OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following obligations of the City of Austin, Texas:

--$107.4 million public improvement and refunding bonds, series 2016;

--$53.6 million certificates of obligation (COs), series 2016;

--$25.1 million public property finance contractual obligations (PPFCOs), series 2016;

--$12.0 million public improvement bonds, taxable series 2016; and

--$8.7 million COs, taxable series 2016.

The obligations are scheduled for a negotiated sale on or about Sept. 7. Proceeds will finance various public improvements and refund a portion of the city's outstanding tax-supported debt for interest savings.

In addition, Fitch affirms the following ratings:

--the city's Issuer Default Rating (IDR) at 'AAA';

--$1.45 billion outstanding public improvement bonds, COs and PPFCOs at 'AAA';

--$8.4 million Mueller Local Government Corporation (Mueller LGC) contract revenue bonds, series 2006 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The public improvement bonds, COs, and PPFCOs are direct obligations of the city and are payable from an ad valorem tax limited to $2.50 per $100 of assessed valuation, levied against all taxable property in the city. The COs also feature a limited pledge (not to exceed $1,000) of surplus revenues of the city's solid waste disposal system.

The Mueller LGC contract revenue bonds are payable from a first lien on pledged revenues pursuant to a grant agreement with the City of Austin; payments are subject to annual appropriation. The pledged revenues are any of the city's available general fund monies, including sales tax revenues from retail activity within the designated Mueller project area.

KEY RATING DRIVERS

Austin's 'AAA' IDR and limited tax bond rating reflects the city's very strong revenue profile and future growth prospects, as well as its sound operating profile and exceptionally strong financial resiliency. Increasing demand for services from an expanding population will generate both operational and capital pressures, but management has a demonstrated history of balancing needs with available resources while maintaining high reserve levels and keeping long-term liabilities at a moderate level.

The 'AA+' rating on the Mueller LGC contract revenue bonds is one notch below the city's 'AAA' IDR rating to reflect annual appropriation risk.

Economic Resource Base

Austin continues to be one of the top performing U. S. metro area economies. The city is the state capital and home to the University of Texas at Austin (University of Texas System; rated 'AAA'), as well as six other colleges and universities. The large state government and higher education employment base historically has provided a stabilizing presence and economic buffer during downturns. Population has been growing at a pace well above the state and nation and is estimated at more than 900,000 currently.

Revenue Framework: 'aaa' factor assessment

Strong historical revenue trends, as well as ongoing population growth and economic development, support the expectation for additional healthy revenue gains. Austin's independent legal ability to increase operating revenues is high given the margin below the constitutional and city charter property tax caps.

Expenditure Framework: 'aa' factor assessment

Austin's natural pace of spending should remain generally in line with revenue growth. Meet and confer agreements with employee groups contribute to expenditure flexibility, and the city's fixed carrying costs for debt and retiree benefits do not materially affect operational flexibility.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are moderate at roughly 12% of total personal income. This metric should remain comfortably within the 'aa' assessment range despite additional growth-driven borrowing needs.

Operating Performance: 'aaa' factor assessment

Austin's revenue and spending controls and sound financial cushion, along with a demonstrated willingness to curb spending when necessary, contribute to strong financial resilience that would enable the city to navigate successfully a typical economic downturn.

RATING SENSITIVITIES

Strong Fundamentals: The rating is sensitive to shifts in the city's substantial financial flexibility and solid economic growth prospects.

CREDIT PROFILE

In addition to higher education and state government, technology manufacturing is a key area employment sector in Austin. Major players are Dell, IBM, Samsung, AMD and Apple. The city's highly-educated workforce and availability of major research facilities continues to attract and support expansion of technology firms. Tourism has also become a growing economic component. The city hosts several festivals and conferences for music and technology throughout the year, which continue to increase in visitor count.

