OREANDA-NEWS. Fitch Ratings affirms its 'AA' rating on the following New Braunfels, Texas' outstanding limited tax debt:

--$72.8 million combination tax and limited pledge revenue certificates of obligation (COs), series 2006A, 2006B, 2007, 2008, 2009, 2012, and 2013;

--$16.7 million limited tax general obligation (LTGO) refunding bonds, series 2006 and 2013A.

The Rating Outlook is Stable.

SECURITY

The GO bonds and COs are payable from an annual ad valorem tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV).

The COs are additionally payable from a limited (nominal), subordinate lien, not to exceed $1,000, on other revenues additionally pledged:

--Combination tax and airport system COs, series 2006A, are further secured by municipal airport system revenues;
--Combination tax and hotel occupancy COs, series 2006B, are further secured by the city's hotel occupancy tax revenues;
--All other aforementioned COs series are further secured by the city's solid waste management system revenues.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The city maintains a strong balance sheet and stout reserves through prudent fiscal management and generally stable operating performance. Surplus operations were restored in fiscal 2014 after a period of moderate budget gaps due to capital outlays and additional costs to support population growth.

ECONOMIC EXPANSION: The city benefits from its location between the robust economies and employment markets of San Antonio and Austin (both cities' GO bonds rated 'AAA', Stable Outlook by Fitch). Tax base and population growth in the city continues, and wealth metrics are average.

PENSION PHASE-IN NEAR COMPLETE: System-wide structural and actuarial changes to the pension plan several years ago improved the city's funded position from previously weak levels, but also required contribution rates to rise. The city chose to phase these increases in, with contributions growing closer to the annual pension cost (APC) in recent years, with full funding of the APC scheduled to begin in fiscal 2015.

ELEVATED DEBT LEVELS: Debt levels are above average and will likely remain elevated given the city's capital plans. Carrying costs are expected to grow, but remain manageable as Fitch anticipates the city's debt plans to be implemented in a measured fashion. The pace of principal amortization is above average.

RATING SENSITIVITIES

MAINTAINANCE OF FISCAL BALANCE: Fitch expects city operations will remain subject to growth- related spending pressures over the near term. A sustained period of fund balance draw-downs to finance recurring costs would place negative pressure on the rating, particularly given the importance of the city's very strong fiscal cushion as a mitigant to the high debt burden and reliance on economically sensitive sales tax revenues.

CREDIT PROFILE

New Braunfels (estimated population of 65,000) is located in central Texas along Interstate Highway 35 (IH-35) between San Antonio and Austin. The city is part of the San Antonio-New Braunfels metropolitan statistical area (MSA), one of the fastest growing regions in the nation.

PROXIMITY TO SAN ANTONIO AND AUSTIN DRIVES ECONOMIC GROWTH

The city's location has contributed to the development of distribution-oriented businesses and retail activity, both of which are major economic drivers for the city. Tourism also serves as a significant industry, as the city is home to or near several rivers, lakes, and historical features as well as one of the country's largest water parks (Schlitterbahn). A growing healthcare sector rounds out the city's economic base.

Unemployment in the city fell to a low 2.8% in March 2015 from 4.0% the prior year with a nearly 2% employment gain in that 12-month period. The city's unemployment rate remains below the state (4.2%) and nationwide (5.6%) rates for the month. Top employers in the city are fairly concentrated, with the top 10 providing about one-third of jobs, led by the local Comal school district (2,400 or 8%), Schlitterbahn (1,860 or 6%; mostly seasonal jobs), a Wal-Mart Distribution Center (1,035 or 4%), and the New Braunfels school district (1,050 or 3.5%). However, residents benefit from the city's proximity to the more diverse and abundant employment markets of both San Antonio and Austin; this fact mitigates concerns over employer concentration.

Wealth levels are about average, with per capita income slightly below and median household income just above the national averages. The city's per capita market value is solid at $90,000.

ASSESSED VALUE AND POPULATION GROWTH CONTINUE

The city's tax base is primarily residential in nature. TAV growth was very strong preceding the economic downturn but decelerated in fiscal years 2010-2011. Flat TAV regained momentum immediately thereafter in fiscal 2012 and has steadily strengthened since then. TAV grew by a solid 7% in fiscal 2014; the fiscal 2015 gain was a strong 13% that brought TAV to $5 billion. Preliminary figures indicate another solid 9%-11% TAV gain is likely for fiscal 2016. Fitch believes the city's TAV will remain on a positive trajectory over the near term due to the city's favorable location, an active housing market, and continuing development.

Population growth has been rapid, up 60% over the past decade, and will likely continue over the near term but at a more moderate pace. The city is reportedly 75% built-out.

