OREANDA-NEWS. Fitch Ratings assigns an 'AAA' to the following San Antonio, Texas bonds and notes:

--$339.6 million general improvement and refunding bonds, series 2015;
--$36,930,000 combination tax and revenue certificates of obligation (COs), series 2015;
--$43,940,000 combination tax and revenue COs taxable series 2015;
--$4,845,000 tax notes, series 2015.

The bonds and notes are scheduled to sell via negotiation during the week of July 27. Proceeds will be used to finance various capital projects city-wide, refund outstanding bonds for interest cost savings, and pay issuance costs.

The Rating Outlook is Stable.

SECURITY

The limited tax bonds, COs, and tax notes are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation. The COs are additionally payable from a nominal pledge of net revenues of the city's municipal parks system (not to exceed $1,000).

KEY RATING DRIVERS

STRONG FINANCIAL FLEXIBILITY: San Antonio's financial performance has been pressured in recent years, although its reserves have remained solid. General operations returned to a net surplus position in fiscal 2014, modestly improving fund balance. The city's recently enhanced reserve policies and its two-year budget strategy, which is part of a longer fiscal planning horizon, are positive credit factors.

MIXED DEBT PROFILE; LARGE CAPITAL PLANS: The city's debt profile is mixed, characterized by a high overall debt burden, balanced against rapid, limited tax bond amortization and ample and growing debt service capacity within the current tax rate. The city's capital plan is aggressive but will allow the city to address its sizeable deferred capital needs.

MILITARY REMAINS KEY SECTOR: Although the local economy has diversified notably, the military remains a major economic factor. This is evidenced by very large recent investments and additions to troop strength resulting from base realignment and closure decisions that have benefited the city.

EXPANDING ECONOMY, TAX BASE: The recessionary contraction of the local economy has reversed course and the city's unemployment rate continues to be well below state and national averages. Population growth remains rapid, aided by affordable home prices and ample developable land. Taxable assessed valuation (TAV) gains continue to strengthen.

RATING SENSITIVITIES

MATERIAL SHIFT IN FINANCES: The rating is sensitive to shifts in key credit characteristics including the city's strong financial reserves. Significant reductions in reserves, even if planned, could result in negative rating pressure.

CREDIT PROFILE

San Antonio is the second largest city in the state and seventh largest in the U.S., with an estimated population of 1.4 million for 2015. Prominent sectors in the local economy are military and government employment, domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

LARGE FINANCIAL RESERVES

The city's financial profile remains solid as evidenced by the maintenance of unreserved or unrestricted fund balances in excess of 18% of spending since fiscal 2006, well above its current 10% fund balance policy level. Additions to fund balance had been enabled by strong sales tax growth and positive CPS payment trends, along with management's aggressive cost controls in the form mainly of annual personnel reductions. In recent years, however, the moderate planned use of reserves to balance budgets has reduced the city's financial cushion. Fitch's rating assumes any future planned drawdowns to be more modest.

TWO-YEAR BUDGET STRATEGY

The city's two-year budget strategy, in which a portion of reserves in excess of its fund balance policy are designated for the next year's spending (the two-year reserve), has expanded its planning horizon. $35 million of such reserve was budgeted for use in fiscal 2014, equal to 3.5% of spending. However, the year's strong 8.4% general fund revenue gain, largely attributable to increased CPS (the city's electric and gas utility) revenue and fueled by a very cold winter and a rate increase, allowed the city to fully offset the planned use of the reserve allocation as well as outpace the year's 3.8% expenditure growth.

Strong sales tax receipts, which were up by approximately 8% in fiscal 2014 or roughly $18.6 million over fiscal 2013 actuals, also added to the year's robust fiscal performance. Sales tax revenues exceeded the budget's 3.5% growth assumption above the fiscal 2013 budgeted levels. As a result, fiscal 2014 operations produced a net surplus of $33.4 million (3.4% of spending). The fiscal 2014 unrestricted fund balance strengthened modestly to $212 million or 21.4% of operating expenditures and transfers out. The positive performance allowed the city to maintain a portion of this fund balance, $88.2 million, as the city's 9% reserve and increase its two-year reserve to $63.3 million (equal to 6.4% of spending).

