include the elimination of cost of living adjustments for ail
service credits earned or purchased on or after July 20, 2019, and employee and employer contribution increases.
These contribution changes include a fixed contribution increase, whereby the city contribution rate will increase by
4.5% in July of 2019, police officer contributions will increase by 4.4% over a three-year period, firefighters will
contribute3.8% more over a two-year period, and general employees will begin contributing between 1.1%-1.8%
beginning in July 2019. Beginning in 2022, if the ADC remains in excess of actual contributions to the plan, a
www.spglobal.com/ratingsdirect May 24, 2019 6
Summary: Fort Worth, Texas; General Obtigation
risk-sharing mechanism will go into effect and increase contributions further for the city and all employee groups, with
a cap equal to 4.0% of payroll. In fiscal 2018, Fort Worth contributed 19.74% of retirement-eligible wages to the plan
for general employees and firefighters, and 20.46% for police officers. With annual budgeted increases in the city's
contribution rates in fiscal years 2018 and 2019 (2.0% total) and additional increases beginning in fiscal 2020, we still
expect contributions to fall short of the ADC during the next several years, notwithstanding any other changes. As a
result, the effective city contribution rate is expected to amortize the unfunded liability over a long 75-year period, as a
level percentage of payroll. Payroll growth is assumed to be 3.0% per year.
Actuarial changes were also made in March 2019, and include a reduction in the discount rate to 7.00% from 7.75% as
well as the use of an updated mortality assumption that uses generational mortality improvements for projections.
These actuarial assumptions will likely result in an increase in lhe pension liability and thus a decline in the funded
ratio and an increase in the ADC beginning in fiscal 2020. Officials indicate that after these assumption changes are
incorporated the new employee and city contribution rates will not fully amortize the pension liability within 30 years,
but instead within 44 years after incorporating the risk-sharing mechanism.
Strong institutional framework
The institutional framework score for Texas municipalities is strong.
Outlook
The stable outloolc reflects our view that the city will likely continue to see strong economic growth and taxable value
gains due to its participation in the Dallas-Fort Worth MSA. The outlook also reflects our view that the city's recent
pension modifications show that officials are committed to reducing the plan's significant net pension liability through
a combination of contribution increases, benefit changes, and actuarial assumption changes, which may ease
long-term budgetary pressures, even though these pressures will likely persist, or potentially worsen, during the
two-yeai• outlook period. The full effect of the recent changes is not lrnown at this time, but we do not expect these
changes to improve the net pension liability or the plan's funded status during the outlook period. At this time, we do
not expect to change the rating within the next two years.
Downside scenario
Assuming all other rating factors remain stable or improve, if the city's recent pension modifications do not show
progress towards malflng the ADC, or if the net pension liability continues to grow after the recent actuarial changes
are incorporated, we cotild lower the rating. We could also lower the rating if continued contribution increases further
pressure the city's budgetary performance that causes a reduction in its budgetary flexibility or budgetary performance,
or a revision in our view of the ciry's long-term financial planning as reflected in our FMA.
Upside scenario
While we recognize that the city has made modifications to its pension, we do not expect a material improvement in
the funded status of the plan, and we do not expect the city to make the full ADC during the two-year outlook period.
However, we could raise the rating if there were a significant improvement in the pension funded status, and the city
begins making its ADC, without reserve levels deteriorating, and the city experienced continued economic
improvement that results in economic metrics that are comparable with those of higher-rated peers, assuming all other
www.spglobal.com/ratingsdirect May24,2019 7
Summary: Fort Worth, Texas; General Obligation
rating factors improve or remain stable.
Related Research
• S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013
• Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance, Feb. 18, 2014
• Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local
Government GO Criteria, Sept. 2, 2015
� Local Government Pension And Other Postemployment Benefits Analysis: A Closer Look, Nov.8, 2017
• 2018 Update Of Institutional Framework For U.S. Local Governments
�- � � � �
Fort Worth GO
Long Term Rating AA/Stable Affirmed
Fort Worth GO
Long Term Rating AA/Stable Affirmed
Fort Worth GO
Long Term Rating
Fort Worth GO
Long Term Rating
Fort Worth GO
Long Term Rating
Fort Worth GO
Long Term Rating
AA/Stable
AA/Stable
AA/Stable
AA/Stable
Affirmed
Affirmed
Affirmed
Affirmed
Certain terms used in this report, particularly certain adjecHves used to express our view on rating relevant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for
further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
action can be found on S&P Global Ratings' public website at www.standazdandpoors.com. Use the Ratings search box located in the left column.
www.spglobal.com/ratingsdirect May 24, 2019 8
Summary: Fort Worth, Texas; General Obligation
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www.spglobal.com/ratingsdirect May 24, 2019 9
S&P Global
Rati ngs
RatingsDirect°
Fort UVorth, `Texas; CP; V1Tater/Sev�er
Primary Credit Analyst:
Theodore A Chapman, Dallas (1) 214-871-1401; theodore.chapman@spglobal.com
Secondary Contact:
Omid Rahmani, Dallas + 1(214) 765 5880; omid.rahmani@spglobal.com
Tab�e Of Contents
Rationale
Outlook
www.sp�lobal.com/ratin�sdirect May 23, 2019 1
F°ort V1Torth, '�'�xas; CP, �Tater/Se�ver
US$96.09 mil wtr and swr sys rev bnds ser 2019 dtd 06/O1/2019 due 02/15/2049
Long Term Rating
Fort Worth
Long Term Rating
Rafiionale
AA+/Stable New
AA+/Stable Affirmed
S&P Global Ratings assigned its 'AA+' rating to Fort Worth, Texas' series 2019 water and sewer system revenue
bonds. At the same time, S&P Global Ratings affirmed its 'AA+' rating on the city's senior-lien water and sewer system
revenue debt. The outlook is stable.
The rating reflects our opinion of the system's general creditworthiness, including Fort Worth's extremely strong
enterprise risk profile and very strong financial rislc profile. The city's first-lien net water and sewer system revenue
pledge secures the bonds. We understand officials will use bond proceeds to fund approved projects in the city's
capital improvement plan (CIP).
Fort Worth administers a citywide plan with separate funds for police, fire and nonuniformed employees that, as of
fiscal year-end 2018, was about 43% funded, down from 58.5% at the end of 2016 and on a path to insolvency. In
response, the city appointed a review committee that recommended proposals that ultimately were approved by both
the ciry council and a vote of employees. The proposals included both cost-containment measures (e.g., establishing
conditions precedent before any cost-of-living increase would become effective), as well as increased contributions
from both the city and employees (both uniformed and nonuniformed). Still, we understand that the revised discount
rate assumption is 7.0%, which we view as somewhat aggressive, especially after a net market value decline during
calendar 2018 of 3%. Further, the city does not expect to amortize the liability within a 30-year horizon, and it may still
be several more years before it can fully fund its actuarially determined contribution (ADC). Just under 11% of the $3.1
billion total net pension liability reflects the water and sewer system, which limits the system's exposure. Generally, we
have seen that for large municipal utilities it is the capital program, not pension or related liabilities, that generates the
need for rate adjustments. IVonetheless, in our view, the overall underfunded position currently creates headwinds to
achieving a 'AAA' rating.
When we stress management's already conservative financial projections for the water and sewer fund, we find the
utility system is likely to maintain sufficient financial capacity for its ongoing operating budget and capital
commitments while absorbing a likely increase in the contribution for its allocable share of the pension and other
postemployment benefits (OPEBs). Although the city cannot look to its wholesale customers to avail itself of the
pension problems, wholesale sales help stabilize the system's total operating revenues, which we also view as a credit
positive. We base our assumption of continued financial capacity of the water and sewer fund on:
• The water and sewer fund's share of the total liability remaining about the same;
www.spglobal.com/ratingsdirect May 23, 2019 2
Fort Worth, Texas; CP; Water/Sewer
• The financial interplay between the water and sewer fund and Fort Worth's general fund not changing in terms of
both transfers and permitting the utility to build and maintain available reserves; and
The CIP remaining similar in size and scope. The CIP, which identifies about $1.08 billion in commitments through
fiscal 2024 and will be approximately 64% debt-funded, is not being pressured by any regulatory actions or
environmental compliance enforcements, unlike that of many comparably sized systems.
