Fitch Rates Lubbock, Texas’ GOs and COs ‘AA+’; Outlook Stable

Fitch Ratings has assigned an 'AA+' rating to the following Lubbock, Texas (the city) general obligation (GO) bonds and certificates of obligations (COs):

--$49.7 million GO refunding bonds, series 2014;

--$65.1 million tax and waterworks system surplus revenue COs, series 2014.

In addition, Fitch affirms the following ratings (pre- refunding):

--$983.4 million in outstanding GOs and COs at 'AA+'.

The Rating Outlook is Stable.

The series 2014 bonds and COs are expected to price via negotiation April 22.

Proceeds of the COs will be used for various capital projects that largely benefit airport, wastewater enterprises; also street and facility improvements as well as pay issuance costs. The GO refunding bonds will be used to refund certain outstanding obligations for debt service savings and pay costs of issuance.

SECURITY

The GO bonds and COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 taxable assessed valuation (TAV). The 2014 COs are additionally secured by a nominal pledge of surplus net revenues (limited to $1,000) of the city's waterworks system.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city maintains a solid financial position, characterized by robust reserve levels in line with adopted policy. Management's proactive forecasting and ongoing monitoring of financial results as well as strengthened sales tax trends have assisted recent fiscal performance.

HEALTHY TAX BASE: The city's TAV is stable and diverse. TAV continues to grow at a steady pace annually. Fitch believes moderate TAV gains over the near term are feasible given current development trends.

STABLE REGIONAL ECONOMY: Lubbock serves as the education and medical center as well as retail/commercial hub for this highly mechanized agricultural area. Unemployment is low and below state and national levels. Income levels are below average due in part to a large student population, but have grown more quickly than the national average and are somewhat offset with the area's lower cost of living.

RELIANCE ON SALES TAXES: The general fund relies heavily on economically volatile sales taxes, although credit concerns are partially mitigated by the city's healthy reserve levels and resilient economy.

MODERATELY HIGH DEBT; LARGE CIP: The overall debt burden is high relative to market value. The city maintains a large, comprehensive capital improvement program (CIP) which has expanded in size, much of which is planned to be funded from city enterprise systems. Carrying costs are expected to remain manageable.

MIXED PENSION & OPEB LIABILITIES POSITION: The city's largest pension program is well-funded in contrast to a separate, firefighters' pension program with a lower funded position despite city contributions above the annual pension cost (APC). Other post- employment benefits (OPEB) are funded on a pay-as-you-go basis.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including strong fiscal practices and planning efforts by management as well as the financial flexibility provided by the city's stout reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

EXPANDING DEBT, CAPITAL PROGRAM: An expanded list of capital projects largely for the city's enterprise systems is balanced against Fitch's expectation of some flexibility in the existing five- year CIP and implementation of the city's debt and capital program as projected over the near term. Healthy enterprise operations and proactive forecasting that include plans to increase rates and charges also somewhat offset credit concerns, although Fitch believes there may be more limited revenue-raising flexibility than previously assumed given recent evidence of rate sensitivity.

CREDIT PROFILE

With an estimated population of nearly 239,000, the city is located in west Texas and covers about 119 square miles in Lubbock County. Population growth since 2000 has remained slightly below the state. Educational attainment is comparable to national levels while income/wealth levels as measured by median household income are between 15 percent-20 percent below state and U.S averages.

STABLE ECONOMY; MODERATE TAV GAINS CONTINUE

Two of Lubbock's major economic indicators, its unemployment rate and TAV, continue to perform well. Year-over-year unemployment edged down slightly to a low 4.2 percent in December 2013 despite a solid 2.5 percent labor force gain, which was down from 4.7 percent in December 2012 and below the state (5.6 percent) and national (6.5 percent) averages for the same time period. Health care, education, and government comprise the area's largest non-agricultural employment sectors.

TAV continues to steadily expand at a moderate pace, averaging 3 percent annual growth over the past five fiscal years, which brought TAV to $13.5 billion in fiscal 2014. The city's tax base is largely residential with minimal taxpayer concentration. Fitch believes management's expectations for further, moderate TAV gains appear reasonable given recent trends that include modest amounts of new retail/commercial development largely oriented towards Texas Tech University's planned expansion of its current 33,000 student population to 40,000 by 2020.

SOLID FINANCES MAINTAINED

The city's financial position is strong, aided by formula-driven transfers to the general fund from the city-owned enterprises and management's continued attention to cost control and conservative budgeting. In addition, long-range fiscal and capital planning have been key components of management's sound financial practices. General fund operations have notably incorporated annual pay-go spending for capital projects that averaged $5.7 million per year over the last five fiscal years while maintaining stable to growing reserves. Sales taxes from a 1 percent levy historically comprise the largest general fund resource, accounting for an above-average 37 percent or $57 million in fiscal 2013, followed by property taxes (29 percent) and payments in lieu of taxes from enterprises (19 percent).

