OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Corpus Christi, Texas limited tax bonds:

--$16.7 million general improvement refunding bonds, series 2016;

--$17.5 million combination tax and limited pledge revenue certificates of obligation (COs), series 2016A.

Proceeds of the refunding bonds will be used to refund outstanding debt for interest cost savings. CO proceeds will be used for street improvements.

Fitch also affirms the following:

-- Issuer Default Rating (IDR) at 'AA';

--$487.8 million outstanding limited tax bonds (pre-refunding) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an annual property tax levy limited to $2.50 per $100 assessed valuation (AV). The COs are payable from an annual property tax levy limited to $0.68 per $100 AV for operations and maintenance and non-voter approved debt issued after 1999. The COs are additionally payable from a subordinate lien on the revenues (limited to $1,000) of the city's solid waste management system.

KEY RATING DRIVERS

The 'AA' rating reflects the city's ample taxing margin, modest revenue volatility, and expenditure flexibility which should allow it to maintain healthy reserve levels throughout economic cycles. Despite growth pressures to fund the city's mobility needs and infrastructure improvements, the long-term liability burden should remain manageable given the favorable prospects for continued economic expansion.

Economic Resource Base

Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic hub for a 12-county area. The city's 2015 population is estimated at 325,477. Prominent industries include petrochemical companies, refineries, associated oil/gas support services, and shipping/port activity. Tourism, military, and higher education are also major employment sectors.

Revenue Framework: 'aa' factor assessment

A healthy pace of revenue growth is likely to continue as cyclical contraction within the energy sector is balanced against tax base gains from numerous large investments within the city's industrial sector. Property tax revenue flexibility remains ample despite a voter-approved property tax cap that is well below the maximum allowed by state law.

Expenditure Framework: 'aa' factor assessment

The pace of expenditure growth is expected to generally track revenue gains. Expenditure flexibility is aided by prudent budgeting, moderate population growth pressures, and manageable carrying costs for debt service and retiree benefits.

Long-Term Liability Burden: 'aaa' factor assessment

Debt and unfunded pension liability is low at 9.8% of personal income. Future debt plans for street improvements may increase the liability burden but Fitch expects it to remain modest as the impact will be balanced against a rapid amortization rate and management's policy to ramp up its pension contributions, gradually reducing its unfunded pension liability.

Operating Performance: 'aaa' factor assessment

Operational flexibility is derived from the city's ample taxing margin, modest revenue volatility, and solid reserves. The city's aggressive pay-go program for street improvements is a source of expenditure flexibility. The city has not fully funded the annual required contribution for its largest pension plan but has instituted a plan to achieve the ARC by fiscal 2018.

RATING SENSITIVITIES

Economic Resiliency: Sustained reversal of the city's economic trends due to continued contraction of the energy sector could result in negative rating pressure.

CREDIT PROFILE

Numerous major commercial/industrial projects are underway which will capitalize upon the area's traditional strength in the energy sector and associated industries. Noteworthy development includes the Cheniere Energy, Inc. expansion adjacent to the Port of Corpus Christi, an $11 billion liquefied natural gas export terminal under construction that will employ 4,000 construction jobs and 300 permanent jobs. The Tianjin Pipe Company is constructing phase II of its $1 billion steel pipe mill and will employ at least 500 by 2017. A $1 billion ethylene cracking plant is under construction by a joint venture of OxyChem and MexiChem. M&G Resins will soon complete construction of its $900 million plastics factory and will employ 225. LyondellBasell is constructing a $750 million ethylene plant which will be completed in 2017. Voestalpine, an Austrian steel producer, will commence operations of its $700 million iron processing plant in late 2016 and will top out at 147 employees.

The Corpus Christi Army Depot is the largest industrial employer in South Texas and several U. S. Navy installations are also located in the area. Tourism is an important component of the economy, with Padre Island National Seashore and Mustang Island State Park as leading area tourist attractions. Schlitterbahn, a major waterpark operator, opened a $550 million waterpark and resort in summer 2015.

The various large projects are expected to help mitigate the impact of job losses within the nearby Eagle Ford Shale that has curtailed exploration and drilling activity due to reduced oil prices. IHS Economics expects regional job growth, personal income, and real gross metro product to outstrip that of the U. S. over the medium term with the greatest growth in the construction, natural resources, mining, and professional and business services sectors.

Revenue Framework

The bulk of the city's operating revenues are comprised of property taxes (31% of general fund revenues), sales taxes (26%), and charges for services (26%). This basket of revenues proved resilient during the last two economic downturns, declining only modestly in one year.

The pace of growth of the city's general fund revenue stream exceeded the U. S. GDP growth rate over the last 10 years and is expected to continue a healthy trajectory despite some cyclicality due to the large energy sector presence. Numerous large investments by downstream users of oil and gas, growing port activity, and moderate population growth will help offset cyclical declines in nearby oil and gas exploration and production activity.