Transfers of surplus net revenues to the general fund are limited and defined. While officials can use surplus net
revenues for any lawful purpose, an over-reliance on transfers out to shore up shortfalls in the general, pension, or
other funds would likely weaken the all-in debt service coverage (DSC) assessment. All-in DSC is S&P Global Ratings'
internally adjusted DSC calculation that includes all debt regardless of lien or accounting treatment, and hypothetically
treats some recurring debt-like obligations, such as demand and capacity payments, as if they were actually city-issued
debt. The calculation also includes all net transfers fi-om the udliry fund as if they were operating expenses because, in
our view, they are a recurring use of utility operating revenues. If we believe the transfers out were associated with a
liquidity crisis, we would view this to be negative extraordinary intervention by the general fund and equalize the utility
and general obligation (GO) ratings.
OUtI00k
The stable outlook reflects our expectation that Fort Worth's willingness to adjust rates, including passing through
wholesale cost pressures, will be key to rating stabiliry. The city's continued economic growth and diversity, limiting
cyclicality from sectors such as energy and commodities, as well as a housing market that we do not view to be in a
bubble, are factors that enhance rating stability, in our opinion.
Upside scenario
Given that the pension reform measures have only recently been implemented and that it could be some time before
the overall funding levels materially improve, a'AAA' rating is not likely within our two-year outlook horizon. Still, a
higher rating would be predicated, in large part, on sustained improvement in addressing the pension liability while still
maintaining strong operations and similar financial capacity.
Downside scenario
Downward pressure on the rating would most likely come from scenarios such as an increased reliance on the utility's
surplus net revenues by the general government either for either subsidizing general fund operations or to shore up
fiduciary funds beyond even that for which the system is responsible. A downgrade could also follow a sharp increase
in debt if Fort Worth were to receive a consent decree or other large-scale requirement, or evidence of what we would
view as deferred maintenance or deferring on key decisions that could help sustain the current financial profile.
Factors that support the water and sewer system's enterprise risk profile include the following:
• A broad and diverse service area that includes retail and wholesale service, in a metropolitan statistical area (MSA)
we consider strong;
• The system's strong operational profile, with raw water provided by the Tarrant Regional Water District (TRWD),
reducing some of the financial and operational risk to the city; and
www.sp�Iobal.com/ratin�sdirect May 23, 2019 3
Fort Worth, Texas; CP; Water/Sewer
A pass-through of wholesale rate increases, with a regular review and as-necessary adjustment of base rates, helping
preserve the system's financial risk profile.
The system serves a deep and diverse customer base with a total population estimate of 1.1 million, including Fort
Worth and more than 30 communities in much of Tarrant County. In addition to the almost 255,000 retail metered
accounts, wholesale revenues will provide about 20% of total budgeted 2019 operating revenues. Despite that, the
system's 101argest retaii customers contributed less than 5% to operating revenues, indicating no revenue
concentration.
The Fort Worth MSA remains one of the more robust in the state, led by health care, professional services, and
construction, sectors which have more than offset the energy sector's wealrness since the drop in commodity prices.
The city is also home to Texas Christian University, Texas Wesleyan University, a robust communiry college system,
and numerous other institutions of higher learning. Therefore, the median household effective buying income
(MHHEBI) for Tarrant County is approximately in line with the nation's. The counry's unemployment rate was 3.3% as
of March 2019, below the national average. We view the economic fundamentals as likely to remain an identified area
of strength. In the long term, Fort Worth is well positioned for further growth due to the significant
undeveloped-but-developable land within city limits and a larger amount of undeveloped land within its extraterritorial
jurisdiction.
The city purchases raw water from TRWD before treating it at five city-owned water treatment plants with a combined
500 million-gallon-per-day (mgd) treatment capacity. Capacity is more than sufficient to meet 2017's 263 million gallon
peak day demand. The larger focus is on enhancing the long-term water supply. The extraordinary rainfall in May 2015
by itself replenished the district's reservoirs to--and in some cases even above--capacity. Even before that, however,
the city had water conservation-oriented rates, outdoor watering and public education programs, and other resource
management policies for years. Given the MSA's robust economic performance, TRWD is gearing up its efforts for
future growth. This includes the integrated pipeline project (IPL), a joint venture with Dallas to move water from a
reservoir southeast of the region. The district is projecting the first phase of the IPL to be operational by 2021, at an
eventual cost of about $2.4 billion; based on capacity allocations, about $1.4 billion of that would be allocable to the
district. The city generally accounts for 55%-60% of TRWD's annual operating revenues. Given the magnitude of the
district's capital commitments, Fort Worth is anticipating wholesale water costs will continue increasing substantially,
from $1.28 per 1,000 gallons currently.
The city's wastewater system is an operational strength, in our view. Its main treatment plant has 166 mgd of rated
capacity, although a portion of the waste is sent to Trinity River Authority's (TRA) 11.5-mgd-capacity Denton Creek
and Central Regional facilities by way of a contractual commitment to TRA. The facilities meet the city's 114-mgd
average flow. Several years ago, Fort Worth executed an agreement with the state environmental agency that
pre-empts any unfunded mandates in exchange for the city increasing levels of collection system maintenance, repairs,
and reporting. Furthermore, the wastewater treatment plant permit does not expire until the end of the decade. All of
this precludes any ldnd of regulatory-driven CIP projects that could further stress finances.
Because of the strong operational profile, the city's user rates are very affordable, in our view. Based on S&P Global
Ratings' universal assumption of 6,000 gallons of both residential water and sewer service, the current bill is about $69,
www.spglobal.com/ratingsdirect May 23, 2019 4
Fort Worth, Texas; CP; Water/Sewer
or a modest 1.8% of MHHEBI. The most recent rate increases- just over 4% each for water and sewer--took effect
January 2018; the ciry did not adjust rates for fiscal 2019. Management has a goal to review rates regularly and adjust
the base rate as necessary, in addition to fully recovering any wholesale cost increases. We believe this is an important
strength that lends itself to credit stability.
Based on our operational management assessment (OMA), we view Fort Worth as a'2' on a scale of'1' to'6', '1' being
the strongest. This indicates, in our view, that operational and organizational goals are generally well aligned, even if
some challenges exist. The OMA of good includes a firm, long-term water supply by way of TRWD; a collaborative
agreement with the state environmental regulator by which Fort Worth has a proactive capacity; management;
operations and maintenance program for the sewer system; and a rate review at least annually. The city has also been
a regional leader in water conservation and drought management, and has a lost water percentage that is in line with
that of peer cities but remains a focus of both the operating budget via an aggressive leak detection program and the
CIP via main repiacements.
Financial risk
Fiscal 2018 ended with annual DSC of over 2.Ox, and by S&P Global Ratings' adjusted "all-in DSC" an extremely strong
1.68x. This exceeded management's policy to set rates to achieve at least 1.5x DSC before transfers to the general
fund. We have reviewed management's forecast that indicates all-in DSC will—very conservatively—approach just under
1.4x, and based on our stress scenarios, would most likely be no lower than 1.2x.
Liquidity continues to increase steadily, with $155.9 million in total available reserves, equivalent to 146 days of
operating expenses in fiscal 2018. Fort Worth's policy is to maintain working capital equivalent to 25% of recurring
operating expenses, and cash on hand of 62-250 days of operations. The five-year CIP (through fiscal 2024) estimates
that pay-as-you-go sources will contribute 37% of the total funding, so we expect that there could be some
year-to-year rise and run to available reserves, but that the general trend will be in line with management's policies.
