OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following obligations of El Paso, Texas (the city):

--$118.6 million general obligation (GO) refunding and improvement bonds, series 2015;
--$54.2 million combination tax and revenue certificates of obligation (COs), series 2015.

Both series are scheduled to sell via negotiation as early as July 14. The GO bond proceeds will be used to fund the construction of city facilities and parks and to refund a portion of the city's outstanding obligations for savings. The CO proceeds will be used to fund city improvements that include various street and transportation projects.

In addition, Fitch affirms the following ratings:

--$560.8 million GO bonds at 'AA';
--$484.9 million COs at 'AA';
--$60.8 million El Paso Downtown Development Corporation (DDC) special revenue bonds at 'A+'.

Fitch has withdrawn the 'AA' rating on El Paso (TX) general obligation refunding bonds series 2008A and general obligation refunding bonds series 2010 as the bonds were not sold.

The Rating Outlook is Stable.

SECURITY
The GOs and COs are payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a de minimis (limited to $1,000 per year) pledge of surplus revenues from the city's waterworks and sewer system.

The DDC special revenue bonds are payable from annually appropriated lease payments made by the city to the DDC from lawfully available revenue, which includes most city operating revenue except property taxes.

KEY RATING DRIVERS
MIXED FINANCIAL OPERATIONS: A trend of balanced operations was reversed by general fund drawdowns even with pension payments below the annual required contribution (ARC) in the last two fiscal years. Fitch's ratings and Stable Outlook anticipate that recent spending cuts will restore structural balance for fiscal 2015 and currently modest reserves will be improved in the near to medium term.

ECONOMIC EXPANSION AND DIVERSIFICATION: The city's economy benefits from its position as a key NAFTA trade corridor near Mexico's maquiladora assembly plants and from the presence of Fort Bliss. Recent investments at Fort Bliss and an emerging healthcare sector may serve as catalysts for further economic diversification.

ELEVATED DEBT; GROWING FIXED COSTS: Overall debt levels are high relative to market value and the pace of principal amortization is slightly below average. The city's underfunding of the ARC and the growing unfunded liability for the police and fire pension plans are credit concerns.

LARGE CAPITAL PLAN: The city's capital improvement plan (CIP) and debt issuance plans continue to increase in support of the city's ongoing growth-related needs and voter-approved quality of life projects. Balancing debt plans against slow tax base growth is essential to the rating given the already above-average debt burden and tax rate.

RATING SENSITIVITIES
ESCALATING LONG-TERM LIABILITIES: Further increases to the long-term liability burden would not be consistent with the current rating.

INADEQUATE RESERVES: Failure to improve currently modest reserves or the continued use of non-recurring means to achieve budget balance (including underfunding of annual pension costs) could apply downward pressure to the rating.

CREDIT PROFILE

DRAWS ON OPERATING RESERVES
Following the recession, the city made timely spending adjustments through fiscal 2012, offsetting modest revenue contraction to produce positive general fund results amidst growth-related pressures. However, one of these adjustments was underfunding of pension obligations, which has resulted in growing liabilities. Pension contributions fell short of actuarially required contributions by $8 million to $10 million dollars in the past two fiscal years (roughly 2% of spending).

In fiscal 2013, the city drew down $5 million of reserves due to a tax appeal payment to a major taxpayer and relocation of the city hall offices.

The city fell short of optimistic revenue projections in fiscal 2014 by $8.4 million (about 3% below budget), attributable to sales taxes, franchise fees, and fines and forfeitures. While the $3.9 million use of reserves was modestly sized (1.1% of spending), it was also larger than anticipated. The unrestricted general fund balance ended the fiscal year at $26.6 million (including a $17.4 million charter required reserve), or a just-adequate 7.7% of fiscal 2014 spending.

The fiscal 2015 budget was adopted with revenue projections based on prior years' actual trends and a recently developed multi-year econometric forecast for the city's key revenue streams. City officials believe these projections are more conservative than those used in fiscal 2014, and report that year-to-date revenues are in line with budget.

A two-cent rate increase for operations and debt service in fiscal 2015 increased the property tax rate to $0.70 per $100 of TAV. The city also cut 68 positions, reduced healthcare claims with the introduction of a fitness program, and implemented a number of procedural changes for an estimated $2 million of cost savings. Fitch believes management's expectation to end fiscal 2015 with a modest addition to general fund balance to be reasonable.

PRELIMINARY FISCAL 2016 BUDGET BALANCED
The fiscal 2016 $356 million preliminary general fund budget is relatively flat compared to the prior year's adopted budget and reflects no change in fund balance. A three cent property tax rate increase is proposed for operations and debt service, and the general fund budget eliminates 74 positions.

City officials proffer that this budget maintains the realistic revenue projections used in fiscal 2015, including anticipated sales tax growth of 2.9%. Fitch considers this assumption to be reasonable, as sales tax receipts grew by an average of 3.6% annually over the past three years, including 4.2% in the first 10 months of fiscal 2015 over the same time period in fiscal 2014. Fitch assumes in its rating affirmation that recent budget changes will improve reserves and allow the city to improve annual pension funding in the near term.

MODEST TAX BASE GROWTH
The city's tax base exhibited modest to moderate growth in recent years, despite recessionary pressures. Flattening TAV for fiscal 2015 was attributable to an appraisal district correction after a significant review of commercial values.

