OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the following Heath, TX's limited tax bonds:

--$4.6 million general obligation (GO) bonds, series 2010;

--$1.3 million combination tax and limited surplus revenue certificates of obligation (COs), series 2007.

In addition, Fitch has affirmed the city's Long-Term Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an ad valorem tax pledge levied against all taxable property with the city of Heath, limited to $2.50 per $100 of taxable assessed value (TAV). The COs are additionally secured by a limited, nominal pledge of the net revenues of the city's water and wastewater system, not to exceed $1,000.

KEY RATING DRIVERS

The 'AA' rating reflects the city's robust financial cushion and ample revenue-raising capability, coupled with more moderate spending flexibility and long-term liability burden.

Economic Resource Base

This small and affluent bedroom community is situated on the banks of Lake Ray Hubbard within commuting distance of Dallas. The city's population has almost doubled since 2000, presently estimated at roughly 8,500, and the accompanying residential development has primarily consisted of high-end single family homes. Wealth indices are more than double state and national levels.

Revenue Framework: 'aaa' factor assessment

The city of Heath has realized a strong, 10-year period of revenue growth and maintains ample ad valorem tax rate capacity.

Expenditure Framework: 'aa' factor assessment

Elevated carrying costs somewhat restrict the city's spending flexibility; although that limitation is partly offset by strong control over workforce spending.

Long-Term Liability Burden: 'aa' factor assessment

The city's debt burden is moderate and is expected to stay level; pensions are well funded and near-term tax-supported capital needs should be affordable.

Operating Performance: 'aaa' factor assessment

Fitch expects the city to demonstrate an exceptionally strong degree of gap closing ability and financial resilience during an economic downturn based on its healthy reserves and high independent revenue raising ability.

RATING SENSITIVITIES

Maintenance of Fundamentals: The rating is sensitive to the maintenance of the city's fundamental credit characteristics while managing steady growth. The Stable Outlook reflects Fitch's expectation that significant shifts will not occur.

CREDIT PROFILE

The city's proximity to the broad Dallas-Fort Worth metro economy provides residents with extensive employment opportunities. Local development slowed in the aftermath of the great recession but regained momentum in fiscal 2015, and will likely continue to grow at a solid pace given some residential development underway.

Revenue Framework

The revenue base is dominated by property taxes that make up slightly more than 60% of general fund revenues, followed by sales and franchise taxes each at roughly 10%.

Over the last decade general fund revenues have grown at a compound annual growth rate (CAGR) of 4.9%, comfortably in excess of both U. S. economic performance and CPI. General fund revenues have grown across the board without any policy action by management, and are expected to keep pace with historical trends in the near - to mid-term.

The city had kept the tax rate flat at $0.3433 per $100 for over 15 years, but raised the rate in fiscal 2015 to $0.4266 in order to pay principal and interest on recently issued debt. The city retains a significant margin under the $2.50 per $100 TAV cap. 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

The city's largest spending area is public safety, which makes up just over half of general fund spending. Spending growth in that area has trended in line with overall general fund expenditure growth.

The pace of spending on operating functions is likely to remain in line with revenue growth. Fitch does not anticipate pressure on service levels given the city's size.

The city maintains expenditure flexibility through strong control of workforce costs; however debt service increased in fiscal 2015 and now consumes an elevated portion of the city's budget. Fiscal 2015 carrying costs were about 23% of governmental spending and were made up almost entirely of debt service.

Long-Term Liability Burden

The city's long-term liability burden is estimated by Fitch at a moderate 13.7% of personal income and the majority is made up of overlapping debt. The city reports near-term capital needs are for roads and water-sewer system infrastructure, but no specific debt issuances have been defined.

The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan. Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $472,476 with fiduciary assets covering 94% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date.

Operating Performance

The city historically has maintained robust reserve levels with very few instances of drawdowns. The city is expected to manage through periods of economic weakness while preserving a superior level of fundamental financial flexibility. General fund reserves are well above the city's reserve policy of 25%, measuring 49% in fiscal 2015, a level that withstands the moderate economic downturn stress evaluated using the Fitch Analytical Sensitivity Tool (FAST).

The city's budgeting practices are precise as evidenced by a long history of break-even results. Management reports no significant variations from the budget for the year ending September 30 and the fiscal 2017 proposed budget uses conservative assumptions.