The city's five-year CIP has identified approximately $1.08 billion in capital projects through fiscai 2024, Regular use of
additional debt is anticipated, inciuding state loans for both distribution and collection system infrastructure. We
understand Fort Worth might also issue parity revenue bonds annually, but this will depend on internal priorities and
not regulatory mandates. The city aiso has in place a$150 million commercial paper (CP) program that it could choose
to use as an interim funding mechanism.
Based on our financial management assessment (FMA), we view Fort Worth to be a'2' on a scale of ' 1' to '6', ' 1' being
the strongest. We have revised the score from '1'. The revision reflects the overall albatross of the pension's net
position on the city, specificaily the recent trend of underfunding the ADC. Still, an FMA of good indicates that
practices are generally well embedded, and likely sustainable. The management team maintains most of the best
practices we believe are critical to supporting credit quality and these are well embedded in the government's daily
operations and practices. Formal policies support many of these activities, adding to the likelihood that these practices
will continue and transcend changes in the operating environment or personnel. This includes comprehensive
long-term planning for both the operational and capital budgets, regular monitoring of year-to-date and
budget-to-actual results, and policies spealdng to minimum working capital levels.
We consider bond provisions neutral to credit quality, especially given current financial metrics are maintained weli
www.sp�lobal.com/ratin�sdirect May 23, 2019 5
Fort Worth, Texas; CP; Water/Sewer
above the rate covenant; these equal lx annual parity debt service. The additional bonds test equals 1.1x parity
maximum annual debt service (MADS) and 1.25x average annual parity debt service.
Pensions
The city's agent multiple-employer defined-benefit pension plan, the Employee's Retirement Fund of the City of Fort
Worth, has experienced a steady decline in funded status since 2010, primarily due to contributions less than the
actuarial recommendations. Contributions to the city's pension plan are statutorily defined and have been well below
the ADC in recent years, causing further deterioration of the plans funded status. As of Jan. 1, 2010, the plan's actuarial
funded ratio was 81.2%. As of the most recent actuarial valuation (Sept. 30, 2018), the plan was extremely weakly
funded on a GASB basis, at 42.9%, with a net pension liability of $3.1 billion, of which 10.7% is allocable to the water
and sewer fund. The city made 71% of its ADC in 2018. GASB liabilities were calculated.using a single discount rate of
7.75%, which we view as representing a target asset portfolio that contains high market risk. Aside from its pension
benefits, Fort Worth provides certain OPEBs for retired employees. As of Sept. 30, 2018, the plan was 7.23% funded
based on a single discount rate of 3.53%. The city discontinued OPEBs for employees hired after 2008. At Sept. 30,
2018, the citywide OPEB liability was $883 million, down from $940 million in the previous year.
In December 2018, the City Council approved changes to the city's pension plan. These changes were approved by
plan members in February 2019. Additionally, changes were made to the plan's actuarial assumptions in March 2019.
The changes approved by members in February of this year include the elimination of cost-of-living adjustments for all
service credits earned or purchased on or after July 20, 2019, and employee and employer contribution increases.
These contribution changes include a fixed contribution increase, whereby the city contribution rate will rise by 4.5%
in July 2019, police officer contributions will increase by 4.4% over a period of three years, firefighters will contribute
3.8% more over a period of two years, and general employees will begin contributing anywhere from 1.1% to 1.8%
beginning in July 2019. Beginning in 2022, if the ADC remains in excess of actual contributions to the plan, a
risk-sharing mechanism will go into effect and boost contributions further for the city and all employee groups, with a
cap equal to 4% of payroll. In fiscal 2018, Fort Worth contributed 19.74% of retirement-eligible wages to the plan for
general employees and firefighters, and 20.46% for police officers. With annual budgeted increases in the city's
contribution rates in fiscal years 2018 and 2019 (2% total) and additional increases beginning in fiscal 2020, we still
expect contributions to fall short of the ADC during the next several years, notwithstanding any other changes. As a
result, the effective city contribution rate is expected to amortize the unfunded liability over an extremely extended
period, as a level percentage of payroll. Payroll growth is assumed to be 3% per year.
Actuarial changes were also made in March 2019 and include a reduction in the discount rate from 7.75% to 7.0% and
the use of an updated mortality assumption that uses generational mortality improvements for projections. These
actuarial assumptions will lilcely result in an increase in the pension liability and thus a decline in the funded ratio and
an increase in the ADC beginning in fiscal 2020. Officials indicate that after these assumption changes are incorporated
into the new employee and city contribution rates, but the debt will not fully amortize the pension liability within 30
years but instead within 44 after incorporating the above-mentioned rislc-sharing mechanism.
Defining benefits, setting contribution rates, and funding contributions of the plan are administered by the mayor and
City council. The governing body has the abiliry to alter benefits, but not increase employee contributions without a
successful employee vote. Although we believe these benefit, contribution, and actuarial changes will better position
www.spglobal.com/ratingsdirect May 23, 2019 6
Fort Worth, Texas; CP; Water/Sewer
the city to address its pension liability, we do not expect the plan's funded status to improve in the near term and we
do not believe the city's contribution costs as a percentage of its total governmental expenditures will decline. It is also
likely that the net pension liability will increase, lowering the funded ratio, once the 2019 pension CAFR is completed
due to the recognition of updated actuarial assumptions. Despite our expectations that these metrics will not improve
and will likely worsen during the outlook period, we view these changes as a positive development for the city since
they provide an updated picture of the liability.
Commercial paper
The CP program--which does not have a separate liquidiry provider--will essentially act as bond anticipation notes to
provide interim funding for identified and approved projects for the city-owned waterworks and sanitary sewer system.
CP notes will carry the standard maximum maturity of 270 days, and an authorization that will allow staff to act in a
manner to retire or roll over notes in whatever means reasonable and available. Because of the underlying long-term
rating on the system as well as what we view as reasonable marlcet access of the city, we do not view this as
introducing contingent risks to the utility system. Similarly, management expects to call outstanding notes prior to
their redemption date. If the notes are not called, the interest rate would "step up" to the greater of the Securities
Industry and Financial Markets Association (SIFMA) index plus 300 basis points (assuming the current rating of 'AA+')
or 7%; the maximum interest rate would be 10%, but that rate would also most likely also be associated with some
ldnd of credit concern associated with a rating below'A-', which we currently view as remote. We understand that the
city, in a worst-case scenario of marlcet disruption and insufficient available reserves in the utility fund, could resort to
interfund borrowing to retire the notes.
US Bank N.A, will act as the issuing and paying agent. JP Morgan Securities LLC will act as dealer.
Fort Worth WS CP
Short Term Rating
A-1+
Affirmed
Fort Worth
Unenhanced Rating
Long Term Rating
Many issues are enhanced by bond insurance.
AA+(SPUR)/Stable
AA+/Stable
Affirmed
Affirmed
www.sp�lobal.com/ratin�sdirect May23,2019 7
Fort Worth, Texas; CP; Water/Sewer
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www.spglobaLcom/ratingsdirect May23,2019 S
Fi1.c���_I�.�tings
Fort Worth, Texas
New lssue �e��r�
Ratings
Long Term Issuer Default Raiing
New Issue
�105,355,000 General Purpose
Bonds, Series 2019
$8,745,000 Tax Notzs, Series 2019
Outstanding Debt
General Purpose Bonds
Combination Tax and Revenue
Certifirates of Obligation
Tax Notes
, i =�;�
New Issue Summary
�{ Sale Date: June 11, 2019, via competitive sale.
Series: $105,355,000 General Purpose Bonds, Series 2019; 58,745,000 Tax Notes,
Series 2019,
AA�
qA� Purpose: Bonds: finance various municipal improvements. Notes: finance vehicle and
equipment purchases.
