Fitch Rates Denton, TX's Series 2015 COs and GOs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns a rating of 'AA+' to the following City of Denton, Texas (the city) obligations:

--$87.98 million certificates of obligation, series 2015;

--$43.15 million general obligation refunding and improvement bonds, series 2015.

The certificates of obligation (COs) and general obligation bonds (GOs) are scheduled for a competitive sale the week of May 18. CO proceeds will be used for municipal and utility improvements; GO proceeds will be used for municipal improvements and to refund outstanding obligations for interest savings.

Fitch also affirms its 'AA+' rating on the following outstanding city obligations:

--$143.7 million GO bonds (pre-refunding);

--$268.5 million COs;

--$43.6 million combination tax & revenue refunding bonds.

The Rating Outlook is Stable.

SECURITY

The GOs and COs are secured by an annual property tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally payable from a limited pledge of utility system surplus revenues.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: Management's commitment to structural balance is reflected in sound reserves and strong liquidity. Budgeting is conservative, with results that are typically than better the city's forecasts. Revenues exhibit relatively low volatility and the city's cost structure retains ample flexibility.

LARGE, DIVERSE REGIONAL ECONOMY: Denton benefits from participation in the broad Dallas-Fort Worth (DFW) economy, as demonstrated by a growing local population and employment base. The city's education levels are strong, and per capita personal income is on par with the national average.

SOUND TAX BASE GROWTH: The diverse tax base has realized solid growth amid low volatility. Situated along the North American Free Trade Agreement transportation corridor (IH 35), the city's tax base includes a broad array of industrial, warehousing and commercial interests. An expanding regional transportation network positions the city well for future growth.

ELEVATED BUT MANAGEABLE DEBT: Fitch expects the city's debt to remain elevated given local and regional growth needs. However, the burden on the budget for debt service and pensions is manageable.

RATING SENSITIVITIES

CONTINUED FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Denton is located at the convergence of IH 35 East and IH 35 West, approximately 35 miles north of Dallas and Fort Worth.

DIVERSE LOCAL ECONOMY WITH GROWTH PROSPECTS

The city is known for its institutions of higher education and regionally prominent medical sector. Denton is home to the University of North Texas (UNT) and Texas Woman's University (TWU), with combined enrollment exceeding 48,500. The city's growing healthcare facilities serve north Texas and southern Oklahoma. These institutions include Columbia Medical Center Denton, Texas Health Presbyterian Hospital, and The Heart Hospital Baylor Denton.

The city's taxable assessed valuation (TAV) grew by a sound 4.3% over the past five years, with a strong fiscal 2015 increase of 10.5% to $7.8 billion. New commercial and retail development continues to accompany the city's residential growth. Ongoing industrial expansions and relocations contribute to the city's low 3.4% unemployment rate as of February 2015.

Recent tax base growth reflects development within the city's reinvestment zones, the newly created Rayzor Ranch Public Improvement District and several business parks. The Public Improvement District (PID Number One) is being developed for as a mixed use commercial, retail and multi-family development.

Fitch anticipates the combination of significant regional transportation improvements currently underway and the city's ample developable land will likely result in ongoing growth for the near to intermediate term.

SOUND FISCAL MANAGEMENT

A diversified revenue base of ad valorem tax (38%), sales tax (31%), and franchise fees (16%) support the city's governmental operations. Management efforts to align expenditures with revenue growth have contributed to positive operating results three of the past four fiscal years. The general fund recorded healthy unrestricted reserves of $25.8 million or 28.8% of spending at the end of fiscal 2014.

The fiscal 2015 budget continues funding in support of the city's competitive salary structure and applies increased franchise fee revenues to the city's street improvement fund. Officials conservatively project a modest increase in reserves at fiscal 2015 year-end.

While the city's five year plan reflects growth-related operating pressures, officials note the conservative nature of the projection. They also have communicated a commitment to structural balance, with maintenance of reserves at a level consistent with the city's 20% of spending policy floor.

MANAGEABLE DEBT BURDEN; ONGOING NEEDS

Overall debt is above average at 7.8% of market value due largely to high overlapping debt of local school districts. The city's debt service, pension and other employment benefits represent a manageable 22.6% of fiscal 2014 governmental spending. The 10-year principal amortization rate is healthy at nearly 60%.

The city's fiscal 2015 capital plan includes an estimated $530 million to $600 million of debt through fiscal 2019, primarily for aging utility infrastructure and carry-forward projects from fiscal 2014. Most of the plan's debt is supported by the city's enterprise operations, and Fitch will monitor the sufficiency of rate adjustments and revenues going forward to service the enterprise-supported debt.

The city participates in the Texas Municipal Retirement System (TMRS) for all eligible employees except firefighters. TMRS had a satisfactory fiscal 2014 funded ratio of 77.3% based on an investment assumption of 7%. The city's firefighters' pension is also funded at an adequate level of 77.1% based on the plan's 7% investment rate assumption. The city also provides other post-employment benefits (OPEB) to its employees. Pension and OPEB costs represent a modest obligation in relation to the city's market value.

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=984258

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Kathryn Masterson
Senior Director
+1 512-215-3730
or
Committee Chairperson
Steve Murray
Senior Director
+1 512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Kathryn Masterson
Senior Director
+1 512-215-3730
or
Committee Chairperson
Steve Murray
Senior Director
+1 512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com