OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following outstanding obligations of Cleburne, TX (the city):

--$34.9 million combination tax and revenue refunding bonds series 2013;
--$8.3 million combination tax and revenue certificates of obligation (COs) series 2013;
--$17.7 million general obligation (GO) refunding bonds series 2008, 2010, and 2011.

In addition, Fitch has affirmed the 'A+' rating on $14 million of outstanding Cleburne 4B Economic Development Corporation (EDC) sales tax revenue bonds.

The Rating Outlook is Stable.

SECURITY

The GO, revenue bonds, and COs are payable from a property tax limited to $2.50 per $100 of taxable value. The revenue bonds and COs are additionally secured by a de minimis pledge of net utility system revenues not to exceed $1,000.

The 4B corporation sales tax revenue bonds are secured by a first lien on a 1/2-cent sales tax levied and collected
city-wide for the purposes of the corporation.

KEY RATING DRIVERS

HEALTHY FINANCIAL PERFORMANCE: Financial management is sound, reflected in a willingness to raise revenues, adjust spending, and budget conservatively during periods of economic pressure to produce surpluses and enhance the city's fund balance position.

WELL LOCATED ECONOMY: The city is situated near the broad labor market of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA). Access to this MSA has been enhanced by a major highway project. Job growth has stagnated recently, yet improvement is likely in the near- to intermediate-term.

TAX BASE IMPROVEMENT: The city's tax base has returned to growth after a period of contraction due to a decline in drilling activity in the Barnett Shale, a large natural gas formation in the area. Formerly very high industry concentration in the oil and gas sector has been tempered as a result, and modest tax base growth is expected to continue given residential and commercial development underway.

MANAGEABLE DEBT BURDEN: Debt levels are moderate and outstanding tax-supported debt amortizes rapidly. Additional tax-supported debt over the near-to-medium term is plausible given the prospects for continuing population growth, which would drive infrastructure investment.

SOUND COVERAGE: Coverage of maximum annual debt service on the 4B sales tax revenue bonds has declined but remains above 2.0x, which Fitch considers sound. The additional bonds test allows for significant further leverage; however, management reports no near-term plans to do so.

RATING SENSITIVITIES

STRONG BUDGET PERFORMANCE: A continuing trend of strong financial performance and maintenance of a sound fiscal cushion could lead to positive rating momentum.

SALES TAX COVERAGE: The rating is sensitive to changes in debt service coverage driven by trends in revenue collection and/or additional issuance. A positive rating action is likely constrained by the provisions of a fairly lenient additional bonds test.

CREDIT PROFILE

Cleburne is located 30 miles south of Fort Worth within the Barnett Shale natural gas play. It is the seat of Johnson County ('AA+'/Outlook Stable). The city's estimated 2014 population is approximately 30,000, reflecting 1.2% average annual growth in the last decade.

SMALL BUT EXPANDING ECONOMY IN THE DFW MSA

Principal industries in the city include manufacturing, distribution, and agribusiness. The city's industrial base is diversified across building and construction materials, power generation, chemicals, oil and gas equipment, transportation, and distribution services. Cleburne's unemployment rate typically trends lower than national averages, yet sluggish growth has recently tempered improvement in the city's rate, which at 4.9% as of September 2015 is slightly above the state (4.4%) and nation (4.8%).

Potential for near-term growth in the local economy is tied to the city's proximity to the large DFW job market. Access has been enhanced by the completion of a major arterial highway that provides a direct link to Fort Worth. The DFW employment base is extensive and the region is outperforming the nation in post-recession job, income, and population growth.

IMPROVEMENT IN TAV

The city lies over the Barnett Shale play, one of the largest natural gas fields in the U.S. Recent weakness in valuations across the residential, commercial, and industrial sectors was a result of decreased drilling activity due to depressed natural gas prices. The cumulative contraction in the tax base from 2011 - 2015 was a moderate 12%. The tax base returned to growth in fiscal 2016 marking a solid 4.3% increase. Taxpayer concentration remains elevated with the top 10 taxpayers making up 17% of taxable assessed value (TAV) but has come down from a high of 32% in 2009 due to declining valuations of oil/gas firms. The top taxpayer group is now diversified with construction, engineering, retail, chemical and utility industry presence.