Mid-year fiscal 2016 budget adjustments reduced general fund revenues by $8 million or 3.5% of budgeted revenues due primarily to a sales tax shortfall. The city attributes the shortfall to reduced disposable income of residents returning from lost jobs within the Eagle Ford Shale. The preliminary fiscal 2017 budget is based on sales tax revenues 7% below fiscal 2016 budget levels. Preliminary fiscal 2017 AV points to a 4.5% gain and the near-term completion of several large industrial projects within the city's industrial district will boost property tax revenues in future fiscal years. Companies located within the city's industrial district are assessed payments-in-lieu-of-taxes (PILOTS) on 100% of land and 62.5% of new improvements via 10-year contracts. In exchange, the city agrees not to annex the industrial district and provides limited services to the area.

The maximum property tax rate permitted by the city's charter for operations and non-voter approved debt service totals $0.68 per $100 AV, well below the $2.50 maximum tax rate allowed by state law. Despite the lower property tax rate cap, which was imposed via a voter referendum in 1980, sufficient taxing margin remains above the city's current rate of $0.60 per $100 AV.

Expenditure Framework

General fund expenditures are led by public safety at 56% of spending.

The pace of spending is expected to remain in line with revenue growth. Near-term cost increases include an accelerated ramp up of pension contributions to the actuarially determined levels. The city's plan to increase the pension contribution rate by two percentage points annually through fiscal 2019 represents a hike of about $6 million or a manageable 2.6% of general fund spending by fiscal 2019.

Adequate expenditure flexibility is derived from management's full legal control over headcount and considerable annual pay-go funding for capital outlays. Beginning in fiscal 2015, a new city policy transfers 6% of general fund revenues to a separate fund for street maintenance. Carrying costs are moderately elevated at 24.9% of governmental spending, driven mostly by debt service which features a rapid 10-year principal amortization rate of 74%.

The framework for collective bargaining agreements (CBA) in Texas gives management control over police/fire hiring and firing and staffing patterns but requires that pay hikes and benefit levels be determined via CBAs. The CBA for police officers expires in September 2019. The CBA for fire fighters expired in July 2014, leaving the fire fighters to operate under an evergreen clause whereby the terms of the expired agreement (excluding pay hikes) are automatically renewed in perpetuity. Talks with the fire associations stalled due to differences over emergency medical service certifications plus wages and overtime. Subsequently, the city cancelled the CBA as it contended the perpetual evergreen clause was unconstitutional. In response, the fire fighter's association requested an order restraining the city from enacting the cancellation of the contract which the county court granted. No wage hikes are awarded during the evergreen period although the city has budgeted funds for 2% pay hikes annually which it has set aside for future use once a CBA has been approved.

Long-Term Liability Burden

The city issues both voter-approved GO bonds and non-voter approved COs for various public improvements. Pensions for all employees except fire fighters are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer retirement plan. Pension for fire fighters are provided through the Corpus Christi Fire Fighter Retirement System (FFRS), a single-employer defined benefit plan. The aggregate unfunded pension liability, attributed primarily to the TMRS plan, totals a modest 1.8% of personal income.

Although TMRS reports the city's asset to liability ratio as a high 91% as of Dec. 31, 2014, the city's audit reported the asset to liability ratio at 78% for the same period. The difference is due to the more conservative valuation basis that assumes cost of living adjustments are annually repeating rather than determined on an ad hoc basis as allowed by TMRS. However, the city has not met its actuarially determined contribution (ADC) in recent years. The city does, however, pay at least the actuarially determined cost based on TMRS assumptions. In the fiscal 2015 budget, the city increased its pension contribution by one percentage point of payroll and plans to increase it by two percentage points annually until the ADC is achieved in fiscal 2019.

The city's long-term liability burden, comprised of debt and the unfunded pension liability, is low at 9.8% of personal income and expected to remain moderate even as the city addresses its capital needs comprised primarily of street improvements. The city has identified significant street improvement needs totaling $880 million. Given management's preference for flat or modest property tax rate increases, Fitch expects the city's approach to funding its street improvement needs to be measured. The city council is considering a possible bond election for only a fraction of the amount, $55 million, for a GO ballot proposition within the next 12 months. Other funding sources for the street improvement plan include a street maintenance fee imposed in fiscal 2014 ($5.30 per month per household) and annual general fund transfers equal to 6% of general fund revenues ($16 million in fiscal 2015). City leaders are also considering a ballot proposition to repurpose a 1/8th of 1% sales tax to fund street improvement. The sales tax, which generated $8.5 million in fiscal 2015, is imposed by the city's business and job development corporation and is set to expire in 2018.

Operating Performance

The city's strong financial resilience is derived from its inherent budget flexibility, in the form of strong control over revenues and spending, and its explicit reserves. The city has maintained reserves at high levels (21.7% of spending in fiscal 2015). Structural balance in recent years was enabled partly due to the appropriation of pension contributions below actuarially determined levels for the TMRS pension plan. The Fitch Analytical Scenario Tool (FAST) projects that the city's revenue growth would rebound quickly in an economic downturn, enabling the city to maintain reserves well above the 'aaa' sub-factor assessment for financial resilience.

Notable budgetary management includes an aggressive pay-go funding program for street improvements which remains a source of expenditure flexibility.