News Column

Fitch Affirms Red Oak, TX's GOs and COs at 'A+'; Outlook Stable

August 25, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'A+' rating on the following Red Oak, TX's (the city) limited tax obligations:

--$5.7 million general obligation (GO) refunding and improvement bonds, series 2005;

--$5.3 million GO refunding bonds series 2007;

--$1.8 million combination tax and revenue certificates of obligation (COs), series 2010;

--$1 million GO refunding bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds and COs are secured by an ad valorem tax pledge levied against all taxable property within the city, limited to $2.50 per $100 of taxable assessed value (TAV).

The COs are additionally secured by a limited, nominal pledge of the net revenues of the city's water and wastewater system, not to exceed $1,000.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: The city's financial profile is marked by generally stable operations and general fund levels which are satisfactory, although somewhat limited on a nominal basis.

SMALL, GROWING ECONOMY: The city's advantageous location south of Dallas along two major interstate highways and availability of affordable land has driven its rapid growth.

HIGH DEBT BURDEN: Overall debt levels are high, reflective of substantial school district debt. Principal amortization is average and near-term debt plans are manageable.

RATING SENSITIVITIES

ADDITIONAL DEBT: A material increase in the city's already high debt burden could apply negative pressure to the rating.

CREDIT PROFILE

Red Oak is a small but rapidly growing bedroom community in Ellis County (GO bonds rated 'AA' by Fitch), 20 miles south of downtown Dallas. The city's boundary stretches to Interstate Highway 35 in the west, which offers expanded development opportunities. Proximity and easy transportation access to the expansive employment base of the Dallas metropolitan area as well as availability of affordable land has and will likely continue to spur growth.

LIMITED ECONOMY WITH GOOD PROSPECTS FOR GROWTH

The city's population, currently estimated at just over 11,000, has more than doubled since 2000. In tandem with population gains, tax base growth had been significant, increasing nearly 60% between fiscals 2006 and 2009. TAV growth slowed beginning in fiscal 2010, reflecting the weakened housing market, but has recently regained momentum, albeit at a moderated pace. Fiscal 2014 marked a strong 7% uptick in TAV and certified values for fiscal 2015 show another year of growth at 3%. Fitch believes prospects for additional growth are favorable given the city's proximity to Dallas, existing road infrastructure, and large amount of undeveloped land within city limits.

The city's local employment base is small and includes numerous light manufacturers, aerospace, retail, healthcare, and governmental entities. The majority of residents commute to jobs in the Dallas-Fort Worth metropolitan area, but the recent construction of Triumph Aerostructures' aircraft manufacturing plant has brought 1,100 skilled workers to the city and diversified the employment base.

Resident wealth levels are somewhat mixed but in line with county and state levels. The county reported a low 5.0% unemployment rate in May 2014 compared to 5.1% and 6.1% for the state and nation, respectively. The drop of more than a percentage point from just 12 months prior is a result of employment growth outpacing labor force growth.

STABLE FINANCIAL PERFORMANCE

The city ended the fiscal year with positive operating results in four of the last five years. The city relies primarily on property and sales taxes for general fund operating support, making up 40% and 17% of general fund revenues in fiscal year 2013, respectively. The city's tax rate has remained at $0.649 per $100 TAV for the last four fiscal years and is well below the $2.50 per $100 TAV cap, leaving the city with ample revenue-raising flexibility if needed.

The city closed fiscal 2013 with a net operating surplus of $1 million after transfers. Sales tax receipts for the year fell short of budgeted amounts by $250,000, or 3% of spending, helping drive a shortfall of revenues of $313,000 from covering operating spending. The positive net operating result in fiscal 2013 was due to the issuance of $1.3 million in tax notes; the unspent balance is reserved within the general fund and therefore does not affect unrestricted general fund balance.

Management expects to end fiscal 2014 with a small surplus of $165,000 due to personnel savings through attrition and higher-than-budgeted franchise and sales tax revenues. Unrestricted general fund balance has remained flat for the last several years, with 16% of general fund expenditures at the close of fiscal 2013, falling slightly short of the 60 days of expenditures informal fund balance target.

The city anticipates adopting a balanced budget for fiscal 2015 that includes a 7.5% increase in sales tax revenues over last year's budget, compared to the 10% increase budgeted in fiscal 2014. Given the 13% growth in sales tax in fiscal 2014 and the current retail development underway, management expects to exceed budgeted figures for a second consecutive year. Fitch views the city's ability to conservatively budget inherently volatile sales tax revenues as an increasingly important credit consideration as this revenue stream becomes a larger proportion of general fund sources.

HIGH OVERALL DEBT BURDEN

Overall debt ratios are very high at $6,897 per capita and 11.5% of market value, driven mostly by overlapping school district debt from Red Oak ISD (GO bonds rated 'A+'). Direct debt levels are low reflecting significant utility support for a portion of outstanding GO debt. With the recent installation of smart meters to increase accuracy and efficiency of meter reading and the implementation of rate increases, profitability of the water and sewer system has improved, boding well for continued self-support of enterprise-related GO debt.

The city historically funded most capital spending by paygo but in recent years has chosen to issue debt. Modest issuances of tax notes in 2014 were for various capital improvements and equipment purchases. Future tax-supported debt will likely be contingent on the city's growth trajectory but Fitch expects it will remain affordable.

WELL-FUNDED RETIREMENT LIABILITIES

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 88.9% at Dec. 31, 2013 (using a 7% investment rate of return). Carrying costs for debt service, pension and OPEB were a low 10.4% of governmental fund spending in fiscal 2013, reflecting the strong state support for retiree benefits, 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=857054

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Leslie Ann Cook

Analyst

+1-212-908-0507

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Rebecca Meyer

Director

+1-512-215-3733

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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