Development continues at Mueller, a mixed-use project located at the city's old airport location. Increasing retail activity boosted sales tax receipts to more than $1 million in each of the last four fiscal years, which exceeds annual debt service on the series 2006 contract revenue bonds. Other high profile projects currently underway are redevelopment of the city's Seaholm Power Plant and Green Water Treatment Plant, both located downtown and both featuring mixed use components, and the new Dell Seton Medical Center at the University of Texas.

Revenue Framework

Austin's operating revenues are primarily property taxes (about one-half of total revenues), with a significant contribution from sales tax receipts (about 28%). The strong overall revenue framework assessment reflects a combination of very healthy historical revenue trends, solid growth prospects, and significant legal revenue raising ability.

Historical general fund revenue gains have comfortably exceeded both U. S. GDP and inflation, with a 10-year compound average growth rate through fiscal 2014 of more than 6%. Taxable assessed valuation (TAV) has registered healthy gains recently as the city has expanded; TAV increased by more than 10% in both fiscal 2015 and 2016, reaching more than $110 billion in fiscal 2016. Prospects are very favorable for additional growth, given the city's appeal to both businesses and individuals.

Austin's fiscal 2016 ad valorem tax rate of $0.459 per $100 of TAV provides ample capacity below the constitutional and city charter caps 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.

Expenditure Framework

In addition to the various services and programs provided by a general purpose city government, the growth in Austin's public safety spending over the past 15 years mirrors that of many cities and is the city's largest expenditure component (more than 60% of fiscal 2016 general fund outlays). Population driven service demands have increased steadily as the city has grown, and these demands are expected to increase for the foreseeable future.

The pace of spending growth in Austin is expected to at least keep pace with revenue gains, as expectations for services and the need to maintain a competitive working environment will push both program outlays and employee costs higher.

The city maintains good flexibility over its main spending categories, as demonstrated by actions in previous economic downturns; management maintains a cost containment plan that outlines various steps that can be taken to reduce outlays. Meet and confer agreements with employee groups afford the city a considerable amount of flexibility regarding contract negotiation, and carrying costs just above 20% of fiscal 2016 governmental spending are manageable.

Long-Term Liability Burden

The city's moderate long-term liability burden is composed of direct debt (about 26% of the total), overlapping debt (44%) and net pension liabilities (30%). Austin issues tax-supported debt for various municipal infrastructure projects, with increasing focus on transportation as population growth pressures existing roadways. Borrowing is likely to continue at a pace consistent with the recent past given the expanding population, but a fairly rapid amortization rate (60% in 10 years) should help keep debt levels affordable.

The city maintains three single employer pension plans (municipal, police, fire). Under GASB Statement 68, the city-wide fiscal 2015 net pension liability (NPL) totaled $1.7 billion, with fiduciary assets covering roughly 68% of total pension liabilities (adjusted for a 7% investment return assumption). City contributions to all three plans have increased recently, and the larger contributions along with benefit modifications for new employees are expected to reduce net liabilities over time.

Operating Performance

Fitch expects Austin to demonstrate exceptionally strong financial resilience during a moderate economic downturn based on its notable independent revenue raising capacity, sound expenditure controls, and healthy operating reserves.

The city budgets conservatively and maintains reserves that exceed its policy minimum of 12% of general fund outlays, consisting of a 6% emergency reserve and a budget stabilization reserve. City policy allows 1/3 of the budget stabilization reserve balance to be used annually for capital and other one-time uses.

Austin's conservative budgeting practices and contingency planning position the city well for recessionary periods, and any use of reserves or deferral of spending during downturns would be manageable. Likewise, the city addresses areas of need during periods of economic expansion/recovery--as evidenced by the decision to ramp up pension contributions over the past several years to address large net liability positions in the city's plans.

The city's fiscal 2015 unrestricted reserves of $176.2 million represented a healthy 19.4% of spending, and the city anticipates a modest increase in reserves at fiscal 2016 year-end despite sales tax receipts coming in slightly below budget (4.6% increase vs. 5.7% budgeted).