�+ Securiry: Limited ad valorem tax.
�� Analytical Conclusion
Rating Outlook Fort Worth's 'AA+' Issuer Default Rating (IDR) and limited tax obligation rating reflect Fitch
Negative Ratings' expectation of strong operating performance through the economic cycle, as well as
solid economic and revenue prospects. Fitch maintains the Negative Rating Outlook to analyze
over the coming review cycle the impact of recent pension reforms on both expenditure
flexibility and operating performance.
The Fort Worth city council and city employees approved of a reform package for the city's
single employer pension plan that adjusts benefits, increases both employee and city
contributions and reduces a previously infinite amortization horizon to an estimated 44 years.
This amortization period exceeds several state of Texas recommended maximum amortization
periods and also exceeds the funding objective for the plan as outlined in the city code.
Management characterizes the 2018 reforms as the latest step in the reform process.
Economic Resource Base: Fort Worth is a major anchor in the Dallas-Fort Worth regional
economy, with a population of nearly 875,000. The metropolitan area employment base is
extensive, and while military-related spending still accounts for a significant part of the local
economy, recent gains in other sectors such as services, construction, and trade have
diversified the labor force.
In addition, ranching, manufacturing, technology, education, and aerospace are significant
components of the Fort Worth area economy and serve to diversify economic acfivity.
Economic prospects for both the city and the metropolitan area as a whole are positive.
Key Rating Drivers
Analysts
Steve Murray
+1 512 215-3729
steve. murray@fitchratings-com
Emmanuelle Lavvrence
+1 512 2153740
emmanueile.lavrrence@fitchratings. com
Revenue Framework: 'aaa'
Growth prospects for revenue are strong, based on recent gains in taxable values and sales
tax receipts as well as ongoing economic development. Property tax rates, while high
compared to other Texas cities, have been trending downward and remain well below statutory
and city charter caps.
Expenditure Framework: 'aa'
The natural pace of spending growth is expected to be in line with to marginally above revenue
growth as service demands continue to grow. Management retains solid overall expenditure
flexibility. Carrying costs are somewhat elevated for the rating level, but a descending debt
service schedule should offset increasing pension contributions and keep carrying costs
in check.
www.fitchratings.com June 5, 2019
Fit:c��1 i�ati�� ��
r s�y
� i � � � . - � , �, �
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f2ating History Long-Term Liability Burden: 'aa'
outiooW The combination of overall debt and net pension liability (NPL) is moderately elevated at 18%
Rating Action wacoh Date of personal income. Recent pension reforms likely will apply a modest amount of upward
a,aT Affim�ed Negative 5�30/19 pressure on the overall liability total due to various assumption changes.
AA+ Affirmed Negative 5(17/18
AA+ Affirmed Stable 7/30l12 O f'fatlll Pertormance: 'aaa'
AA+ Affirmed Positive S/04r11 p g
aa+ Revised Stable 4/30/10 The city's sound financial resilience suggests the highest level of gap-closing capacity through
AA Do�vngraded Stable 8i09107
aa+ Affirmed Stabie 3(19/03 a typical business cycie. The ongoing deferral of a portion of annual pension costs, even after
AA+ Upgraded — 5f23l00 incorporating the recent pension changes, weakens the budget management assessment to
AA Assigned — 8l20/92
a degree.
Rating Sensitivities
Pension Sustainability: Recent pension reforms include more sustainable plan assumptions
and call for increased contributions to the single employer plan. Continued progress toward
plan sustainability and closing of the gap between actual and actuarially determined pension
contributions (ADCs) could return the Rating Outlook to Stable; conversely, a widening of that
gap and a material increase in the long-term liability burden lil<ely will result in a downgrade.
Related Research
Fitch Rates Fort Worth, TX S114PAM �T Bonds,
Tax Notes'AA+', Affirms IDR; OuUook Nega6ve
(May 2019)
Related Criteria
U.S. Public Fnance Tax-Supported Raung
Criteria (Apnl 2018)
Cresiit Profile
The city has registered solid gains recently in employment, building permits, tax base and sales
tax revenues in conjunction with overall regional economic gains. Fort Worth's population
continues to grow (up more than 3% annually since 2000). In addition, the city's extra-territorial
jurisdiction is sizable and provides opportunity for future annexation and growth.
Management reports a number of commercial, residential and industrial projects either
unden,vay or planned in the ciry. American Airlines Group, Inc, is nearing completion of its new
1.8 million square-foot corporate headquarters; AMR employs roughly 25,000 workers in the
area and is the city's largest employer. The defense sector concentration in the local economy
exposes local employers to periodic federal spending cutbacks. Lockheed Martin is the city's
second largest employer with about 13,700 workers. Other noteworthy projects include
continued expansion at Alliance Texas (a major mixed-used project with 48,000 workers),
recent completion of a ne�v 25-story downtown office tower and ongoing construction of a new
city-owned multi-purpose arena (completion projected for November 2019).
The city continues to add to employment totals as the regional economy expands.
In February 2019, the city's unemployment rate stood at 3.8%, unchanged from the prior year
and below the state and national averages for the month. Taxable values have registered gains
in the past eight years and the fiscal 2019 taxable valuation totals $67.8 billion, up more than
10% from the prior year. A near-record 14,000 building permits approved by the city in 2018
indicate continued near-term tax base and overall economic expansion will continue for the
near term.
Revenue Framework
Property and sales taxes are the dominant operating revenue sources for Forth Worth, together
representing more than 80% of fiscal 2018 general fund revenues. Each component has
exhibited solid increases following recessionary and energy sector-related declines in the
2009-2011 period.
The city's historical revenue performance over the last ten years — adjusted for tax rate
changes — registered a 3.5% CAGR, generally tracking U.S. GDP growth over the same
period and overcoming the collapse of natural gas prices that significantly impacted operating
Fort Worth, Texas
June 5, 2019
I���tch Ratings
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i� �i�'E;�
n
revenues for several years. Given recent revenue trends and current economic activity, the
expectation is that future revenue growth will continue this pattern. The positive growth
prospects for the city and for the Dallas-Fort Worth region suggest continuation of recent
healthy gains in economically sensitive revenues. Fort Worth sales tax collections have
averaged more than 5% annual increases over the past six years.
Fort Worth retains a significant margin below its statutory an� city charter property tax
limitations, providing notable flexibility in terms of legal ability to increase operating revenues.
Expenditure Framework
As is the case with many cities, public safety is the largest general fund cost driver,
representing two-thirds of fiscal 2018 spending. Culture and recreation and general
government (both at 10%) were the next largest spending components.
Fitch expects spending growth will largely track revenue trends over the near term, as an
expanding population and area economy will generate increased service demands. Additional
spending pressure also will come from pension contributions, which have fallen short of
actuarially required amounts recently and will be increasing in the near term.
A favorable workforce environment (in terms of contractual arrangements and management
control), annual pay-go capitai spending and the city's demonstrated budgetary responsiveness
underpin an overall solid expenditure flexibility profile. Carrying costs (debt service and retiree
benefit contributions) have been increasing and totaled 23% in fiscal 2018 governmental
spending. The increases have been driven primarily by growing ADCs, which have exceeded
the actual amounts contributed in recent years. The recent pension reform package calls for
additional increases in ciry contributions (in addition to larger employee contributions), but the
outlays will still fall short of required amounts. Further reform measures will be necessary to
close the gap between actuarial and actual contribution amounts. The city does retain some
capital-related taxing margin that could be redirected to benefit contributions if necessary; a
descending debt service schedule also will enable the city to absorb increasing pension costs.
