OREANDA-NEWS. Fitch Ratings has affirmed the 'AAA' rating on the following Midland, Texas (the city) obligations:

--$107.4 million tax and limited pledge revenue certificates of obligation (COs), series 2007, 2009, 2012, and 2014;
--$21.1 million general obligation (GO) refunding bonds, series 2006A, 2006B, 2009, and 2014;
--$585,000 combination tax and revenue refunding bonds, series 2007.

The Rating Outlook is Stable.

SECURITY
The GOs, 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 $2,500.

KEY RATING DRIVERS

PRUDENT FISCAL MANAGEMENT: The city's prudent fiscal practices and conservative budgeting are evidenced in its stable financial history and strong reserve levels despite its inherent vulnerability tied to the energy sector.

SALES TAX RELIANCE: General fund reliance on sales tax revenues generates a notable vulnerability to economic fluctuations. After increasing markedly in recent years, receipts are falling sharply with the energy sector collapse.

ENERGY SECTOR EXPOSURE: The city serves as the commercial hub and corporate headquarters for Permian Basin energy activity. As such, the city's economic fortunes generally rise and fall with changes in this industry. Government, education and medical top employers lend some stability to the local economy, and wealth levels historically have been high.

DIVERSE TAX BASE: As the regional hub of the Permian Basin, the city's tax base is diverse despite the economic dependence on the oil and gas sector. The top 10 taxpayers account for less than 5% of taxable values.

MODEST OVERALL DEBT LEVELS: The city's overall debt burden is moderately low, with a manageable capital plan that is partly funded on a pay-go basis. Principal amortization is average.

RATING SENSITIVITIES

WEAKENED FINANCIAL PROFILE: The rating is sensitive to the city's financial flexibility that mitigates exposure to oil and gas price fluctuations and the associated changes in sales tax revenues. Any notable deterioration in this flexibility would likely pressure the rating.

CREDIT PROFILE
The city is the county seat for Midland County (GO bonds rated 'AAA' by Fitch). It is located in the Permian Basin region, about 300 miles west of Dallas. The Permian Basin is one of the United States' largest mineral reservoirs and exploration activity has been robust in recent years. The city's 2014 estimated population of 128,037 is 25% higher than 10 years prior.

STABLE FINANCIAL OPERATIONS WITH STRONG RESERVE LEVELS
Fitch considers the city's financial profile to be a significant credit strength. Financial performance has been consistently positive with the general fund reporting five consecutive years of surplus, adding over $30 million to fund balance. The general fund reported a net operating surplus of $10.8 million in fiscal 2014, bringing unrestricted fund balance to $68.5 million at year-end, or a very high 70% of spending. Preliminary 2015 results point to a modest surplus of $1 million, as weaker sales tax revenue totals are affecting total operating revenues. Sales tax receipts comprised 43% of fiscal 2014 operating revenues.

The fiscal 2016 adopted budget is structurally balanced and includes a 4% increase in revenues due in part to additional property taxes. Management prudently estimated a 7% contraction in sales tax revenues for fiscal 2016, and year-to-date actual results show a large 21% decline in collections compared to this time last year. Historically, management has promptly responded with budgetary measures to yield stable operating performance in years of contracting or stagnant revenue, and similar action would be expected if deemed necessary in the near term.

SALES TAX REVENUE GROWTH
The city's sales tax receipts almost doubled in the last five years as increased oil and gas drilling activity drove up the city's population and attracted additional retailers. Council developed a strategic plan to use sales tax funds in excess of a certain amount (one-third of general fund revenues) for non-recurring uses, one time capital improvements, or to enhance fund balance reserves in order to maintain a minimum of 30% in reserves, slightly above the 25% formal fund balance policy level. Fitch notes the city's historically conservative budgeting practices are again being tested with the energy sector collapse that began in 2014.

ENERGY-BASED ECONOMY WITH A DIVERSE TAX BASE
The city is located in the heart of the Permian Basin reservoir serving as the commercial hub in one of the country's largest oil and gas reservoirs whose exploration and drilling has fueled strong economic activity. The city covers approximately 66 square miles of the vast Permian Basin and its property valuation is more diverse than the county's, with the top 10 taxpayers comprising less than 5% of the fiscal 2015 total, compared to 16% for the county.

The well documented energy sector decline that began in 2014 has significantly affected the Permian Basin area. Rig counts have fallen sharply since 2014 from a peak of 568 to 217 at the close of the 2015 calendar year. The November 2015 unemployment rate of 3.4% is one percentage point above last year's rate yet remains well below state and national averages.

Economic activity realized by the oil and gas sector is significant to the city, yet real oil, gas and other mineral values comprised less than 1% of the fiscal 2015 tax base, with residential accounting for 65% and industrial and commercial valuations at 18%. Industry diversification is represented by manufacturing, hospitality, business services, higher education and local government interests.

Local wealth levels as measured by median household income and per capita personal income are high. The 2016 assessed value showed a modest increase of 3% in fiscal 2016 after two years of double-digit growth. Year-to-date, the average home sale price has contracted modestly (2.7%), pointing to sluggish housing demand.

MODEST OVERALL DEBT
The overall debt burden remains moderately low at $2,231 per capita and 2.5% to market value, with manageable capital needs. Principal amortization is about average. Fitch expects the city's debt profile will remain stable given the city's historically conservative pay-go practices and debt policy.

Pension benefits for all employees except fire fighters are provided through the Texas Municipal Retirement System, a statewide agent multiple-employer plan. The city's funding position is a healthy 86% as of December 2013. Pension benefits for fire fighters are provided through a single-employer defined benefit plan. The city's 60% funded position using a 7% rate of return as of the latest valuation date (December 2013) is considered weak due to an open 59-year amortization period.

Other post-employment benefits (OPEB) are funded on a pay-go basis and the unfunded liability represents 0.36% of market value. On a combined basis, the city's carrying costs, including debt service and contributions for pension and OPEB pay-go, approximate a low 11.6% of 2014 governmental spending.