OREANDA-NEWS. Fitch Ratings downgrades the following Robstown, Texas (the city) limited tax bonds:

--$390,000 limited tax general obligation (LTGO) refunding bonds, series 2003 to 'BB+' from 'BBB';

--$905,000 combination tax and limited pledge revenue certificates of obligation (COs), series 2003 to 'BB+' from 'BBB'.

The Rating Outlook is Stable.

SECURITY

The GO and COs are secured by an annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a de minimis pledge of net revenues of the city's utility system.

KEY RATING DRIVERS

RECENT SIGNIFICANT FINANCIAL DECLINE: The downgrade reflects recent significant and unexpected fiscal deterioration, with reserves essentially depleted in fiscal 2014 and expected fiscal 2015 deficit operations leading to a negative general fund ending balance.

ADDITIONAL NEAR TERM PRESSURE: Current projections call for continued financial strain in the near term, including the fiscal 2016 budget indicating a smaller, but still negative general fund ending balance. Financial control and reporting weaknesses increase the potential for worse than projected operating results.

FINANCIAL CONTROL CONCERNS: City finances have been challenged by weakness in the city's internal controls, which resulted in a partial missed interest payment in 2012. Management has taken some steps to improve accounting practices, but internal controls deficiencies continue to be cited in the city's audit and have contributed to recent financial stress.

SALES TAX VOLATILITY: The general fund relies on economically volatile sales taxes for operations, and prior years' receipts featured notable fluctuations. Fiscal 2014 finances were weakened by sales tax revenues that declined more sharply than expected, reflecting a stronger than anticipated negative impact from oil price declines.

LIMITED ECONOMIC BASE: The local economy is limited, with a concentration in the cyclical oil and gas sector. Income and wealth levels are below average.

HIGH DEBT BURDEN: City debt levels are high, particularly relative to the tax base. Debt levels should remain high, as amortization is average, though no additional debt issuance is currently planned.

RATING SENSITIVITIES

FURTHER FINANCIAL DETERIORATION; INADEQUATE RESPONSE TO DEFICIT: Further, significant financial deterioration, including a larger than expected fiscal 2015 deficit and significantly weakened liquidity will lead to further downward pressure on the rating. Failure to address budget imbalance and return to a positive general fund ending balance in a timely manner would also result in downward rating pressure.

CONTINUED INTERNAL CONTROL PROBLEMS: An inability to implement fiscal controls, leading to improvement in financial operations and reporting, could also have a negative impact on the rating.

INCREASED DEBT BURDEN: A significant increase to the city's already high debt burden could also lead to downward pressure on the rating.

CREDIT PROFILE

Robstown is located in Nueces County, about 15 miles northwest of downtown Corpus Christi. The 2014 population of 11,657 represents a decline of about 8% since 2000, although recent years' population figures have remained essentially flat.

RECENT SIGNIFICANT DECLINE IN FINANCES

Following a trend of financial stabilization (including operating surpluses in fiscal years 2012 and 2013), fiscal 2014 saw a sharp decline, with a general fund deficit of $713,826 (7.5% of spending) resulting in a reduction in the unrestricted balance to $6,221 (about 0.1% of spending) from $720,047 (8.3%) in fiscal 2013. The fiscal 2014 amended budget had suggested balanced operations, with general fund revenue growth of about 9% projected.

Estimates at the end of the fiscal year still indicated positive operations and a modest surplus, evidence of the city's challenged financial controls and reporting. Revenue projections were not adequately updated to reflect much weaker than expected actual revenue performance, driven by larger than budgeted sales tax declines and smaller than budgeted property tax increases. Fiscal 2014 general fund revenues declined by nearly 2% and despite lower than budgeted spending, the year ended with a deficit.

The city is moderately reliant on economically volatile sales taxes, which made up 31% of general fund revenues in fiscal 2014. This revenue stream performed well in recent years due to economic activity from energy exploration in the area, but dipped sharply when oil prices collapsed in 2014. Fiscal 2014 sales tax revenues were budgeted to decrease by about 6%, but actual performance was worse (down 15%), reflecting a larger than expected impact from the oil price decline.

Property taxes make up about 20% of general fund revenues. While overall general fund property tax revenues grew in fiscal 2014 (up 1.1%), actual collections were more than 18% below the amended budget figure. Management attributes the shortfall to a combination of budget misstatements and weaker actual collections.

Fitch views a healthy fund balance as a necessary mitigant to the city's small overall budget size and exposure to economically sensitive sales taxes, a portion of which are derived from cyclical oil and gas activities. The recent depletion of reserves and uncertainty regarding replenishment significantly weaken the city's credit profile.