Long-Term Liability Burden
Fort Worth's long term liability burden (overall debt and the Fitch adjusted NPL is moderately
elevated at 18.5% of total personal income. The direct debt component is comprised primarily
ofi tax-supported debt issued for basic infrastructure improvements; 5630 million in long term
obligations are outstanding (not including the current offerings). Capital needs appear
affordable, with annual borrowings planned to continue both the 2014 and 2018 GO bond
authorizations. Approximately $370 million will remain in authorized but unissued debt,
following the $114.2 million in sales of long-term bonds, to address needs associated with
streets, parks, library, safety and other items.
The city maintains a single employer pension plan for retirees, with empioyer contribution rates
set by city council action. The city reported a fiscal 2018 plan total liability of �5.35 billion and
assets ofi $2.27 billion, resulting in an NPL of $3.08 billion (assets covering 42% of the liability).
The calculation used a 5.13% blended discount rate and projected a depletion date of around
2050. The NPL has been climbing due to weaker than expected investment performance and
changed plan assumptions.
The city in recent years made a number of adjustments to civil and public safety retiree benefits
in an effort to shore up the plan. Beginning in 2011 these changes included increasing the
retirement age, removing overtime from the compensation base and eliminating COLAs.
Contribution amounts have trailed actuarial requirements over the past several years, however,
Fort V�lorth, Texas 3
June 5. 201�J
, -. � ,.�
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� It�� , �` �
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negating the benefit adjustments and resulting in the increasing NPL and infinite projected
amortization period.
Recognizing that more significant reforms were required to ensure the plan's sustainability, the
city in 2015 appointed a pension review committee comprised of plan stakeholders and citizens.
The committee proposed a series of plan changes that addressed both benefit levels and
contribution amounts. The city council approved the reform package in December 2018, and
after a series of informational meetings 74% of voting city employees approved the changes in
early 2019.
Highlights of the Reform Measure
• Increased annual city contributions (from 19.74%-20.46% of pay, depending on employee
group, to 24.24%-24.96%).
• Increased employee contributions (from 825%-8.73% to 9.35%-13.13% over the next two
years).
• Elimination of COLA for future service effective 7120/2019.
• Variable COLA for active eligible employees based on plan performance.
• Risk sharing provision that, beginning in 2022, requires city and employee contributions to
each increase by 2% annually (with a maximum 4% increase) if actual contributions fall
short of the actuarially determined amounf for two consecutive years (assuming a 30-year
closed amortization period and a discount rate calculated by averaging a rate provided by
two independent sources).
• A reduction in the plan discount rate from 7.75°/o to 7°/o.
An actuarial study that includes these plan changes notes that initial contribution increases will
still leave total contributions below actuarially determined amounts. As a result, the study
projects the additional contributions required under the risk sharing provision will begin in 2022
and estimates an amortization period of 44 years. Acknowledging that this projected
amortization period extends beyond industry norms and the plan objectives detailed in the city
code, management anticipates additional plan adjustments in the future.
OPEB benefits are limited to employees hired before Jan. 1, 2009, and the city has established
a trust for this obligation. Assets in the trust at Sept. 30, 2097 were valued at roughly
�68 million, or roughly 7% of the total OPEB liability; the net OPEB liability represents 2.4°/o of
total personal income,
Operating Performance
Fitch expects that operating reserves will remain above leveis consistent with an 'aaa'
resilience assessment level throughout a typical business cycle. For defails, see Scenario
Analysis, page 6.
The city contributes annuaily to pay-as-you-go capital spending (�35 million to $40 million, or
about 6% of fiscal 2019 budgeted general fund spending), which the city could adjust to react
to changing economic conditions or increases in pension contributions. The budget
management assessment is negatively affected by continued funding of the city's pension
obligation below the ADC. The fiscal 2018 contribution of $93.5 million was $38.2 million (or
nearly 3% of governmental spending) below the ADC. The projected fiscal 2019 contribution of
$119 million will also fali short of the $152 million ADC. Current projections include steadily
increasing annual contribution totals over the next decade.
Fiscal 2018 general fund results included a$17.3 million surplus after transfers, increasing the
unrestricted fund balance to more than 5137 million or 21% of spending. Management currently
Fort Worth, Te;�as 4
June 5, 201�J
f
��itc,hRa�iz�.gs
�a
Fort Worth, Texas
.hine 5 701.
is projecting another positive general fund result for fiscal 2019. Tax revenues and
expenditures reportedly are both outperforming original budget projections, contributing to an
expected S5 million surplus after transfers at year-end.
�
. . ',.�
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Fort Worth (TX)
Scenario Analysis
Reserve SaFety Margin in an Unaddressed Siress
s.oss
o.oss
zoi2
'�C[U3� � $C£112f10
Fitch expec`� that operating reserves will remain above levels consistent v�ith
an 'aaa' resilience assessment level throuehout a typical business cycle. The city
has demonstrated an ability and willingness to reduce spending during a
downtum, and retains a number of budgetary tools to respond to changing
'emnomic ronditions and to maintain reserves comfortably above the policy
minimum of 1D;6 0� spending.
GDP�L�umpuon(SSChange) (1.0:_) 0.55� 2.055
Erpendture A<_<_ump[ion (So ChangeJ 2.0;6 2.0°S 2.OiS
Rev2nue Outpu[ (� ChangeJ (2.2b) 0.8:5 3J5,
Inherent Budget Flexihili.y Superior
— - — ��
i i i � i i .�
Total Revenues 500,193 509,205 514,037 542,710 569,916 596,168 634,373 6Z0,637 625,295 E4[i,223
°� Change in Revenues - 1.3� SJ% 4.956 5.035 s'.6°5 6.4% (2.25j 0.8;6 3J%
Total Expenditures 534,794 557,707 553,593 549,049 565,732 590,546 615,266 627,571 fi?0,123 652,925
� Change in Expendiwres - 43io (0,756} (o.s;by 3.0�. 4.496 4.2Y 2.ose 2.0� 2.0:3
TransFers In an�i Other Sources 55,263 58,535 58,512 63,758 42,554 57,523 50,465 49,372 49,743 51,567
TransfersOutandOtherU3es 15,9�1 17,224 95,244 23,930 39,373 59,622 52,325 53,372 5".,439 55,528
PletTranifers 39,419 41,411 (39,732) 4=1,853 3,176 j2,094} (1,SE0) (�,D00) (4,696) (3,961j
Bond Proceeds and Other On�-rme Uses - - - - - - _ _ _ _
Met Opera[ing Surpius(+)/Deficit(-) AfCerTran3fers
Net Opera[ing Surplus(+)/Deficit(-) {%of EKpend. and TransFers Ou[}
Unrestricted/Unrz,erved Fund Balance (General Fund)
OtherAvailable Funds (GF+Non-GF)
Com6ined Avails6le Funds Balanre (GF = O[her Avall2ble Funcls)
Coin6ined Availa�le Fund 8a1. (%of Expend. an�i Tramfers Out)
4,313 (7,090) (75,393) 33,519 7,360 3,523 27,252 (10,93d) (19,521) (3,658)
0.95� (1.2°�} (11.696) 6.75� 1.25� O.SSS 2.65� (F.6S) (2.Si;) (1.2'b)
154,730 1A0,565 77,317 106,981 9I,360 122,61D 137,177 126,243 100,723 98,065
154,730 140,565 77,817 106,981 91,360 122,610 137,177 126.243 106,723 98,Oo5
23.19� 24.SS6 11.946 18.7 0 15,145 18.9% 20.5 a 18.575 15.4s'L 13.6i5
Reserve5afetyMargin (aaaJ 34JS� 173S� 10.8°� 65 � 43',5
Reserve Safety Margin (aaJ 26,0% 13.0% 3JS5 5.456 3.2� �
Reserve Safety Nlcrgin (aJ 17356 8.7S5 S.4 � 3.255 2.2Y
Reserve Safety Margin (bbbJ 6.555 4396 3.2°� 2.29; 2,056
No[es: Scenario analysis repre,en[s an unad�ressed stress on issuer finances. Ftch's downturn scenario 2ssumes a-1.055 GDP decline in the first year, followed 6y 0.5%and 2.OS6 GDP grow[h in Years 2
anU 3, respectively. E�entlitures arz assumed to grow at a 2.096 rate of in(lation. Inher2n[ hud;et fle+tihilfry is the anaryst's ass2ssmznt of the issuer's af�i�iry to deal with fiscai stress through tax 2nd
spending policy chol[es, and determines the multiples used to [alculate the reserve saferymargin. For funher details, please see F[th's US Tax-Supported Rating Criteria.
