Fitch Affirms Tulia, Texas' COs at 'BBB-'; Outlook to Positive

Fitch Ratings takes the following rating action on Tulia, Texas (the city) as part of its continuous surveillance effort:

--Approximately $1.4 million combination tax and revenue certificates of obligation (COs), series 1997, affirmed at 'BBB-'.

The Rating Outlook is revised to Positive from Negative.

The Outlook revision reflects the city's recent trend of improved general fund performance (comparable to its formal policy) that reversed a three year trend of negative general fund balances. In addition, while the general fund maintains its dependency on utility fund transfers, new city management has recently standardized its intra-fund transfer policy and established a payment-in-lieu of taxes (PILOT) from its enterprise funds with the stated goal to have all funds become self-supporting over the long term. The financial position of the city's electric utility fund remains healthy in general, despite providing much of the general fund transfer amount. A longer trend of maintaining adequate general fund reserves that reflect adherence to these improved financial practices will be key to any upward rating action.

The 'BBB-' rating reflects the city's financial improvement, a still fairly low tax rate, and very low debt levels with an absence of additional borrowing plans balanced against a limited yet fairly stable area economy and a very small, flat tax base. As anticipated, the position of the water/sewer enterprise fund is comparable to Fitch's last rating review or slightly worse. Liquidity has declined further, and there has been negative operating income in four of the past seven years. Capital reinvestment in the system remains minimal.

Located in the Texas Panhandle south of Lubbock along Interstate 27, this small city is the principal commercial/agricultural center and county seat of predominately rural Swisher County. Demographic trends reflect modest, annual declines in population since 2000; in 2007, the city's population was estimated at approximately 4,600. Area wealth levels are below average. Although rising to 6.7% in September 2009, the county's unemployment rate remained well below those of the state and U.S., comparable to historical trends. Tax base growth has been fairly flat overall since 2005, increasing at an annual average rate of just under 2%. At $88 million in fiscal 2010, the tax base remains small and vulnerable to fluctuations in agricultural inventory, evidenced in part by the 7% decline from the prior year in fiscal 2010. Taxpayer concentration is moderate at nearly 12% in fiscal 2010.

Ongoing transfers from the water/sewer and electric utility funds have historically supported the city's annual operating deficits. However, despite these transfers, the city recorded a negative general fund position from fiscal years 2004-2006. More recent financial results reflect a reversal of this trend, and in fiscal 2008, the city further improved its operating reserves from the prior year, reporting approximately $106,000 in reserves or about 6% of spending at year end. According to city management, fiscal 2009 results include growth in both property and sales tax revenues, and after the utility fund transfer, ending results are projected to be approximately $80,000 in reserves or about 5% of annually budgeted revenues. Recently positive results have been assisted in part by modest annual increases to the still low operating tax rate. For fiscal 2010, the $1.9 million expenditure budget remains fairly flat from the prior year; general fund reserves are projected to be comparable to 2009 levels. Also, the fiscal 2010 budget reflects city management's initial implementation of a formalized and reduced utility transfer amount in conjunction with enterprise fund PILOT payments, which is projected to move associated funds towards greater structural balance over the long term.

Debt levels are very low. The two outstanding bond series are self-supporting (series 2003 combination tax and revenue COs not rated by Fitch); the city does not levy an interest and sinking (I&S) tax rate. The city continues to manage its modest capital needs with pay-go spending and short-term loans with reportedly no additional debt plans over the near term.

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