FISCAL 2015 AND 2016 BUDGETS

Budgeted general fund appropriations in fiscal 2015 grew by a manageable 6% to $1.05 billion due to increased public safety spending and enhanced funding for streets and capital projects. The budget was funded at the existing property tax rate, assumed sales tax receipts growth of 2.8% and CPS transfers declined by 3.2%, as well as planned use of the entire two-year reserve of $63.2 million over fiscals 2015-2016.

Unaudited fiscal 2015 performance points to a very modest $8 million general fund surplus after closing the year's $16.4 million (or 1.7% of spending) budget gap. These results are again largely aided by improved actual revenue trends (inclusive of sales taxes) year-to-date that exceed conservative projections in addition to modest cost savings. The city's financial cushion is projected to remain strong and stable at year-end, inclusive of the city's enhanced 10% financial reserve ($103 million) as well as the two-year reserve ($32.6 million equal to 3% of spending).

The fiscal 2016 operating budget is under development and presently estimated at $1.09 billion. Growth of 2%-9% from fiscal 2015 mid-year estimates is projected in the city's three key revenue streams (CPS payments, sales and property taxes) in support of the year's increased spending. Budgeted sources also include full use of the aforementioned $32.6 million two-year reserve, although Fitch notes the city's historical outperformance of its initial projections. The city expects to further enhance its financial reserve to 15% by year-end (about $164 million) while establishing its two-year reserve at $54.7 million, equal to 5% of spending, for fiscal 2017.

LARGE CAPITAL NEEDS

Voters approved a $596 million general obligation (GO) bond authorization in May 2012, the largest in the city's history. The bond authorization is intended to address the substantial deferred capital needs. According to management, all future debt will be sized and timed to maintain the city's current debt service tax rate assuming modest tax base growth. About $54 million in GO bond authorization remains after this issuance. The city plans to seek similarly sized authorizations every five years.

OVERALL DEBT PROFILE PRESSURED

The impact of the 2012 bond program on the city's direct debt profile should be manageable given its generally declining debt service schedule expected to be maintained with this issuance, above average pay-out rate, and expansive, growing tax base. But the city's overall debt burden remains elevated at approximately $5,700 per capita and 8.8% of fiscal 2015 market value due to the presence of 12 overlapping school districts. The 10-year principal amortization rate for property tax-supported bonds is above average at 61%.

WELL-FUNDED PENSION PLANS

Civilian and certain public safety employees participate in an agent multiple employer defined benefit pension plan administered by the Texas Municipal Retirement System (TMRS).
Structural and actuarial changes to TMRS' valuation methodology approved at the state level significantly boosted the city's funded position in recent years, which remained sound and stable at 88% as of actuarial date Dec. 31, 2014. TMRS' valuation is based on a 7% discount rate which Fitch considers reasonable. Fire fighters and police participate in a single employer defined benefit pension plan which was similarly well-funded at an estimated 88.1% as of Oct. 1, 2014 using a Fitch-adjusted 7% investment return assumption.

Retiree health benefits for civilians are provided by the city and are funded on a pay-go basis. Retiree health benefits for fire fighters and police have been financed on a pre-funded basis since 1989, resulting in a notable funded position of 41% as of Oct. 1, 2014. The combined carrying costs for the city's tax-supported debt, pension, and other post-employment benefit obligations totaled a moderate 17.4% of fiscal 2014 governmental expenditures. Fitch notes that a healthcare and benefits taskforce has recommended that the city review public safety healthcare and retirement benefits for potential cost savings.

MILITARY STILL KEY WITHIN BROAD ECONOMY

Recent employment gains have been led by the professional/business services and construction sectors. The city's job base was also expanded by energy sector employment from oil and gas activity within the nearby Eagle Ford Shale, although this has tapered recently given reduced activity as a result of lower oil prices. Nonetheless, the city's unemployment rate remained a low 3.5% in March 2015, which was down from the 4.8% level recorded a year prior. The city's unemployment rate compares favorably to state and national averages of 4.2% and 5.6%, respectively, for the same period.

After posting strong annual gains through fiscal 2009, the city's taxable values remained flat through fiscal 2013 as new improvement values were offset by reappraisal losses on existing properties. TAV rebounded with increases of approximately 5% and 7% in fiscal 2014 and 2015, respectively. Another strong 9.5% TAV gain is anticipated for fiscal 2016. Included in this assumption are the city's projections of annual new construction increasing taxable values from 1.5% - 3.0% annually over fiscals 2016-2020 which Fitch considers reasonable.