Fort Worth, Texas �
June 5, 2019
2013 2014 2015 ?016 2017 2019 Yearl Year2 'lear3
Finan[ial Resilience Su6factorAssessment:
�AvailaBla Fund a3lanco - �6hb —a —aa —a2a
I
.
�.�;11:1�5
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Fort �Vorth, Texas
.i���P � �n�n
Titclll�.atl��gs
Fort Worth, Texas
Water and Sewer System Revenue Bonds
hlew Issue Report
Ratings
New Issue
Water and Sewer System Revenue
Bonds, Series 2019
Outstanding Debt
Water and Sewer System Revenue
Bonds
Rating Outlook
Stable
C' � � ' �-�� I I� I� I'') L�, �''
New Issue Details
Sale Information: Approximately $96,090,000 Water and Sewer System Revenue Bonds,
Series 2019, to sell June 11 competitively.
Security: First lien on the net revenues of the combined water and sewer system including any
additional pledged revenues. Pledged revenues exclude impact fees. The series 2019 bonds
will not be secured by debt service reserve fund.
Purpose: To fund improvements and extensions to the system and pay costs of issuance.
Final Maturity: Feb. 15, 2049.
Key Rating Drivers
AA
AA
Stable Financial Performance; Improving Liquidity: Fitch Ratings-calculated all-in debt
service coverage (DSC) has averaged 1.9x over the past three years and cash balances
continue to gradually improve. Continued planned rates adjustments, along with adopted
financial policies related to cash balances should result in improving liquidity and stable DSC
over the coming five years.
Related Research Average Direct Debt: Direct system debt levels are comparable to similarly rated credits and
overall system leverage, as measured by debt to funds available for debt service (FADS), has
2019 Water and Sewer Medians
(November2018) trended down since 2013. Leverage is anticipated to remain relatively stable despite plans for
2019 Outlook: Water and Sewer sector additional debt over the next five years to support capital spending.
(December 2018)
Increased Capital Spending: The current capital improvement plan (CIP) totals about
$1.1 billion and is primarily focused on wastewater system upgrades, including the upgrade of
the city's Village Creek Reclamation Facility, and an additional plant in the out-years of the plan.
Sound Revenue Defensibility: Despite continued rate adjustments, system rates remain
affordable and retain flexibility. The system's rate structure provides for over 25% of cost
recovery through a fixed base rate. Planned increases over the next five years moderately
grow the user charges. The currently affordable rates, coupled with expectations for gradually
increasing MHI, should provide continued rate flexibility to handle future adjustments.
Analysts
Teri Wenck, CPA
+1 512 215-3742
teri.wenck@fitchratings.com
Steve Murray
+1 512 215-3729
steve.murray@fitchratings.wm
Wholesaler Pressures: Fort Worth's (the city) reliance on wholesale providers creates cost
pressures outside of the utility's direct control. System debt levels are elevated when taking into
account off-balance sheet debt of its wholesale providers Tarrant Regional Water District (the
district) and Trinity River Authority (the authority).
Large And Diverse Service Area: Fort Worth is a major anchor in the Dallas-Fort Worth
regional economy, with a population of roughly 6.5 million. The system continues to experience
moderate growth in its customer base.
Rating Sensitivities
Timely Rate Recovery; Leverage: Maintenance of adequate debt service coverage and
liquidity levels will continue to be a key rating consideration as the city of Fort Worth water and
sewer system funds planned capital needs. Failure to increase rates to support additional debt
carrying cost could pressure the rating. Conversely, continued improvement of leverage over
time could result in positive rating momentum.
www.fitchratings.com June 3, 2019
�— �. .
, �Ztchl�ating�
�:
�
— _ ;+.J�.+�
_'�
�-'�,!�.iii� ��
�atirng �lisfory
outlook/
Rating Action Watch
AA Affirmed Stable
AA Affirmed Stable
AA Affirmed Stable
AA Affirmed Stable
AA Affirmed Stable
AA Affirmed Stable
AA Downgraded Stable
qq+ Affirmed Sfable
AA+ Affirmed Stable
AA+ Revised Stable
AA Affirmed Stable
AA Downgraded Stable
qq+ Upgraded Stable
AA Assigned —
City financial projections through fiscal 2024, which exclude connection fees and all noncash
expenses, point to all-in DSC around 1.8x. The forecast assumes additional annual rate
increases and accounts for increased debt service costs from current and planned debt
issuances. Management has expressed its commitment to maintaining all-in coverage at its
policy of 1.5x or above before transfers by adjusting rates as needed.
All Water Sold by Category 2018 Wastewater Sales by Customer Class
(Million Gallons) i20� $)
����������..
Indust
5 °/a
�ard Meters
�o�a
Residential
32%
Commercial
19%
Credifi �rrofile
Dafe The system provides retail service to the city and a portion of the surrounding area through
sizsi�s over 250,000 separate user accounts. In addition, the system provides wholesale water and
5/17/18
s���i�� sewer treatment to numerous surrounding communities for a total service area population of
7/15/15 over 1.2 million. The system continues to record steady customer growth, averaging almost 2%
�iz�i�a annually over the past five years. With an estimated 2017 population of over 874,000,
4/10/13 Fort Worth's population continues to grow. The city's extraterritorial jurisdiction is also sizable
8/1 /12
aiai�i and provides opportunity for future annexation and growth.
4/30/11
4/21/10
8/9/07 Steady Financial Metrics
10l6100
1/9(96 Financial results for the past three years are stable with Fitch-calculated DSC averaging a solid
2.Ox. Fitch calculated liquidity registers just under 140 DCOH for fiscal 2018, and has grown year
over year since 2015. The city adopted formal policies in 2015 relating to minimum cash
balances, which targets cash balances of no less than 62 DCOH with a goal of 250 DCOH. This
policy will help ensure cash balances remain stable.
Related Criteria
Public-Sector, Revenue-Supported
Entities Rating Criteria (May 2019)
U.S. Water and Sewer Rating
Criteria (November 2018)
Source: City of Fort Worth 2018 disclosure document.
All-in Debt Service Coverage
(City versus Median)
� Fort Worth W&S All-in DSC
'AA' National Fitch Median DSC
(x)
3.0
2.5
2.0
1.5
1.0
0.5
o. o
2014 2015 2016 2017 2018
Note: Median year reflect the prior fiscal year results.
Source: Fitch Ratings.
Effluent
Municipafities 2%
17% Residential
Industrial ' ' - 46%
(Includes
Monitored)
2%
Commercial
(Includes Monitored)
33%
Source: City of Fort Worth 2018 disclosure document.
Days Cash on Hand
(City versus Median)
� Forl Worth W&S Days Cash on Hand
'AA' National Fitch Median Days Cash on Hand
(Days)
700 ; _ _ ._ _ _ _ . _ _ _ _ _
600 � __.....__—
500 __............ _ .. ... . . . ..
400
300
200
,00'■ ■ ■ ■ ■
0
2014 2015 2016 2017 2018
Note: Median year reflect the prior fiscal year results.
Source: Fitch Raiings.
Fort Worth, Texas 2
Fitc.�_ii.ati��g�
�
� � .. � , �; , ��;��; , �� -_,
Fort Worth Five-Year CIP Comparison
�$oao�
1,200 . . _. .. _ ... ... ._ __. . . .. _ ._.. ..... _ _ . ..._ ._. _ _._ . .. . . . . . .___ .
i 922.47 974.92 1,000.39
1,000 . _- _ _.... . _._ _.... ..___.----- . ._..