RETURN TO REVENUE GROWTH

Property taxes, charges for services, and sales taxes are the predominant revenue sources. City officials confronted the declining TAV trend by incrementally raising the tax rate, and there remains ample room under the cap. Sales tax performance was particularly weak post-recession, declining by a compound annual average of 6% from 2008 - 2013. Fiscal 2014 saw a strong year of growth at 10% over the prior year, and unaudited fiscal 2015 results show a 1.9% increase over the prior year, pointing to recovery in one of the city's important revenue streams (16% of general fund).

Fiscal 2014 concluded with a general fund unrestricted fund balance of $15.2 million or 43% of spending, after a $4.4 million transfer out primarily for future road maintenance. The year ending Sept. 30, 2015 will likely report similar results, closing out the year with a $1 million draw on fund balance after a $3 million transfer for future road maintenance. Management notes the positive operating results are due to strong revenues and an underspending of the budget. At the end of fiscal 2015 reserves are comfortably above the city's formal policy that requires an unassigned fund balance at or above 90 days (25%) of expenditures. The fiscal 2016 adopted budget remains largely unchanged from prior years and management reports the likelihood of using some set-aside capital for paygo throughout the year.

MODERATE DEBT BURDEN THAT AMORTIZES SWIFTLY

The city's overall debt load is moderate at $1,913 per capita and 2.7% of market value. Carrying charges for debt service are affordable at 11% of governmental expenditures in fiscal 2014. Amortization of debt is very rapid with 79.4% of principal retired within 10-years.

Management is in the process of finalizing a long-range infrastructure assessment, yet reports that tax-supported debt will likely be minimal with the majority of general government needs addressed on a pay-as-you-go basis. The ABT on the sales tax revenue bonds allows for coverage of no less than 1.25x MADS of gross sales tax revenues for any 12 consecutive months out of the prior 18; however, there are no current plans to further leverage the 4B sales tax revenues.

In the recent November 2015 election voters approved by a wide margin three propositions that included a 1/2 cent increase in the city's sales tax rate and the issuance of up to $25 million in bonds backed by the additional sales tax revenue to purchase land and construct a 75-acre retail and dining complex with a baseball stadium. Fitch will monitor plans for the issuance of debt and details concerning the financing and operation of the project for ramifications on the city's general credit quality.

PENSION FUNDING LEVELS IMPROVING

City employees participate in one of two city-sponsored pension programs: the Texas Municipal Retirement System (TMRS), which serves the majority of city staff, or the Firemen's Relief & Retirement plan. TMRS' funding levels have improved steadily following a system-wide restructuring of actuarial assumptions and internal fund accounting, reaching a 74.0% funded level as of Jan. 1, 2014 using the system's 7% investment return rate. The city's annual contributions to TMRS reached full funding as of fiscal 2013.

The smaller firefighter's plan funded position was at 54.4% using a 7% investment return rate assumption, and its unfunded actuarial accrued liability $32.7 million or 1.6% of market value. Additionally, the plan utilizes an open amortization period that could delay full amortization and/or increase future contribution requirements. The combined actuarial required contributions (ARCs) for both plans consumed a manageable 9.6% of government spending in fiscal 2014.
Retirees and their dependents can purchase health coverage from a city plan at the group rate, and receive city-paid coverage for up to five years with 25 years of service. The city funds the costs of these benefits on a pay-go basis. The plans' fiscal 2014 unfunded actuarial accrued liability totaled $5.8 million or a nominal 0.2% of market value. Combined fixed-costs for debt service, pension ARC, and other post-employment benefit (OPEB) pay-go consumed a slightly elevated 22.2% of fiscal 2014 governmental expenditures.