OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following bonds of Killeen, TX (the city):

--$37.4 million general obligation (GO) refunding bonds, series 2016.

Proceeds will be used to refund a portion of the city's outstanding debt for debt service savings. The bonds are scheduled to sell the week of May 2 via negotiation.

In addition, Fitch affirms the 'AA' rating on the following:

--The city's Issuer Default Rating;
--$82.5 million in outstanding GO bonds, series 2011, 2012, 2013, and 2014;
--$51 million in outstanding certificates of obligation (COs), series 2011, 2012, and 2014;
--$48.9 million in outstanding pass-through toll revenue and limited tax bonds, series 2011 and 2011A.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an ad valorem tax levied against all taxable property within the city, limited in amount to $2.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

The 'AA' rating reflects the city's above average revenue growth, healthy fiscal cushion, and low fixed costs. The city is largely dependent upon military activity at the Fort Hood army base, but development planned and underway is expected to continue producing stable tax base growth in the near term. The long-term liability burden is low and capital needs are modest.

Economic Resource Base
Killeen is located in central Texas, about 60 miles north of Austin, and has an estimated 2016 population of 146,401. The local economy is anchored by Fort Hood and also benefits from ongoing transportation infrastructure improvements. The city's tax base continues to modestly expand.

Revenue Framework: 'aa' factor assessment
Killeen's revenue growth over the past 10 years compares favorably to national trends, though future growth is dependent on continued federal presence. The city has ample capacity to raise property tax revenues.

Expenditure Framework: 'aa' factor assessment
Fitch expects expenditures to outpace revenues under the city's current spending profile. However, carrying costs are affordable and management has strong control over labor costs.

Long-Term Liability Burden: 'aaa' factor assessment
The city's long-term liability burden is expected to remain low based on limited debt issuance plans.

Operating Performance: 'aaa' factor assessment
Despite recent growth in spending, management has adopted budget policies that are expected to maintain structural balance. The city has ample budget flexibility and strong reserves to manage through a typical economic downturn.

RATING SENSITIVITIES
Federal Military Spending: The city's substantial economic dependence on Fort Hood makes it susceptible to changes in military funding levels.

CREDIT PROFILE
Military Presence Dominates Local Economy
The economic base is heavily concentrated in the military. Fort Hood is located adjacent to Killeen and is the largest Army post in the U.S. The base employs over 66,000 military and civilian personnel, accounting for a significant portion of the region's employment base. Troop levels tend to fluctuate as a result of continuous deployments, but the impact to Killeen's economy is smoothed in part by the presence of soldiers' families, who remain at the base during deployment, and new recruits who arrive on an ongoing basis. The city anticipates a decline of about 3,000 troops during a potential 2018 Base Realignment and Closure process, to be offset by the addition of a similar number of civilian personnel.

Revenue Framework
Property taxes contributed 38% to fiscal 2015 general fund revenues, followed by local sales taxes at 32%. Fitch expects that revenues will continue their current growth trajectory given ongoing commercial investment and a modestly expanding tax base.

Killeen's general fund revenues grew at an average annual rate of 5.4% over the past 10 years, outpacing both the U.S. GDP and inflation. However, this is largely due to increases in federal activity, and current development activity suggests a trend more in line with the U.S. economy.

The city has ample taxing margin below its statutory maximum rate of $2.50 per $100 of TAV, as the tax rate for fiscal 2016 is $0.75.

Although Killeen's economy will likely always remain heavily dependent on Fort Hood, a growing medical sector, the recent expansion of the Texas A&M University-Central Texas campus, and growth of retail add a small measure of revenue diversity.

Expenditure Framework
Public safety is the largest general fund expenditure at about 60%, and increased significantly in recent years due to staff additions and a large pay raise.

Fitch expects the pace of spending will continue to trend with revenue growth in the absence of policy action by management.

The city derives expenditure flexibility from management's strong control over headcount and the absence of collective bargaining. Carrying costs for debt service, pension, and other post-employment benefits (OPEB) are manageable at 17% of fiscal 2015 governmental spending, and reflect an above-average principal amortization rate of 64% in 10 years.

Long-Term Liability Burden
Killeen's long-term liability burden is low at less than 7% of personal income. The city's near-term plans for debt issuance are modest, consisting of $5 million in COs to be issued in fall 2016 for reimbursement of prior capital outlay.

The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan, and the Killen Firefighter's Relief and Retirement Fund (FRRF), a single-employer defined benefit plan. Under GASB 68, the city reports a fiscal 2015 net pension liability (NPL) of $70.3 million, with fiduciary assets covering 71.3% of total pension liabilities. The NPL and fiduciary net position are $74.4 million and 70.2%, respectively, after adjusting the FRRF investment return assumption to 7%, which is also used by TMRS. The city's unfunded OPEB liability is modest at 0.1% of personal income.

Operating Performance
The city has maintained a strong fiscal cushion despite draws on general fund balance in recent years for capital spending. The city's policy to reserve 22%-25% of expenditures, combined with the ability to adjust revenue and spending, provides flexibility well in excess of Fitch's expectation for financial resilience at even the 'aaa' level.

Killeen's budgeting practices are generally conservative, and Fitch expects that recent policy changes will allow the city to control expenditure growth and preserve healthy reserve levels.