CONTINUED FINANCIAL WEAKNESS

Management currently projects a fiscal 2015 general fund deficit of about $1.3 million, which would result in a negative general fund ending balance of about $1.3 million or -12.7% of spending. Fiscal 2015 estimates include flat revenues (0.6% decline versus fiscal 2014 actual revenues) and about 5% expenditure growth, driven in part by debt service needs due to the impact of fiscal 2014 debt issuance payments. Fiscal 2015 general fund spending included about $700,000 for debt service, which is expected to be covered by an increase in the debt service property tax rate in fiscal 2016.

The current fiscal 2016 budget is balanced, aided by an annual transfer from the city's utility funds of about $960,000. A recently approved additional utility transfer of about $700,000 is expected to reduce the general fund ending deficit balance to about $331,000 or -3.7% of spending

Management has indicated that additional revenue and/or expenditure measures are being considered to further shore up operations. The fiscal 2016 budget assumes a 10.4% decline in expenditures, driven largely by reduced public works spending and cuts in administrative costs.

DEFICIENCIES IN FINANCIAL REPORTING PRACTICES

Recent annual audits featured unqualified opinions. However, the city's auditor has cited several deficiencies regarding internal controls. The city pointed to these deficiencies as the cause of a 12-day delay in a small portion of the Sept. 1, 2012 interest payment (less than 5% of the total $165,384 payment).

Despite new procedures to address the internal control concerns, these deficiencies were again cited in the city's fiscal 2014 audit and certainly have contributed to the ongoing financial stress. Management has indicated that additional efforts are being made to improve financial controls and reporting.

INCREASED RELIANCE ON UTILITY SYSTEM REVENUES

The city's combined electric, water, and gas utility system supports general city operations through annual transfers. The transfer totaled $785,000 in fiscal 2014 or 8% of general fund revenues. The transfer totaled $725,000 for fiscal 2015, with another $120,000 added for budget stabilization. The standard transfer is budgeted at about $960,000 for fiscal 2016, plus the additional for budget stabilization that was recently approved.

The standard monthly transfers were initiated to support the fiscal health of the city and are annually appropriated in the system's budget. The transfers are made per a memorandum of understanding (MOU) between the city and the system that expired in 2013. The city reports that it is working on a renewal of the MOU.

The system demonstrates adequate capacity for continued general fund assistance due to its limited debt obligations and positive operating margins that produced over $2 million in net revenues after debt service and city transfers, in fiscal 2014. Continued utility fund support of the general fund, beyond an amount commensurate with administrative costs and/or a payment in lieu of taxes or franchise fee, is an ongoing credit concern.

LIQUIDITY SUPPORTED BY UTILITY FUND

The city does not currently produce annual cash flow estimates. General fund liquidity levels have been low in recent years, and management initially projected a potential need to borrow about $250,000 for cash flow needs in fiscal 2016. The recently approved additional transfer from the utility system eliminated this need. Should cash flow needs arise later in the year, management has indicated that borrowing would be from utility system available revenues.

HIGH DEBT BURDEN; INCREASING BUT MANAGEABLE OVERALL CARRYING COSTS

The city's overall debt levels are high on a per capita basis ($5,785 for fiscal 2014) and extremely high as a percentage of market value (15.5%). Debt levels should remain high as amortization is average (about 50% in 10 years). No additional near-term debt issuance is planned. The city's annual debt service as percentage of governmental spending is midrange, at about 8% in fiscal 2014, but will increase significantly in fiscal 2015 (estimated at 15%) reflecting the impact of 2014 sales tax, CO and GO borrowings.

The city's pension plan is provided through the Texas Municipal Retirement System and was 88% funded as of Dec. 31, 2013. Other post-employment benefits are limited to supplemental death benefits totaling one year of salary. Total carrying costs for debt service and pensions were manageable at about 11% of governmental fund spending in fiscal 2014. Increased debt service levels in fiscal 2015 will increase total carrying costs, but the level is expected to remain manageable, estimated at 18% for fiscal 2015.

ECONOMIC CONCENTRATION

Robstown's local economy is limited, with a concentration in the energy sector. The city benefits from its location at the intersection of two major gulf coast surface, port, and rail corridors. While the economy has benefited from the drilling activity in the Eagle Ford shale, a large oil and gas shale formation that reaches just north of the city, recent declines in oil prices have negatively affected the industry in the area and, as a result, city tax revenues.

City employment figures are unavailable. The Nueces County July 2015 4.9% unemployment rate represents a decline from 5.4% a year prior, and is close to the comparable state rate (4.6%) and below the comparable national (5.6%) average. City income and wealth indicators are well below average, and the city's poverty rate is about double the U.S. average.

The city's tax base has seen recent continued expansion, with annual TAV growth averaging about 9% for fiscal years 2014 through 2016. Some of this growth was likely driven by inherently cyclical oil and gas activity, which could moderate with continued sector weakness. The city is seeing some additional economic development activity, including the construction of an 83-store outlet mall expected to be completed by 2016.