Fitch Upgrades Arlington, TX's Perm Improv Bonds to 'AAA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'AAA' rating for the following Arlington, Texas (the city) limited tax securities:

--$31.2 million permanent improvement bonds (the bonds), series 2015A;

--$36.1 million permanent improvement refunding bonds, series 2015B.

The bonds are scheduled for competitive sale the week of May 25. Proceeds from the series 2015A bonds will be used for a variety of governmental improvements and from the series 2015B bonds for debt service savings.

In addition, Fitch takes the following rating actions:

--$325.3 million in outstanding bonds and certificates of obligation (Cos) upgraded to 'AAA' from 'AA+';

--$201.3 million in special tax bonds affirmed at 'A+'.

The Rating Outlook 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

RATING UPGRADE: The upgrade to 'AAA' recognizes the city's strong financial performance, financial resilience and manageable long-term liabilities.

STRONG FINANCIAL PROFILE: The city's strong financial profile is supported by expenditure flexibility, a positive revenue trajectory, healthy reserves and ample liquidity.

FAVORABLE GROWTH PROSPECTS: Arlington benefits from its central location in the Dallas-Fort Worth (DFW) metropolitan area and status as a regional hub for entertainment and tourism. Development and business expansion bode well for ongoing growth of the tax and employment base.

MANAGEABLE DEBT; SOUND PENSION: Overall debt 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

LONG-TERM LIABILITY BURDEN: Fitch expects the city's debt burden to gradually decline over time given economic growth prospects, limited capital needs and rapid amortization of existing debt. The rating is sensitive to a negative shift in that trajectory.

CREDIT PROFILE

Arlington is located in the center of the DFW metroplex (about 20 miles west of Dallas) with an estimated 2014 population of about 370,000. 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. Top employers include The University of Texas at Arlington, General Motors, Six Flags over Texas, Texas Health Resources, JP Morgan Chase and the Texas Rangers Baseball Club.

Arlington's broad tax base is without taxpayer concentration. TAV realized four years of growth averaging 2.4% subsequent to a recessionary dip in fiscal 2011. Preliminary fiscal 2016 TAV growth of 4% is consistent with a strong 4.5% gain in fiscal 2015, reflecting home price appreciation and new development.

Arlington's February 2015 unemployment rate of 4.1% compares favorably to state (4.3%) and national (5.8%) averages for the same period. Fitch anticipates business expansion and new development to spur additional employment and tax base growth in the near term.

SOLID FINANCIAL PROFILE

The city's finances are characterized by revenue diversity, structurally balanced operations and sound reserves. Property taxes and sales taxes are the primary revenue sources, comprising about 35% and 24% of fiscal 2014 general fund revenues, respectively. The city undertook cost saving measures to largely offset muted revenue growth during the recession.

Fiscal 2014 unrestricted reserves of $55 million represent a solid 25.2% of spending after the application of previously assigned funds for capital and project priorities. Based on fiscal year to date performance and spending priorities, the city projects completing fiscal 2015 with generally similar reserves. The city's operations are structurally balanced and officials anticipate maintaining strong reserves in excess of their policy floor.

Strong results are supported by the city's long-term planning and reserve policies. 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 $118 million.

MANAGEABLE DEBT; WELL-FUNDED PENSIONS

Voters overwhelmingly approved $236 million in general obligation (GO) bonds in November 2014 to support street, park and recreation, fire facility and library improvements. The city expects to issue against the authorization through fiscal 2020. The city's existing and new GO authorization ($295 million combined) compares to about $235 million of principal currently scheduled for retirement through fiscal 2020.

Arlington's manageable capital plan reflects the city's maturity and disciplined attention to infrastructure needs. Fitch anticipates the city's debt burden to gradually decline in the mid-term based on the city's capital planning forecast and rapid amortization schedule. Overall debt represents 5.0% of market value and includes a sizable overlapping debt component.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The city's pension is well funded at 83.9% as of Jan. 1, 2014 and the unfunded liability is $161 million. The city's other post-employment benefits (OPEB) unfunded liability is modest at $103.5 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 2014 carrying costs (debt service, pension and OPEB contributions) account for a high 27% of governmental spending. However, with debt service totaling 19% of spending, Fitch's concern about above average carrying costs is mitigated by the rapid amortization (68% in 10 years) and limited new issuance plans.

SATISFACTORY COVERAGE OF SPECIAL TAX BONDS

Coverage of the special tax stadium bonds remains satisfactory due to growth of the pledged tax revenues. Fiscal 2014 annual average debt service was a sound 1.7x based on pledged tax revenues and rent payments and 1.5x based on tax revenues alone.

Fiscal 2014 pledged tax revenues and rent payments covered maximum annual debt service (MADS) a solid 1.4x, and 1.3x based on tax revenues alone (excluding rent revenues). The debt matures in 2028, with MADS in 2025, although based on the city's practice of modest annual early redemptions, the city plans to retire the debt by 2023.

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 2.4% average annual growth over the past seven years. 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, a variety of top-name concert events, 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=984456

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