City officials indicate various retail and commercial development projects are underway throughout the city. However, preliminary values for fiscal 2016 reflect a modest 0.8% decline due to a council-approved increase in the TAV exemption for seniors and disabled persons. For purposes of capital planning and budgeting, the city has assumed a 1.5% annual TAV growth rate in fiscals 2017 through 2019, followed by 2% annual growth through fiscal 2021. Fitch believes assumptions of a return to this level of growth over the medium term are reasonable given recent development trends and growing commercial values.

ELEVATED DEBT BURDEN AND LARGE CAPITAL PLAN
The area's growth-related capital pressures have led to a high 7.4% overall debt burden relative to market value, with more moderate debt per capita of $3,966. Overlapping debt includes issuances by El Paso Independent School District (ISD) and Socorro ISD, whose unlimited tax GOs are rated 'AA' and 'AA-' by Fitch, respectively. These debt ratios do not factor in the significant state debt service support received by these and other local school districts due to their relatively low property wealth.

Including this issuance, principal amortization is slightly below average with 43% to be retired within 10 years. Given the city's plans to issue additional debt for voter-approved quality of life projects, as well as COs for transportation and public infrastructure projects, debt levels are projected to remain elevated for the medium term. The city's CIP for fiscals 2015-2019 totals $563 million, offset by $232 million scheduled to retire during the same period. The city plans to issue approximately $119 million in GO bonds and COs in 2016.

Voters approved $473 million for quality of life projects (e.g. parks and recreation, zoo, open space, libraries, museum, and performing arts) in 2012 with strong 70% approval. The city plans to issue this debt over the next 10 years, and has accelerated from previous forecasts its issuance plans for larger projects. Such acceleration would necessitate a projected tax rate increase of about $0.08 per $100 of TAV to $0.33.

Fitch believes the city will be challenged to balance ongoing capital needs against an already above-average debt service tax rate, slower tax base growth in the near term, and below-average socioeconomic characteristics.

PENSION FUNDED LEVELS BOOSTED BY BOND ISSUANCE
The city maintains two single-employer pension plans: a city employee pension fund (CEPF) and a fire and police pension fund (FPPF). The city issued $212 million voter-authorized pension obligation bonds in 2007 and 2009 to address underfunding in the FPPF. The funded position for the combined plans is estimated at 72% as of fiscal 2014, adjusted for a 7% return on investment. The city's unfunded pension liability and outstanding debt make up a combined 9% of market value.

The city has contributed between 96% and 97% of its annual pension cost (APC) over the past three fiscal years for the CEPF. However, contributions to the fire and police divisions of the FPPF were about 16% and 32% below the APC, respectively, in fiscal 2014, consistent with prior fiscal years. The actual funding contributions have not grown commensurate with pension cost increases. Pension payments totaled 6.8% of audited fiscal 2014 governmental fund spending, compared to 8.3% had the city paid the required amounts.

The preliminary fiscal 2016 budget includes 2% increased funding for pensions, which is unlikely to meet the ARC. This underfunding is a credit concern, and continued underfunding of ARC would not be consistent with the current 'AA' rating.

Public safety employees hired after July 2007 participate in a less generous second tier of pension benefits that is expected to reduce growth in the overall liability over time. A similarly structured program was also implemented for general city employees beginning in fiscal 2012. Carrying costs for debt service, retiree healthcare, and required pension payments were moderately high in fiscal 2014 at 22% of governmental fund spending.

ECONOMIC DIVERSITY
El Paso is the sixth largest city in Texas. Its current population estimate of more than 685,000 reflects ongoing growth at an average annual rate of 1.3%. City income levels are below average, but continue to grow at a faster clip than state and U.S. averages.

The city's economic activity has historically come from its position as a key NAFTA trade corridor near Mexico's maquiladora assembly plants, and from the presence of Fort Bliss, the Army's second largest installation. Recent investments in the medical sector and the opening of the Texas Tech University Health Sciences Center further help to diversify the city's economic base.

The Pentagon's 2005 base realignment and closure (BRAC) recommendations led to the addition of troops at Fort Bliss with corresponding relocation of family members. The ongoing expansion of military facilities has boosted residential and commercial construction citywide. A large downsizing of troops from federal sequestration measures would have a material economic impact on the city. However, significant recent investments by the military, including the ongoing $1 billion expansion of the Beaumont Army Medical Center, support prospects of near-term stability.

Government and educational entities comprise most of the top civilian employers. The city's unemployment rate is down on a year-over-year basis to 4.8% in March 2015 from 6.3% in 2014, due to a greater (3%) loss of labor force than employment (down 1.4%), and remains below the U.S. average of 5.6%. Despite recent declines, resident employment has generally been increasing.

BALLPARK PROJECT NOT ESSENTIAL TO CORE OPERATIONS
The DDC special revenue bonds are payable from annually appropriated lease payments made by the city to the DDC from lawfully available revenue, which includes most city revenue except property taxes. Fitch does not consider the leased asset (ballpark) to be essential to core governmental operations, leading to a two-notch distinction between the DDC special revenue bonds and the city's limited tax bonds. However, the statutory requirement that ballpark costs are the sole eligible use of receipts of a voter-approved 2% increase in hotel occupancy tax lessens Fitch's concerns about the city's incentive to make full and timely appropriations.