800 I. 725.59 _ _
600
400 i
200
0
Debt/Funds Available for
Debt Service
(x)
__.
� 5.40 . 5.20
5.0 , _._ . ..._ .
4.10
4.0 -- --
3.0 . — - -
z.o
�.o '
o.o
Fort Worth, Fort Worth, 'AA'
TX W&S TX W&S National
2017 2018 Fitch Median
2019
Source: Fitch Ratings.
. . ..._ __ _..
1.081.05
2016-2020 2017-2021 2018-2022 2019-2023 2020-2024
Source: City of Fort Worth.
Increasing Capital Spending
The system's fiscal years 2020-2024 CIP totals almost $1.1 billion, up 8% from the prior year's
CIP. Starting with the fiscal years 2017-2021 CIP, the system accelerated several sewer
projects due to development of the Tarleton State University — Fort Worth Campus along with
growth in other areas. The current plan continues to focus on updates and improvements to the
city's sewer system.
The plan will be about 50°/o debt supported and 50% restricted reserve for capital projects and
cash from operations. Existing debt ratios compare favorably to Fitch's 'AA' medians.
Fiscal 2018 debt to net plant is 32% compared to Fitch's `AA' rating category median of 46%
and debt to FADS 4.1x, stronger than Fitch's 'AA' median of 5.2x. System leverage is expected
to grow modestly with the inclusion of planned debt financings for CIP.
Direct debt levels are projected to increase with debt per customer expected to grow to over
$2,000, elevated compared to Fitch's 'AA' median of $1,673. The system's debt structure also
includes a$150 million commercial paper (CP) program utilized for appropriation authority.
There is currently nothing outstanding on the CP line.
Solid Rate Flexibility; Tempered Rate Increases
The combined water and sewer monthly bill of just over $74, assuming usage of 10 hundred
cubic feet (cc� per month for water and eight ccf per month for sewer, equals an affordable
1.5°/o of MHI, providing the system sufficient rate flexibility. City council has typically adjusted
rates when necessary, and it will be important that this continue in order to keep purchased
water costs from eroding financial performance and to ensure adequate funding of capital.
Since 2014, the city has been restructuring its own rates by shifting a greater portion of its
volumetric water charges to fixed charges, which Fitch views positively, as it reduces revenue
variability. Fixed charges currently comprise about 25% of the combined water and sewer bill.
For fiscal 2019, the city did not adopt rate increases providing a rate holiday following several
years of rate adjustments. Anticipated annual rate adjustments are expected to resume in 2020
through 2024 and anticipated to be no larger than 5%. Continued implementation of rate
increases should ensure consistent financial metrics, while continuing to support increased
debt carrying costs, higher water purchase costs and system maintenance.
Water Supply and Declining Wholesale Provider Rates
The city has its own water treatment facilities and purchases raw water supplies on a
wholesale basis from the district. The majority of sewer flows are treated at the city's owned
Fort Worth, Texas g
.liina 3 9f11A
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and operated sewer facility, but a small portion are treated at authority sewer treatment plants.
Total costs for purchased water and sewer treatment from the district and the authority equaled
28% and 4% of operating expenses, respectively, in fiscal 2018 and are paid prior to debt
service on the bonds.
Fort Worth is the districYs largest customer, accounting for over 60% of the districYs sales.
The district's debt burden has grown due to investment in the integrated pipeline project (IPL),
which is expected to provide water through at least 2040. District debt doubled from 2010 to
2015 and additional debt is planned through 2022, translating into higher purchased water
costs for the city. As the district moves through its capital expansion cycles, rate adjustments
have been necessary to support rising wholesale pass-through costs. Following several years
of above-average increased purchased water costs, the city's purchased water costs saw a
small decline in fiscal 2018. Purchased wholesale costs comprise about 30% of the city's
operating expenses.
Sound Economic Fundamentals
The metropolitan area employment base is extensive. While military-related spending still
accounts for an estimated one-quarter of the economy, recent gains in other sectors, such as
services, construction and trade have helped diversify the labor force. For March 2019, the
city's unemployment stood at 3.8%, unchanged from the prior year and is largely on par with
the state and nation. City wealth levels are on par with the state and national averages,
showing some gradual improvement since 2013. The poverty rate is elevated at 16.9°/o
compared to the national average of 14.6%.
Goven�nts
Security: The outstanding bonds are secured by and payable from a first lien on the net revenues
of the system including any additional pledged revenues. Revenues exclude impact fees.
Rate Covenant: Rates and charges must provide sufficient revenues to pay operating and
debt service expenses and all other system financial obligations.
Additional Bonds Test: Additional bonds may be issued if net revenues for either the preceding
fiscal year or any consecutive 12 months ending no more than 90 days before the issuance of
parity debt equal at least 1.25x pro forma average ADS and 1.10x pro forma MADS.
Debt Service Reserve Fund: The city reserves the right to establish and fund a reserve fund
for the benefit of the owners and holders of the parity bonds. No reserve fund has been funded
for the series 2015, 2016, 2017 and 2018 bonds. The required reserve amount for prior senior
lien debt issuances is funded with Ambac and AGM surety policies.
Flow of Funds: Revenues to meet system obligations are distributed in the following order
of priority:
• operating expenses;
• debt service fund; and
• reserve fund, if necessary.
Fort Worth, Texas 4
�.._� � ��, �
�,i1;chRati���,s
� � � I . '�.. I c�. l' I I ''_ \. �l
Financial �umrnary
($000, Audited Years Ended Sept. 30) 2014 2015 2016 2017 2018
Balance Sheet
Unrestricted Cash and Inveslments 61,929 68,451 81,786 93,996 110,312
OtherUnrestrictedCurrentAssets 53,651 68,146 57,422 53,107 56,280
Current Liabilities Payable from Unrestricted Assets (79,826) (80,946) (81,559) (78,629) (79,881)
Net Working Capital 35,754 55,651 57,649 68,474 86,711
Net Fixed Assets 2,382,996 2,438,881 2,463,215 2,559,102 2,646,586
Long-Term DebtOutstanding 855,745 837,749 831,583 870,675 854,089
Operatinc� Statement
Operating Revenues
Non-Operating Revenues Available for Debt Service
Connection Fees
Total Revenues Availahle for Debt Service
Operating Expenditures (Excluding Deprecialion)
Depreciation
Net Revenues Available for Debt Service
Senior Lien ADS
All-In ADS
361,979
2,681
10,227
374,F387
226,719
67,254
148,168
76,253
91,351
389,205
2,020
23,314
414,539
253,114
67,311
161,425
83,807
95, 256
Financial Statistics
Sr. Lien DSC 1.9 1.9
Sr. ADS (Excluding Connection Fees) �.g �.7
All-In ADS i,g � �
All-In ADS (Excluding BABs/RZED Bonds Subsidy) 1,6 1.7
Days Cash on Hand 100 99
DebUNel Plant (%) 36 34
Outstanding Long-Term Debt Per Customer ($) 1,864 1,795
Outstanding Long-Term Debt Per Capita ($) 732 710
Free Cash/Depreciation (%) 53 61
Note: Fitch may have reclassified certain financial statement items for analytical purposes. N.A. - Not available.
Source: Fitch Ratings, Fitch Solutions, Fort Worth.
Fort Worth, Texas
June 3, 2019
417,299
2,170
12,129
431,598
269,704
71,656
161,894
80,251
90,487
2.0
1.9
1.8
1.8
111
34
1,761
679
63
425,615
1,906
15,136
442,657
280,923
73,756
161,734
86,615
92, 571
1.9
1.7
1.8
1.8
122
34
1,799
690
62
46fi,171
5,378
26,076
499,625
291, 274
75,238
208,351
85,780
94,714
2.4
2.1
2.2
2.2
138
32
1,718
673
117
5
;� :�
.,.
