Fitch Affirms Grand Prairie, Texas' Sales Tax Rev Bonds at 'AA'; Outlook Stable

Fitch Ratings affirms its 'AA' rating on the following Grand Prairie, Texas' (the city) bonds:

--Approximately $9.2 million in outstanding sales tax revenue refunding bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The sales tax bonds are payable from a senior lien on the 1/4-cent sales and use tax, authorized in perpetuity for the city's parks and recreation system. The bonds have a springing debt service reserve that will only be funded in the event maximum annual debt service (MADS) coverage of the parity bonds falls below 1.50x.

KEY RATING DRIVERS

STRONG, RESILIENT ECONOMY: The city of Grand Prairie is located in the heart of the broad and resilient Dallas-Fort Worth (DFW) metropolitan area. Residents benefit from easy access to an expansive employment market via the major transportation corridors that run through the city.

DIVERSE RESOURCE BASE: The city's tax base is diverse with average wealth metrics. Prospects for continuing economic development and tax base growth are favorable given the city's central location in a strong regional economy, some ongoing development, and highway expansion projects.

STRONG SALES TAX COVERAGE: Recent growth in sales taxes has slightly improved already sound coverage levels. Fitch expects debt service coverage to remain sound despite a weak 1.25x additional bonds test (ABT) given satisfactory historical revenue performance, absence of further leveraging plans, and need for residual revenues to pay subordinate lien debt and support park operations.

SOUND FISCAL PROFILE: Sound management practices, including adherence to prudent fiscal policies and timely spending adjustments, have preserved the city's strong financial profile. General fund reserves and liquidity are robust and the city has prudently continued its pay-go approach to capital spending.

ELEVATED DEBT BURDEN: Overall debt levels are high and likely to remain so, due primarily to the debt of various overlapping school districts. Future capital needs will require debt funding but the budget impact should be tempered by the rapid amortization of existing debt.

GOOD PENSION FUNDING: Unfunded pension liabilities are manageable, having declined due to the city's full funding of its required annual contribution as well as system-wide structural and actuarial changes.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to changes in fundamental credit characteristics including the city's strong financial management practices and sales tax performance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.

CHANGE IN BORROWING PLANS: Fitch does not anticipate further leverage of this sales tax revenue stream in the near term. Additional parity borrowing that materially reduced coverage levels could cause a downgrade of the sales tax bonds.

CREDIT PROFILE

The city of Grand Prairie (general obligation bonds rated 'AA+', Stable Outlook by Fitch) encompasses a narrow, 80 square mile stretch of land in the center of the DFW metroplex, directly between the two major cities and just south of DFW International Airport. Population growth is continuing and is currently estimated at over 181,000, up 44% from 2000.

STABLE ECONOMIC BASE CENTRALLY LOCATED IN DFW METROPLEX

Defense, manufacturing, aerospace, and distribution are major components of Grand Prairie's economy and are complemented by a retail and entertainment presence. The city's economy is buoyed by its location in the heart of the DFW metroplex and easy access to major air and ground transportation routes. The city's employment picture is positive, with both employment and labor force growth in the last 12 months improving the unemployment rate to 4.2% in December 2014 from 5.6% in December 2013. The unemployment rate is comparable to the state (4.1%) and below the national average (5.4%). Residents also benefit from access to the broad and diverse employment market of the greater DFW MSA, which has outpaced the nation in job growth since 2009.

City wealth indices are mixed. Median household income approximates the state and nation but per capita income is only 80% of the national norm. Market value per capita ticked up to $71,000 in fiscal 2014 but remains below-median for the 'AA' rating category.

STRENGTHENED TAV

TAV performance was lackluster from fiscals 2010 to 2013, declining by an average of 1% annually during this four-year period. The TAV weakness reflected slightly lower residential and flat commercial/industrial valuations, as well as a decline in new development activity. However, commercial development along recently completed highway connections had been anticipated for some time, and the first major facility, a Restoration Hardware retail distribution center, opened in 2013. In addition, permitting activity gradually strengthened. The positive growth sparked a 5% increase in TAV for fiscal 2014.

Year-over-year TAV growth strengthened in fiscal 2015 to 7.5%, reaching $10.5 billion. This was boosted in large part by improving home and business inventory valuations. Officials expect some continuation of this two-year TAV momentum over the near term with further, positive residential reappraisals and added development along new highway access roads, which Fitch believes is reasonable. Management actively promotes economic development and has spurred investment through the city's three diverse tax increment financing (TIF) districts.

STRONG COVERAGE OF SALES TAX BONDS

The sales tax bonds carry a senior lien; the city also has one series of subordinate lien bonds outstanding (not rated by Fitch). Bond documents do not stipulate any cross-default between the liens. Historical coverage of the senior lien bonds by the pledged 0.25% sales tax revenues has been strong; fiscal 2014 audited revenues covered MADS 4.3x. The city does not currently anticipate leveraging down to the 1.25x ABT for parity bonds.

Pledged sales tax revenues declined moderately over the recession, but quickly regained positive traction. Strong annual growth of 8% in fiscal years 2012 and 2013 was bolstered by the opening of a 100-store outlet mall (Paragon Outlets), which generated its first full year of sales taxes in fiscal 2013. Sales tax performance in fiscal 2014 remained positive but subdued with a 3% year-over-year gain. Further modestly positive revenue gains appear reasonable to Fitch in the near term given the aforementioned retail and commercial investment in addition to historical performance. Year-to-date fiscal 2015 sales taxes also support this assumption as management indicates they are trending about 4% above the prior year's actuals.

