OREANDA-NEWS. Fitch Ratings affirms its ratings on the following Laredo, TX (the city) obligations:

--\\$221.8 million general obligation bonds (GOs), certificates of obligation (COs) and public property finance contractual obligations (PPFCOs) at 'AA';
--\\$29.5 million outstanding sports venue sales tax revenue bonds, series 2011 at 'AA-'.

The Rating Outlook is Stable.

Fitch does not rate Laredo's combination tax and revenue COs, series 2014; PPFCOs, series 2014; and GO refunding bonds, series 2015.

SECURITY
The GOs, COs and PPFCOs are limited tax obligations, payable from an annual property tax levy limited to \\$2.50 per \\$100 of taxable assessed valuation (TAV). The COs are additionally secured by a pledge of limited net surplus revenues from the city's international toll bridge system. The sales tax bonds are payable from a first lien on the city's 1/4% sports venue sales tax.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The city's financial management is sound, aided by a diverse general fund revenue stream, a demonstrated ability to respond to changing economic conditions, and a solid fund balance policy that voters added to the city's charter. Healthy reserve levels result from eleven consecutive years of general fund operating surpluses.

STABLE ECONOMY: Transportation, warehousing, and distribution sectors have historically produced the city's core economic growth. Such sectors benefit from the city's major role in international trade and should provide stability to the local economy in the wake of ongoing contraction in Eagle Ford natural gas and oil drilling activity.

HIGH DEBT BUT MODERATE CARRYING COSTS: Overall debt levels relative to market value are elevated due to growth induced capital pressures. However, moderate carrying costs and rapid amortization provide flexibility for the city in meeting its future capital needs.

UNDERFUNDED PENSION: The city fully funds its annual pension contributions, but its pension plans remains under-funded.

SATISFACTORY DEBT SERVICE COVERAGE: The sports venue sales tax, reauthorized by a high percentage of voters, provides adequate debt service coverage for all parity debt.

RATING SENSITIVITIES

RISING DEBT/CARRYING COSTS: Continued growth of the city's high overall debt levels, if not offset by the maintenance of moderate carrying costs, could lead to negative rating pressure.

CREDIT PROFILE
Laredo continues to grow rapidly, with an estimated 2014 population of 251,552, 43% higher than the 2000 census. The population of its nearby sister-city in Mexico, Nuevo Laredo, is estimated to add another 300,000 to the combined metropolitan center referred to as 'Los Dos Laredos'.

STABLE ECONOMY
As the nation's largest inland port, Laredo's international trade sector is a key component of the local economy. In recent years, economic activity has been further boosted by substantial oil and natural gas exploration and production in the nearby Eagle Ford formation. However, the 2014 plunge in oil prices has stalled new drilling activity and reduced the number of active wells within Webb County by over 50% according to the Texas Railroad Commission.

Although the MSA's mining sector employment declined by 4% over the 12 months ending July 2015, all other sectors grew or remained flat, allowing the city's unemployment rate to decline to 4.5% from 5.4% a year prior. Strong sector growth was led by leisure and hospitality, transportation, warehousing and utilities, and retail trade. The city's unemployment rate compares favorably with state (4.6%) and national (5.6%) averages for the same period.

Recessionary pressures stalled TAV growth in 2011-2013 but the tax base resumed moderate annual growth, averaging 3.9%, through fiscal 2016 due to renewed building activity. Recent commercial development includes four auto dealerships, two hotels, and considerable multi-family housing (1,112 units). Demolition is underway at the future site of a \\$100 million outlet mall which is scheduled to begin construction by year end and is projected to add over 1,000 permanent jobs.

Despite surging economic activity, the city's market value per capita remains low at \\$49,000. Income levels are also low but are growing faster than state or national averages. The city's lower cost of living partially mitigates the low wealth levels as a credit concern.

STRONG FINANCIAL PROFILE
City finances benefit from a diverse revenue stream comprised of property taxes (equal to 30% of fiscal 2014 general fund revenues), charges for services (24%), and sales taxes (18%). The large majority of charges for services are comprised of international bridge toll revenues. Such revenues are indexed at 50% of total bridge toll receipts per city ordinance. Although international bridge toll receipts are susceptible to economic cycles, Laredo's role as a major gateway for international trade and its strategic location on Interstate 35, which is a major North America Free Trade Agreement corridor that leads into Canada, offsets Fitch's concerns over bridge toll revenue volatility.

The city consistently outperforms budget expectations, recording a general fund operating surplus in each of the last eleven fiscal years. In fiscal 2014, the city posted a modest \\$1 million net operating surplus (equal to 0.6% of spending), resulting in a solid unrestricted general fund balance of \\$30.6 million (equal to 16.9% of spending). The total exceeded the 15% fund balance requirement per the city charter.

Continued positive results are projected for fiscal 2015. Aided by the continued cost controls, the general fund is projected to add \\$1.5 million (1% of spending) to fund balance in fiscal 2015. The proposed fiscal 2016 budget is balanced and based on a level total property tax rate and a 2.5% increase in sales tax revenues, which Fitch considers reasonable given recent trends.

ELEVATED DEBT BUT MODERATE CARRYING COSTS
Growth-induced capital pressures have led to the city's high overall debt burden relative to its market value, totaling 8.4%. Overall debt per capita remains moderate at \\$3,927. Overlapping debt is comprised primarily of debt issued by United Independent School District (ISD) and Laredo ISD, whose ULTGO's are both rated 'AA-' by Fitch. City debt levels are net of \\$164 million in direct debt supported by the city's various enterprise systems, enabling the city's debt service carrying costs to remain moderate at 9.4% of fiscal 2014 governmental spending.

The amortization rate of limited tax debt is rapid with 65% of principal scheduled for retirement within 10 years. The \\$519 million five-year capital plan is manageable and includes continued development of the transportation and water / wastewater utility systems. The city plans to issue \\$23 million in tax-supported debt for streets, solid waste, and airport improvements within the next 12 months.

Maximum annual debt service coverage of the city's sports venue sales tax bonds totals an adequate 2.1x based on fiscal 2014 revenues. Fitch notes debt service is level through 2024. The sales tax bonds additional bonds test requires coverage of at least 1.4x based on historic revenues. The bonds' debt service reserve fund equals average annual debt service and is funded with cash, although the city has an option to substitute a surety bond. Management reports no plans to leverage the tax further over the near term.

UNDERFUNDED PENSION OBLIGATIONS
The city provides retirement benefits for all of its employees (except firefighters) through the Texas Municipal Retirement System (TMRS). The city historically fully funds its annual required contribution (ARC). Although the pension plan's funded position remains below average at 68.6% as of Dec. 31, 2014, it has improved in recent years due to a change in TMRS' actuarial methodology. Concurrently, the city has been phasing in larger contribution rates but the plan remains below the city's goal to achieve a 75% funded ratio.

The city provides retirement benefits to firefighters through a single employer defined benefit pension plan. Although the city has fully funded its ARC, the funded position of the firefighter plan is well below average at 59.7% as of Sept. 30, 2014. Adjusting for Fitch's 7% rate of return assumption decreases the funded position to only 53.8%. The city funds other post-employment benefits (OPEB) on a pay-go basis. Carrying costs for net debt service, pensions, and OPEB are moderate at 19.6% of fiscal 2014 governmental expenditures but is likely to increase given future additional borrowings and increased pension contributions.