�- - . .
T1tchRat�ngs
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Fort Worth, Texas
June 3. 2019
U.S. PUBLIC FINANCE
SECTOR COMMENT
30 May 2019
�r/ Rate this Research
Analyst Contacts
Gera M. McGuire +1.214.979.6850
VP-Sr Credit Of ficer/Nianager
gera. mc�u i re@m oodys.com
Local government — Texas
Property tax reform limits revenue�raising
ability, a credit negative for bulk of local
governments
On May 25, the Texas (Aaa stable) legislature passed property tax reform legislation (Senate
Bill 2) that further limits most local governments' ability to raise revenue, a credit negative.
The governor is expected to sign the bill into faw, which wou(d then take effect on January 1,
2020.
Brett Adelglass +1.214.979.6866 The bill reduces property tax revenue increases without voter approval to 3.5% ff01Y1 8%
AssociateLeadAnalyst annually on existing properties (new construction is exduded from the limit). Voterapproval
brett.adelglass@moodys.com to override the limitation requires a simple majority. The restriction applies to the portion
Alexandra 5. Parl<er +1.212.553.4889 of municipal revenue used for government operations; it does not restrict revenue for debt
l�ID-PublicFinance service. The legislation offers some flexibility by allowing locaf governments to "bank" up to
alexandra.parker@moodys.com
three years of unused margin for an increase greater than 3.5% in a year.
CLIENT SERVICES
Americas
Asia Pacific
Japan
EMEA
1-212-553-1653
852-3551-3077
81-3-5408-4100
44-ZO-7772-5454
The measure lowers the limit for cities, counties, municipal utility districts (MUDs) and
other entities that can levy a property tax, but the limit will remain at 8°/o for community
college and hospital districts. At the same time, the bill reduces the number of signatures
required to petition a rollback in the event the 8% limit is exceeded by the districts. Sma�l
local governments can increase their operational levy up to $500,000 as long as the amount
does not equate to more than an 8°/o revenue increase derived from existing property. If
the amount is above that limit, only 3% of voters are required to initiate a rolfback election
under Senate Bill 2, down from 7% or 10%. Under separate legislation, also expected to
be signed by the governor, school districts would have to reduce tax rates if property value
growth exceeds 2.5% in fiscal 2021.
With Senate Bill z set to take effect in fiscal 2021, local governments have time to adjust
budgets, though most have already begun to prepare. The bill will mostly affect budgets that
take effect in August and September af 2020.
The bill also aims to increase transparency by creating an online database that defines,
simplifies and highlights proposed levy changes and provides for immediate citizen input with
an online comment form and information on when public hearings will be held.
Revenue-raising ability to pay debt service not affected by legislation
Limitations on revenue-raising restrict financial flexibility, hampering credit quality. However,
Senate Bill 2 does not hinder the ability to raise revenue to pay debt service.
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
In Texas, property taxes are set based on two legal�y separate rates that combine to form an overa�l governmental unit's levy: an
"operational rate," which is subject to the revenue limit in Senate Bill 2, and a"debt service rate," which is not subject to the limit.
Expenditures using funds raised under the debt service rate are defined by statute and approved and enforced by the attorney general.
Revenue raised under this rate cannot be used for operational expenditures.
Given that the debt service levy is legally separate from the amount restricted under the 3.5% Senate Bill z limit, local governments
will maintain direct control over the rate necessary to service debt. In Texas, most school and municipal utility debt carries a general
obligation unlimited tax (GOULT) pledge; most city and county debt has a general obligation limited tax (GOLT) pledge.
Homeowner savings minimal, but budgetary impact on governmants would be significant
The new legislation stands to reduce individual tax burdens minimally but hurt local governments substantially. The median home price
in Texas is $150,000; the median operational tax rate is $4.30 per $1,000 of assessed value. An 8% increase in the revenue would lead
to the owner of a$150,000 home paying $696.60, assuming the rate in the previous tax year was $4.30. Under the 3.5% limitation in
Senate Bill 2, the homeowner would pay slightly less at no more than $667.58 — a difference of only $29.00. Under that scenario, the
homeowner's cumulative savings over 10 years would be just $2,260 (see Exhibit).
For a local government with property tax operating revenues of $25 million, however, the difference between a 3.5% increase annually
versus an 8% increase would translate to a cumulative 10-year loss of over three times the current year's revenues. More specifically,
the 3.5% restriction would result in an $87.6 mil�ion loss in potential property tax collections over 10 years. However, the short-term
impact would be much less dramatic. In the first year with municipal revenue increases subject to the 3.5% limit, the reduction in
potential revenues would be only $1.1 mil�ion.
Senate Bill 2 provides homeowners with marginal property tax relief, while limiting local governments ability to raise revenue
5100
S90
580
S70
S60
550
S40
530
S20
$10
S-
Cumulalive losl property lax revenue for local govemmenl (lel axis) � Cumulative homeowner savings (nghl axis)
� 51,000
5500
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Taz year
S2,500
52,000
51,500
Source: Moody's Mvestors Service
Economic slowdown would magnify impact of Senate Bill 2
Texas cities have relatively high debt burdens compared with their national peers — 2.0% vs.1.1%, respectively, for Moody's-rated
cities. Senate Bill 2 stands to increase debt burdens if reduced excess tax revenue forces cities to use the capital markets more
frequently to address infrastructure needs versus the cash funding that traditionally has offset rising debt burdens.
If debt ratios rise while tackling capital needs, a prolonged economic slowdown and escalating debt service schedule could reduce a
government's political will to increase taxes. As a result, a government may be forced to tap dwindling reserves or cut services, leading
to considerab�e credit challenges.
Despite the limitations in Senate Bill 2, most local governments in Texas will continue to benefit from new investment resulting in
taxable property not subject to the 3.5% revenue-increase limit. However, if the economy cools significantly, the restriction would
This pubfication does not announce a credit rating action For any uedit ratings referenczd in this publication, please see the ratings tab on [hz issueNentity pa;e on
w�n�w.moodys.com fo� the most updated credit ra[ing action inFormation and ratin; history.
2 30 May 2019 Local aovernment - Terar Prnnartv hav rnfnrm limftc ro"an��o_r����.,� �ti�rr„ � �.ede. ..e�.�t�„e Fn. 6�JL ..t I,..�I ..................�.
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
become much more of a burden. For example, cities that face rising pension liabilities, debt service payments and other necessary
operational costs, such as emergency response employees, would likely have fewer expenditure-cutting options.
3 30 May 2019 Lo[al eovernment - Taxac Prnnarry raY raf��m i�,,,tro �o„e.,��o_r���:..,. ��.�r.,, .,.,.e:. .,.,.....:.... c... �...u. _� �-"' -""'----`-
IMOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
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entity that ii not a NkSRO and, consequently, the rated obligation will not qualih� for certain rypes of treatment under U.S. la�vs. i�1JKK and MSFJ are credit rating agencies regisrered
�vith the Japan Financial Services A;ency and their registra[ion numbers are FS.4 Commi;sioner (Ratings) No. 2 and 3 reipectivzly.
MJkK or bISfJ {as applicab(e) hereby di;dose that most issuer of debt searities (including corporate and municipal bonds, debenturzs, no[es and commercial paper) a�d preferred
stock rated by PiJKK or P15FJ (as applicable) have, prior to assignmen[ oFany rating, agrezd ro pay to MJKY.' or MSFJ (as applirablzJ fur ra[ings opinions and services rendered by it fees
ranging From JPY125,OOp ro appror.ima[ely�PY250,000,000.
MJKK anA P15fJ also maintain poficies and procedures ro address Japanese regulatory requirements.
REPORT NUMBER 1'178257
�d"
MOODY'S
INVESTORS SERVICE
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