Fitch Rates Arlington, TX's Perm Improv Bonds and Cos 'AA+'; Outlook Revised to Positive

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the following Arlington, Texas (the city) limited tax securities:

--$14.9 million permanent improvement bonds (the bonds), series 2014

--$29.7 million combination tax and revenue certificates of obligation (COs), series 2014

The bonds are scheduled for competitive sale on June 10. Proceeds from the 2014 bonds and COs will be used for a variety of governmental improvements and projects. In addition, Fitch affirms its ratings on the following securities:

--$338.8 million in outstanding bonds and COs at 'AA+';

--$226.9 million in special tax bonds at 'A+'.

The Rating Outlook for the bonds and COs is revised to Positive from Stable.

The Rating Outlook on the special tax bonds is Stable.

SECURITY

The 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). COs are also secured by a pledge of limited surplus revenues ($1,000) of the city's water and waste water system.

The special tax bonds are secured by a first lien on pledged special taxes and pledged accounts. The pledged taxes consist of a citywide 0.5% sales and use tax, a 5% tax on short-term motor vehicle rentals, and a 2% hotel occupancy tax. The series 2005C bonds are secured further by annual rental payments from the National Football League's Dallas Cowboys and a portion of annual stadium naming rights fees.

KEY RATING DRIVERS

POSITIVE OUTLOOK: The positive outlook reflects consistently strong financial management and a trend of growth in the city's tax and employment base.

FAVORABLE LOCATION IN DFW: Arlington benefits from its central location in the Dallas-Fort Worth (DFW) metropolitan area and status as a regional hub for entertainment and tourism. Job growth is continuing and unemployment is relatively low.

STRONG FINANCIAL PROFILE: The city's stable financial position reflects revenue diversity, healthy reserves and ample liquidity. Management is conservative with a strong planning and control environment.

MANAGEABLE DEBT; SOUND PENSION: Overall debt is moderate and capital needs are manageable. The city's pension plan is well-funded.

SATISFACTORY COVERAGE; CLOSED LIEN: Coverage of special tax bonds remains satisfactory. The lien is closed with no alternative or competing uses for the special tax revenues.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The city's ability to maintain its strong financial position, reflected in structurally balanced operations and healthy reserves, will likely lead to positive rating action.

CREDIT PROFILE

Arlington is located in the center of the DFW metroplex and has an estimated 2014 population of about 366,000. The city is home to the Dallas Cowboys and Major League Baseball's Texas Rangers.

DIVERSE, RESILIENT ECONOMY IN THE HEART OF DFW

The city is home to diverse manufacturing, distribution, and retail trade given its central location in DFW, proximity to the DFW International Airport, and well-developed highway transportation network. Tourism is also a significant component of the local economy given the presence of popular amusement parks and professional sports franchises, which are a major draw for residents from the area and around the state. Higher education rounds out the economic base with the presence of The University of Texas-Arlington (UTA), a growing 34,000 enrollment campus that continues to invest in facility improvements.

Arlington's broad tax base is without taxpayer concentration. TAV realized modest growth over the past three years after a recessionary dip in fiscal 2011. Fitch considers the city's expectation for near term TAV gains approximating 3% per annum reasonable based on a strengthening housing market and ongoing commercial and industrial development.

The city continues to outpace the nation in job growth. Arlington's March 2014 unemployment rate improved to 5% from 5.8% in March 2013 due to growth of its employment base. This unemployment rate compares favorably to the state (5.3%) and national averages (6.8%) for the same period.

PRUDENT FINANCIAL POLICIES

Fitch views the city's financial practices and reserve policies as positive credit factors. The city maintains a 15% minimum general fund balance policy. Included therein are a one-month working capital reserve, an unallocated reserve for emergencies, and a business continuity reserve that provides funding for operational needs as-needed.

In addition, the city maintains a community foundation dedicated to cultural/quality of life projects and neighborhood revitalization. The endowment is funded primarily from natural gas lease and royalty payments and could be used for general purposes, if needed, with supermajority approval of the council. The endowment has grown substantially since its incorporation in 2007 and has a current balance of $102 million.

SOLID FINANCIAL PROFILE

Property taxes and sales taxes are the primary revenue sources, comprising about 36% and 25% of fiscal 2013 general fund revenues, respectively. The city undertook cost saving measures to largely offset muted revenue growth during the recession.

Fiscal 2013 unrestricted reserves of $55.5 million represent a solid 25.3% of spending after the application of previously assigned funds for capital and project priorities. Based on fiscal year to date performance the city projects completing fiscal 2014 with $53.5 million in unrestricted general fund reserves, reflecting a $1.5 million budgeted application for technology improvements. The city's operations are structurally balanced and officials anticipate maintaining strong reserves in excess of their policy floor.

MANAGEABLE DEBT; WELL-FUNDED PENSIONS

Fitch anticipates the city's moderate overall debt (4.9% of market value) to remain manageable. To support its five year capital plan requirements and supplement $59 million in current capacity, the city anticipates seeking GO authorization for up to $190 million in 2014 for capital needs in 2016 through 2019. Arlington's manageable capital plan reflects the city's maturity and disciplined attention to infrastructure needs.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The city's pension is well funded at 87.2% as of Jan. 1, 2013. The city's OPEB unfunded liability is modest at $107.5 million (less than 1/2 of 1% of MV) and projected to decline based on recent plan changes that shift an increasing share of costs to retirees. Fiscal 2013 carrying costs (debt service, pension and OPEB contributions) account for an above average, but manageable, 28% of governmental spending. However, with debt service totaling 21% of spending, the elevated burden primarily reflects the city's rapid amortization rate of 67.4% in 10 years. Fitch believes the carrying cost budget burden should trend down as debt rolls off and new issuance plans are limited.

SATISFACTORY COVERAGE OF SPECIAL TAX BONDS

Coverage of the special tax stadium bonds remains satisfactory due to growth of the pledged tax revenues. Fiscal 2013 pledged tax revenues and rent payments covered maximum annual debt service (MADS) a solid 1.3x, and 1.2x based on tax revenues alone (excluding rent revenues). No new money debt secured by the pledged revenues may be issued under the indenture. The master ordinance limits the use of taxes to pay debt service, replenish reserve funds, or redeem bonds since the project is complete.

The pledged tax revenues demonstrated modest sensitivity to the recession but have generally remained on a positive trajectory realizing 3.7% average annual growth over the past seven years, with a solid fiscal 2013 gain of 4.3%. Fitch expects coverage will remain sound over the near term given the economic trends in the city and addition of several marquee events at the stadium (annual Cotton Bowl, the Academy of Country Music Awards, the 2014 NCAA Final Four, and the 2015 College Football Championship).

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, 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=831357

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Associate Director
+1 512-215-3742
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1 212-908-0608
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Associate Director
+1 512-215-3742
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1 212-908-0608
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com