OREANDA-NEWS. Fitch Ratings has upgraded Andrews, Texas' Long-Term Issuer Default Rating (IDR) and the following limited tax obligations to 'AA' from 'AA-':

--$8 million combination tax and revenue certificates of obligations (COs), series 2015.

The Rating Outlook is Stable.

SECURITY

The COs are payable from an annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV), and additionally from net revenues of the city's water, sewer and electric utility system (not to exceed $1,000).

KEY RATING DRIVERS

The upgrade to 'AA' reflects application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016 and includes a more focused consideration of economic factors. The rating reflects the city's favorable revenue framework, strong reserve position, and low liability burden. Strong budgeting practices and low fixed costs provide flexibility in the case of economic downturns.

Economic Resource Base

Andrews encompasses five square miles in far-west Texas in the Permian Basin, one of the largest mineral reserves in the U. S. The city is about 45 miles northwest of Midland and Odessa and serves as the seat of Andrews County; the current population is roughly 13,000.

Revenue Framework: 'aa' factor assessment

Andrews has realized very strong revenue growth over the past 10 years and maintains sizable ad valorem tax rate capacity. The 'aa' assessment takes into account the local economy's energy concentration and associated revenue-base volatility, as well as the long-term viability of the U. S. energy industry.

Expenditure Framework: 'aa' factor assessment

The pace of spending is expected to be generally in line with revenue growth. Fixed carrying costs for debt and retiree benefits are low and are not expected to shift materially.

Long-Term Liability Burden: 'aaa' factor assessment

The combined long-term liability is low and is expected to remain a limited burden on resources given narrow future borrowing plans and modest unfunded pension liabilities.

Operating Performance: 'aaa' factor assessment

Revenue and spending flexibility, in conjunction with well-funded reserves, provide exceptional gap-closing ability through a typical economic cycle. A normal downturn is not expected to impair the city's overall financial flexibility.

RATING SENSITIVITIES

Spending Flexibility: The rating is sensitive to management's ability to adjust spending in light of volatile revenues.

CREDIT PROFILE

The primarily residential tax base has seen robust growth due to its location in the Permian Basin, which holds much of the nation's proven, accessible oil and natural gas reserves. The local economy is narrow, focused on oil/gas exploration and associated industries, radioactive waste disposal, and agribusiness. Mineral values make up just 1% of the city's TAV.

Drilling activity in the area increased significantly in recent years due to the discovery of layered Permian Basin shale plays made accessible with horizontal drilling technology. A period of sufficiently high oil prices made extraction economical, but the recent collapse in oil prices presents downside risk to exploration activity and the various related businesses that operate in the local economy.

Revenue Framework

Sales tax receipts provide over one-half of the city's operating revenues, followed by property taxes (12%) and franchise taxes (8%). Sales tax receipts have grown dramatically in the last decade, from $1 million in fiscal 2005 to over $6 million in fiscal 2015, aided by the collection of an additional.25% beginning in fiscal 2012 to fund a highway relief route around the city.

The compound annual growth rate (CAGR) of general fund revenues was a very high 13.9% over the 10 years through 2014, well in excess of both U. S. economic performance and CPI. The increase in the price of crude oil over this period drove a boom in exploration and production and associated services; however, revenue growth is likely to be severely challenged over the near term due to volatility in sales tax revenues associated with drilling activity.

Previously strong sales tax revenue growth allowed the city to reduce its ad valorem tax rate from $0.298 per $100 TAV in fiscal 2006 to $0.189 in fiscal 2016, providing ample capacity below the statutory cap of $2.50. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. Management has kept the tax rate flat in recent years.

Expenditure Framework

The city's largest spending area is public safety, which makes up a bit more than a third of general fund outlays. Spending growth in that area has trended in line with general fund expenditure growth. Fitch does not anticipate pressure on service levels given the city's maturity.

The city exercises considerable expenditure flexibility through full control of workforce costs and very low carrying costs. Fiscal 2015 carrying costs were a low 6.2% of governmental spending in fiscal 2015, although spending for the year was above average due to capital outlays. The percentage will be higher in more typical spending years. Amortization is slow, with 24% retired in 10 years.

Long-Term Liability Burden

The city's long-term liability burden is a low 4.1% of personal income, due primarily to low direct and overlapping debt and the city's preference to cash-fund most capital needs. The city's 10-year capital budget amounts to approximately $5 million in general government expenditures and there are no near-term borrowing plans.

The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan, and the Texas Emergency Services Retirement System (TESRS), a cost-sharing multiple employer pension system; both plans are administered by the state.

Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $3 million, with fiduciary assets covering 87% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date. The city's liability for TESRS is nominal. The city does not offer other post-employment benefits. The NPL of both plans represents less than 1% of personal income.

Operating Performance

The city's finances are characterized by robust reserves and conservative budget assumptions. The budget has increased significantly in recent years with the increase in sales tax receipts and the application of excess revenues for one-time capital spending. Audited fiscal 2015 ended with a modest surplus after transfers and included $8 million in capital spending for the highway relief route as well as the receipt of $8 million in CO proceeds for the project. Unrestricted reserves at year-end were very robust at 86% of spending, although this percentage is understated given the elevated spending total for the year.

Management prudently budgeted a decline in sales tax revenue for the current fiscal year, yet year-to-date results are falling 11% below budgeted figures. Despite this revenue weakness, the city anticipates a modest surplus for the year that ends September 30. The fiscal 2017 budget will likely assume flat revenues and a $400,000 reduction in spending. The city's property tax rate will remain unchanged for the 8th consecutive year, and taxable assessed values currently are holding steady despite the economic headwinds.