STABLE FINANCIAL PROFILE BENEFITS FROM GOOD MANAGEMENT PRACTICES

The city's finances are well-managed. Property and sales taxes (from a separate 1% sales tax levy) are the leading sources of general fund revenue at 43% and 24%, respectively, in fiscal 2013. Management prudently managed sluggish performance in revenue from fiscals 2009 to 2011 with spending adjustments. Recent modest fund-balance declines reflect continued general fund transfers for capital and other non-recurring expenditures, including early defeasance of debt with cash. Management considers unassigned fund balance in excess of the city's formal policy floor of 50-60 days of expenditures (15%) as available for non-recurring budget items. Fund balances have tracked at between 25% and 33% of spending over the past six fiscal years.

The general fund concluded fiscal 2013 with a modest $1 million operating surplus after transfers (roughly 1% of spending). Ending results remained within the range of fiscal performance previously anticipated by Fitch given the year's steady narrowing of the $5.7 million drawdown originally budgeted. The positive variance was largely due to added growth in property and sales tax revenues and under-spending of the operating budget. Unrestricted fund balance improved slightly to $28.8 million or a strong 28.2% of spending. Fiscal 2014 audited results included a moderate $4.7 million (4% of spending) net drawdown on reserves as another contribution to capital funds while preserving $24 million in unrestricted reserves or about 21.5% of spending at year-end.

The fiscal 2015 general fund budget of $109.4 million increases total appropriations by $6.8 million or 6.7% from 2014 spending estimates. Key line-item spending changes include a $4 million increase in personnel costs for additional staff and pay raises. Operations remain structurally balanced and revenue assumptions appear reasonable. Management indicates operations are presently running in line with budget. The nominally flat tax rate of $0.67 per $100 was adopted for the 14th consecutive year. A $4.8 million fund balance drawdown is budgeted for one-time spending priorities, but residual fund balance would remain in compliance with the city's fund balance policy. In addition, Fitch believes it is likely the city will improve upon initially budgeted projections as the fiscal year progresses, in line with historical performance.

ELEVATED DEBT BURDEN LIKELY TO PERSIST

Overall debt levels are high at $5,100 per capita and 7.2% of full market value. The elevated debt levels are primarily attributable to the debt of various overlapping school districts. The city's variable-rate exposure has moderated somewhat to roughly 22% of outstanding debt, down from what was a recently high 28% in Fitch's estimation. Early retirement of a portion of the city's variable-rate obligations in addition to issuance of primarily fixed-rate, tax-supported debt since 2008 has prudently reduced the presence of this risk over time. Fitch also notes the city's variable-rate exposure does not impact general government operations or debt service coverage on the senior-lien sales tax bonds. Tax-supported debt service (property-tax and sales-tax bonds) consumed 13% of governmental fund spending in fiscal 2013 and reflects a rapid pace of amortization (84% retired in 10 years).

The city's most recent five-year capital improvement plan (CIP; 2015-2019) calls for an increased $171 million of tax-supported debt issuance, up from $128 million in the last iteration. Total CIP spending is higher than prior-year plans due to the addition of a public safety communication system ($13 million) and some new city facility projects. Nonetheless, management estimates there is sufficient capacity to debt-fund these various capital projects without an accompanying tax rate increase, assuming a modest 2% annual TAV expansion during that time period. Fitch believes this is a reasonable assumption given the recently stronger TAV growth and also takes some comfort from the city's reported flexibility in the timing of the city's CIP if there is a return to sluggish TAV trends.

In addition to the city's aforementioned tax-supported CIP, the city received voter approval in May 2014 to repurpose and extend two expiring sales tax levies (0.125% each) to separately support an expansive capital parks project (EPIC). Preliminary plans include the maximum allowable use of $75 million in debt funding from this dedicated tax revenue stream for the construction of a large recreation center and waterpark, expected to open in the summer of 2017. Operations are also expected to be self-supporting, which is underlined by management's plan to adjust spending as needed to ensure these results. However, in the event they became a drain on general fund or other budgetary resources, it could affect the city's credit standing.

The city's debt ratios will likely remain elevated given the planned tax-supported capital projects. However, Fitch expects the debt burden will remain manageable given the city's prudent fiscal management, prospects for tax base growth, and rapid debt retirement.

WELL-FUNDED PENSIONS

Pensions are provided through the Texas Municipal Retirement System (TMRS), a state-wide, agent-multiple-employer plan. The city has consistently made 100% of the actuarially-calculated annual required contribution (ARC). The city's pension position has improved in recent years as a result of consistent ARC funding and more notably, TMRS' recent, system-wide methodology changes to its fund accounting and actuarial assumptions. The city's pension funded position as of Dec. 31, 2012 was a sound 86.3% using the system's 7% investment return.

Other post-employment benefits (OPEB) are funded on a pay-go basis. The unfunded liability for the city' OPEB totaled a nominal 0.30% of full market value. Combined fixed costs for debt service (excluding cash defeasances), pension ARC, and OPEB pay-go totaled a manageable 19% of governmental fund spending in fiscal 2013.

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, the Texas Municipal Advisory Council, 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=980743

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