OREANDA-NEWS. Fitch Ratings affirms the following rating on Commerce, Texas (the city):

--\$795,000 GO refunding and improvement bonds, series 2003 at 'BBB';
--\$490,000 combination tax and revenue certificates of obligation (COs), series 2003 at 'BBB'.

The Rating Outlook is Stable.

SECURITY
The GO bonds and COs are payable from annual property tax levy limited to \$2.50 per \$100 taxable assessed valuation (TAV). The COs are additionally payable from net revenues of the city's combined water, sewer and electric utility system.

KEY RATING DRIVERS

IMPROVED FINANCIAL CONDITION: The city continues to restore reserves to historical levels with positive operating results through conservative budgeting and expenditure controls. The strong fund balance position is an important credit characteristic that will help cushion against projected taxable assessed value (TAV) losses in the near term.

LARGEST TAXPAYER LOSS: TAV will remain challenged with the impact of the departure of the largest taxpayer realized in fiscal years 2015 and 2016, although this will be somewhat offset by annexations and retail and residential development. The tax base will remain highly concentrated, even after this loss.

LIMITED ECONOMY: Area economic conditions remain weak with below-average income and above-average poverty rates, partly driven by the student population at Texas A&M University at Commerce, overall a stabilizing presence in the city.

MIXED DEBT PROFILE: The overall debt burden is high. Amortization is slow, contributing to moderate carrying costs. The city's pension liability and near-term capital needs are minimal.

RATING SENSITIVITIES

MAINTENANCE OF RESERVES: Robust reserve levels are an important offset to the city's highly concentrated tax base. Continued maintenance of reserves above the stated policy level could result in positive rating action.

CREDIT PROFILE
Located approximately 65 miles northeast of Dallas, the small city of Commerce has a population of about 8,000 residents. The city is anchored by the established Texas A&M University at Commerce with student enrollment at 12,000.

TOP TAXPAYER LOSS TO PRESSURE LIMITED ECONOMY
Tax base concentration is a concern with the 10 largest taxpayers making up almost 34% of the tax base in fiscal 2015. There is some industry diversity as the largest taxpayers are manufacturing, utility, retail, real estate, and oil and gas companies.

Covidien, a global healthcare product company and manufacturer, was one of the largest employers and the largest taxpayer in the city before announcing its departure in 2012. The first phase of the tax base loss was realized in fiscal year 2015 in the amount of \$16 million, with the remaining \$24 million loss to fall in fiscal year 2016. The company's TAV accounted for over 17% of the city's total at its peak in fiscal 2013.

Somewhat offsetting this loss is the full annexation of Hydro Aluminum, a light metal division of the Norwegian aluminum and renewable energy company Norsk Hydro ASA. Hydro Aluminum historically made PILOT payments to the city before it was fully annexed in fiscal 2015, adding \$22 million to TAV, so the immediate revenue impact of the annexation is negligible. Other modest residential, commercial, and retail development will add to the tax base, yet Fitch believes these additions will not be sufficient to fully offset the loss of Covidien and overall TAV losses may continue in the near term. The city's ability to weather potential TAV fluctuation without materially eroding the city's recently improved financial profile will be a key credit factor going forward.


IMPROVED FINANCIAL POSITION
Unaudited fiscal 2014 results mark the fourth consecutive year of positive operating results, after several years of fiscal challenges, including late audits, negative accounting adjustments, and draws on fund balance. Fiscal 2014 ended with a modest surplus of \$435,000, bringing the total unrestricted general fund balance to a healthy 51.2% of expenditures. Year-to-date results point to a positive variance to the budget, which was structurally balanced and included a conservative estimate of sales tax receipts.

The improved financial position of the city will be challenged in coming years given the loss of Covidien. Management anticipates property tax revenue losses may lead to a draw on fund balance in fiscal 2016, however the city is committed to maintaining unrestricted fund balance no lower than 20% of general fund expenditures. The city retains significant legal margin under its tax rate cap, but as a practical matter, revenue raising flexibility is limited given the relatively high tax rate, amplified by a recent shift in the total tax rate from operations to debt service. Fitch believes the current rating of 'BBB' encapsulates the possibility of volatile operating results going forward.

DEBT BURDEN HIGH; OTHER LONG-TERM LIABILITIES MANAGEABLE
The overall debt burden is high due largely to local school district debt and approximates nearly 10% of market value or a more moderate \$3,625 per capita. Near-term capital needs are manageable and management has no immediate plans to issue debt. Amortization remains slow with 33% retired in 10 years.

The city's pension and other post-employment benefits (OPEB) are provided through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Recent structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position to a strong 90.8% at Dec. 31, 2012 using the TMRS 7% investment rate of return, up from a below-average 66.7% at Dec. 31, 2009. Carrying costs for the city (debt service, pension and OPEB costs) were elevated at 24.5% of governmental fund spending in fiscal 2013, but a more moderate 12.6% of spending excluding self-supporting utility debt.. Carrying costs are expected to remain manageable going forward given the flat debt service schedule and minimal borrowing plans.