Fiscal 2013 results were again bolstered by stronger, above- budget sales tax performance of nearly 8 percent or about $4.1 million. Unrestricted general fund balance rose to $33.7 million at fiscal 2013 year-end or nearly 23 percent of spending, up from $28.1 million or about 20 percent of spending in fiscal 2012. General fund cash/investments totaled $25.7 million at fiscal 2013 year-end or slightly over two months of operations.

For fiscal 2014, the $158.4 million operating budget was adopted with a moderate $8 million drawdown (about 5 percent of spending), largely for pay-go capital projects. The year's budget incorporated a slightly higher estimate of sales tax growth at 3.6 percent and projected maintaining reserves above the adopted policy level of no less than 20 percent of operating revenues. Fitch favorably acknowledges maintaining reserves according to policy, but points out a lack of robustness in the city's financial flexibility at this established level given the policy does not factor in the rising, annual transfers from city-owned enterprises that provide key revenue support for general operations. Year-to-date, management reports sales tax trends are stable but subdued as compared to prior fiscal years, up by a modest 1 percent-2 percent over budget and on a year-over-year basis, while operations remain level with budget.

MODERATELY HIGH DEBT BURDEN; LARGE CIP TEMPERED BY HEALTHY ENTERPRISE OPERATIONS

The city's overall debt burden is high relative to market value at approximately 6 percent, but somewhat more moderate on a per capita basis at about $3,600. Amortization is above average with nearly 67 percent of principal retired in 10 years. All of the city's tax-backed debt is fixed-rate and historically, the city has not issued revenue bonds for its various enterprise systems with the exception of Lubbock Power & Light (revenue bonds rated 'A+' Stable Outlook by Fitch). Much of the city's outstanding tax-backed debt is self-supporting with the use of enterprise system revenues and therefore not included in Fitch's debt burden calculations.

A priority list of the city's general capital needs is being developed by a citizens' committee that management anticipates will be presented to voters in a May 2015 GO bond election, yet to be sized. The city continues to implement a large CIP. The city's rolling five-year CIP (excluding the electric utility) for fiscal years 2015 through 2019 totals an expanded $470 million, up from the prior year's $410 million, driven by various water and airport projects. The city adopts only the current fiscal year of its CIP and although Fitch maintains some concern over the expanded size of the city's capital program, Fitch recognizes some flexibility exists in its implementation over future years. Approximately 90 percent of the projects are planned to be debt financed with self-supported debt; the city plans to increase rates and charges corresponding with the additional cost to support the enterprises' CIP. Fitch views the plausibility of steady rate and fee increases throughout the enterprise systems with some skepticism given the political challenges and rate sensitivity evidenced by local electric utility ratepayers recently, which could lead to further pressure on the city's debt profile.

MIXED PENSION & OPEB LIABILITIES POSITION

The city's primary pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. The city has paid an increasing portion of its annual pension cost (APC) over fiscals 2011-2013, up from 78.2 percent in fiscal 2011 to 99.4 percent in fiscal 2013. Like many other Texas cities, this was done by design as part of an eight-year phase-in of increased annually required costs with TMRS. The city chose to end the phase-in beginning in fiscal 2012 and paid TMRS' full required rate of contribution. Structural and actuarial changes to TMRS in recent years approved at the state level also significantly boosted the city's funded position despite previously contributing less than APC. The pension's funded level was good at 82.4 percent at Dec. 31, 2012, which management expects to maintain over the near term.

The city also participates in a single-employer pension plan for its firefighters. Trends over the last three fiscal years (fiscals 2011-2013) reflect some catch-up by the city, as the APC has been funded most recently at nearly $6 million or 112 percent of fiscal 2013 APC. At the latest actuarial valuation of Jan. 1, 2013, the plan's funded position dropped slightly to 74.5 percent from 79.4 percent at Dec. 31, 2010. Fitch estimates the current funded position a lower 67 percent after adjusting for a more conservative 7 percent investment rate of return. Using Fitch's calculation, the UAAL totaled $79.2 million or less than 1 percent of market value.

OPEB offered by the city include an implicit rate subsidy for health and dental insurance coverage for retirees and their dependents. The city funds OPEB annually on a pay-go basis, which has covered no more than 45 percent of the actuarially determined annual OPEB cost in the last three fiscal years (2011-2013). Carrying costs for the city (debt service, pension, OPEB costs, net of self-supporting enterprise debt) are moderately high and total about 26 percent of governmental spending in fiscal 2013 due in part to the above-average pace of debt principal amortization.

More information:

fitchratings.com

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=685314

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=686015

fitchratings.com/gws/en/disclosure/solicitation?pr_id=826601

fitchratings.com/understandingcreditratings

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