Fitch Affirms Commerce, TX GOs & COs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the following ratings on Commerce, Texas (the city):

--$830,000 general obligation (GO) refunding and improvement bonds, series 2003 at 'BBB';

--$720,000 combination tax and revenue certificates of obligation (COs), series 2003 at 'BBB'.

The Rating Outlook is Stable.

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 by a subordinate lien on surplus revenues from the city's waterworks and sewer system.

KEY RATING DRIVERS

IMPROVEMENT IN FINANCIAL CONDITION: The city continues to restore reserves to historical levels with positive operating results through conservative budgeting and expenditure controls. The strong fund balance position is an important credit characteristic that will help cushion against projected TAV losses in the near term.

LOSS OF LARGEST TAXPAYER: TAV will remain challenged with the full impact of the departure of the largest taxpayer realized in 2015, although this loss will be slightly offset by annexations and retail and residential development.

LIMITED ECONOMY: Area economic conditions remain weak with below-average income and above-average poverty, partly driven by the student population at Texas A&M University at Commerce, a stabilizing presence in the city.

HIGH OVERALL DEBT; OTHER LONG-TERM LIABILITIES MODERATE: The overall debt burden is high. Amortization is below average, contributing to moderate carrying costs. The city's near-term capital needs are minimal.

RATING SENSITIVITY

DEPARTURE OF LARGEST TAXPAYER: The city is vulnerable to the impending TAV loss driven by the departure of Covidien, further limiting the city's revenue raising flexibility. Management's ability to mitigate the impact of the loss on the financial profile of the city is an important credit consideration.

CREDIT PROFILE

NORTHEAST TEXAS UNIVERSITY TOWN

Located approximately 65 miles northeast of Dallas, the small city of Commerce has a population of about 8,000 residents. The city is anchored by the established Texas A&M University at Commerce with student enrollment at 11,000.

TOP TAXPAYER LOSS IN FISCAL 2015 TO PRESSURE LIMITED ECONOMY

The city experienced two consecutive years of modest TAV growth of 2.0% and 0.7% in fiscals 2013 and 2014, respectively. However, a significant loss in TAV is anticipated in fiscal 2015 as Covidien, a global healthcare product company and manufacturer, closed its local facility in January of 2014. The company's TAV accounted for over 17% of the city's total TAV in fiscal 2013, and the full impact of its loss in fiscal 2015 is estimated at $40 million.

Somewhat offsetting this loss will be the full annexation of Hydro Aluminum, a light metal division of the Norwegian aluminum and renewable energy company Norsk Hydro ASA. Hydro Aluminum has historically made PILOT payments to the city, but will be fully annexed by the city in fiscal 2015, adding an estimated $22.4 million to TAV. Other modest residential, commercial, and retail development under development will add to the tax base, yet Fitch believes these additions will not be sufficient to fully offset the loss of Covidien.

IMPROVED FINANCIAL POSITION

After several years of fiscal challenges, including lagging audits, negative accounting adjustments, and draws on fund balance, unaudited fiscal 2013 results mark the third consecutive year of positive operating results. Fiscal 2013 ended with a surplus of $468,000, bringing the total unrestricted fund balance to a healthy 51.4% of expenditures. Management reports current year-to-date results for fiscal 2014 do not show any material variances with the budget, which includes a conservative estimate of sales tax receipts and a modest addition to fund balance at year end.

The improved financial position of the city will be challenged in coming years given the loss of Covidien. Management anticipates property tax revenue losses may lead to potential future draws on fund balance; however, an informal fund balance policy dictates that unrestricted fund balance should not dip further than 20% of general fund expenditures. Revenue-raising capacity is limited given the relatively high tax rate, amplified by a recent shift in the total tax rate from operations to debt service. Fitch believes the current rating of 'BBB' encapsulates the possibility of volatile operating results going forward.

DEBT BURDEN HIGH; OTHER LONG-TERM LIABILITIES MANAGEABLE

The overall debt burden is high due largely to local school district debt and approximates nearly 10.4% of market value or a more moderate $3,628 on a per capita basis. Near-term capital needs are manageable and management has no immediate plans to issue debt. Amortization remains below average with 43.3% retired in 10 years.

The city's pension and other post-employment benefits (OPEB) are provided through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Recent structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position to a strong 90.8% at Dec. 31, 2012 (using a 7% investment rate of return), up from a below-average 66.7% at Dec. 31, 2009. Carrying costs for the city (debt service, pension and OPEB costs, net of self-supporting utility debt) are estimated at a moderate 16.2% of governmental spending in fiscal 2013 and are expected to remain manageable going forward.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827325

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook, +1 212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Moses, +1 512-215-3739
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook, +1 212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Moses, +1 512-215-3739
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com