Fitch Rates DeSoto, TX GO and CO Bonds 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following DeSoto, Texas' (the city) limited tax bonds:

--$1.37 million general obligation (GO) refunding bonds, series 2011;

--$845,000 combination tax and revenue certificates of obligation (COs), taxable series 2011A;

--$3.905 million combination tax and revenue COs, series 2011B;

The bonds are scheduled to sell the week of June 6 via negotiation.

In addition, Fitch affirms the following ratings:

--$94.7 million (pre-refunding) in parity debt at 'AA'.

The Rating Outlook is Stable.

Fitch has also withdrawn its 'AA' long-term rating on the combination tax and revenue COs, series 2000 because they have been prerefunded. The correct rating history for the bond is now reflected on Fitch's web site at 'www.fitchratings.com'.

RATING RATIONALE:

--The city's financial profile remains positive with solid reserve levels, facilitated by sound and conservative financial policies and practices;

--Direct debt levels are moderate (with manageable capital needs) but overall debt levels are high; somewhat offsetting this concern is a rapid pace of amortization;

--With the general downturn of the housing market, the city has experienced two consecutive years of declines in taxable values; however, the annual declines have been modest at about 4%;

--Property tax receipts have generally held steady, aided by management's willingness to raise taxes. Sales tax receipts, after rebounding in fiscal 2010 from a prior-year decline, have shown some weakness in fiscal 2011;

--The city benefits from its central location in the diverse economy and employment base of the Dallas-Fort Worth (DFW) metro area, and long-term economic prospects remain favorable;

--Fitch considers the city's pension funded status weak, but recent plan changes are expected to incrementally improve the funded ratio.

KEY RATING DRIVERS:

--Management's continued attention to maintaining budgetary structural balance in light of modest weakness in sales tax revenues and potential future contraction in property tax revenues;

--The maintenance of solid reserve levels for financial flexibility is also key to maintaining the rating.

SECURITY:

The GO bonds and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured from a limited pledge of the net revenues of the city's waterworks and sewer system.

CREDIT SUMMARY:

The city of DeSoto is located 12 miles south of Dallas, and benefits from its proximity to the DFW metroplex and the completed expansion of major transportation corridors that traverse the city. The estimated 2010 population of about 49,000 reflects a 30% increase from 2000 census levels. Most residents work throughout the broader metropolitan area, which provides more abundant employment opportunity and partly mitigates the city's relatively higher unemployment rate of 9.5% in March 2011, compared to the DFW metro area rate of 8.1% and U.S. rate of 9.2%. Wealth indicators are favorable, with median household income levels above state and national levels and a below average poverty rate.

With the general downturn in the housing market, the city's primarily residential tax base contracted modestly over the past two fiscal years, posting a 4% decline to $2.8 billion taxable assessed value (TAV) for fiscal 2011. Officials expect a modest 1% decline in fiscal 2012 TAV based on flattening residential values. Fitch believes this projection is reasonable given the relative strength of the regional economy and improvement in area housing indicators; having previously experienced an uptick in foreclosures, officials note that this trend has been on the decline. While anticipated commercial development along the recently expanded IH-35 corridor has not materialized to the degree expected, officials note that some commercial development has occurred, including the recent completion of DeSoto Town Center (a mixed-use development). Year-to-date building permits for fiscal 2011 are also trending higher than the previous year.

The city's financial profile remains sound, evidenced primarily by the maintenance of solid reserves amidst some weakness in major revenues. Fiscal 2009 results show a $629,000 general fund surplus (2.3% of spending) and unreserved fund balance totaling $7.2 million or roughly 26% of spending. The unaudited fiscal 2010 results indicate a roughly $437,000 deficit (1.6% of spending) due to outlays on non-recurring special and capital projects, but fund balance remains well above the city's formal fund balance goal of two months (16% of operating expenditures). Fitch also holds a positive view of management's conservative approach to allocating excess fund balance, historically utilizing only a small share of the available excess fund balance for one-time spending. Liquidity also remains adequate, with fiscal 2009 general fund cash and investments totaling $6.1 million or roughly 2.5 months of operating expenditures.

Property taxes and sales taxes represent the major general fund revenues, comprising 56% and 19%, respectively, of fiscal 2009 operating revenues. Aided by management's willingness to slightly increase the operations & maintenance (O&M) tax rate, property tax receipts have held steady in the past few years despite recent losses in TAV. Sales tax revenues dipped about 5% in fiscal 2009, but spurred by voter approval authorizing the sale of beer and wine in local stores, rebounded to a 9% gain in fiscal 2010. With another slight increase to the O&M tax rate, management budgeted for balanced operations in fiscal 2011. Despite year-to-date sales tax receipts trending lower than budget and about 3% off prior-year receipts, officials indicate that gains in other revenue sources and various departmental savings will substantially close the modest shortfall. As consistent with the budget, officials plan up to a $570,000 use of fund balance for non-recurring projects. However, even after this drawdown, the fiscal 2011 unreserved fund balance would remain at a still solid $6.2 million or about 20% of budgeted spending, which remains comfortably above the city's target fund balance.

DeSoto's direct debt levels are moderate at about 3% of full market value (MV), but overall debt levels are very high at 8.8% of MV due primarily to DeSoto ISD's debt burden (unlimited tax bonds rated 'AA-' by Fitch). In light of the above average debt levels, Fitch notes that the overall tax affordability for Texas residents still compares favorably to other states, due partly to the lack of a state income tax. Debt service as a percentage of operating expenditures is also high at 22.5%, but somewhat offsetting this is a rapid pace of principal amortization, which including this issuance, is about 72% retired in 10 years. Plans to approach voters for additional GO authorization have been pushed back for now and officials are uncertain when they will issue additional tax-supported debt. The city's five-year capital improvement (2011 - 2016) originally called for about $19 million in GO debt issuance to finance major street projects, but officials have indicated these projects are not required to be addressed in the immediate term. The city does plan to issue about $3.9 million in water and sewer revenue bonds in the spring of 2012.

The city contributes to the Texas Municipal Retirement System (TMRS) and has recently made changes to address its pension funded position, which Fitch considers weak at 67% funded for fiscal 2009. Due to actuarial changes to TMRS in fiscal 2008, participating entities were allowed to phase-in increases to the annual actuarially required contribution rate (ARC) over an eight-year period; the city originally selected this phase-in option, which resulted in only 84% of the ARC paid in fiscal 2009. The city subsequently adjusted its plan structure for fiscal 2010, reducing the city's matching ratio from 2 to 1 to 1.5 to 1, and increased its contribution rate to 15.5% (from 14%). While unaudited fiscal 2010 figures for the ARC and pension funded ratio were not available, officials expect that with this change, a level 15.5% contribution rate will allow the city's pension funded position to reach 100% over a 20-year period.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, TX Municipal Advisory Council, and US Federal Government.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct 08, 2010).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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