STRONG FINANCIAL POSITION; AMPLE RESERVES & LIQUIDITY

The city's financial position remains strong despite the costs associated with servicing a rapidly expanding population. The general fund registered net operating surpluses after transfers from fiscal years 2009 to 2011, primarily due to management's timely spending reductions during a period of lackluster revenue performance. The city is reliant on inherently volatile sales tax revenues for operations (about 37% of total fiscal 2014 operating revenues).

Catch-up on deferred hiring, capital equipment purchases, as well as some pay increases drove much of the moderately-sized general fund net operating deficits that occurred over fiscals 2012 and 2013. The steeper fiscal 2013 $4.6 million net operating deficit (9.3% of spending) was attributable to a $2.6 million transfer out in order to establish a separate fund for civic/convention center equipment replacement.

Management's attention to regaining fiscal balance that resulted in level year-over-year spending in conjunction with strong 8% revenue growth favorably led to a return of surplus operations ($1.7 million before transfers) in fiscal 2014. The audited fiscal 2014 unrestricted general fund balance increased to $22.6 million or a strong 49.4% of spending. Included within the unrestricted general fund balance is the unassigned portion of fund balance equal to just under 40% of spending, which is comfortably above the city's unassigned fund balance policy floor of 25%. General fund cash and investment balances of $20.3 million at the end of fiscal 2014 equaled slightly more than five months of operating costs.

Current fiscal 2015 year-end projections by management conservatively estimate a relatively modest $1 million drawdown (based on a $51 million budget) of unassigned fund balance for pay-go spending on various capital items, in line with budgeted expectations. Sales tax trends are reportedly sluggish year-to-date (down 1% as compared to the prior year's actuals), although the city has yet to record any sales tax revenue based on tourism activity from its historically strongest months, which Fitch believes may reasonably allow for improved revenue performance by year-end.

The fiscal 2016 budget is expected by management to be generally similar in composition to fiscal 2015. Baseline projections include $3.6 million in additional operating revenue, largely driven by projected growth in property and sales taxes. This is anticipated to adequately fund at least a portion of management's proposed market-adjustment pay increases as well as some new positions. Management expects to adopt a budget that substantially maintains the city's currently robust level of operating reserves and keeps unassigned fund balance above the formal 25% policy floor.

ELEVATED DEBT & GROWING FIXED COST BURDEN

Overall debt burden metrics are high at approximately 5.8% of market value and $5,200 per capita. Fitch believes debt ratios will remain elevated over the medium term given the city's borrowing plans. Management anticipates measured debt issuance through fiscal 2019 of its remaining $72 million GO bond election for streets, drainage, parks, and economic development. This will fund a portion of the city's currently large CIP, although management has communicated to Fitch that these projects are mostly 'wish list' items and subject to council prioritization.

The city repays about 25% of its limited tax bonds from non-property tax sources (hotel/motel, sales tax, and solid waste revenues). Continued support from these non-property tax sources and TAV growth has mitigated the tax rate impact from recent debt issues. At the time of the 2013 GO bond election, the city estimated an 8.8-cent tax rate increase (19%) would be necessary to fund existing and proposed debt issuance under relatively conservative TAV estimates. However, actual TAV gains have steadily surpassed original forecasts and TAV is presently estimated to grow at a slightly higher 5% over the near term. Projected TAV assumptions, which appear reasonable to Fitch, now anticipate a much-reduced total tax rate increase of 4.25-cents needed to support the entire GO bond authorization. Continued tax base growth and good financial performance are key mitigants to concerns of a rising debt burden.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The city's primary pension plan is administered through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. Structural and actuarial changes to TMRS in recent years significantly boosted the city's funded position. The pension's funded position was 74% at actuarial date Dec. 31, 2014. The city chose to phase-in its increased APC in recent years as did many other member cities. This has resulted in under-funding of its APC since fiscal 2009 but has gradually improved the amount contributed. The city's contribution equaled 95% of APC (about $5 million) in fiscal 2014. The city expects to pay TMRS' full required rate of contribution in fiscal 2015.

Other post-employment benefits (OPEB) offered by the city are limited to an implicit rate subsidy for retiree healthcare. The city funds OPEB annually on a pay-go basis, which has covered about 15% of the actuarially determined annual OPEB cost in the last three fiscal years (2012-2014). The unfunded actuarial accrued liability totaled $13 million at the Sept. 30, 2014 actuarial date or less than 1% of market value. Carrying costs for the city (debt service, net of self-supporting non-property tax debt, pension APC, and OPEB pay-go costs,) totaled a moderate 14% of governmental spending in fiscal 2014 despite the above-average pace of debt principal amortization (63% of principal amortizing in 10 years). Fitch expects carrying costs to rise further but remain manageable.