Fitch Affirms DeSoto, TX's GOs and COs at 'AA'; Outlook Stable

Fitch Ratings affirms the 'AA' rating on the following Desoto, Texas' (the city) outstanding debt:

--$61.73 million general obligation (GO) bonds;

--$27.35 million certificates of obligation (COs).

The Rating Outlook is Stable.

SECURITY

The GOs and COs are payable from a direct annual ad valorem tax levied, limited to $2.50 per $100 assessed valuation, against all taxable property within the city. The COs are further secured by a limited pledge of surplus revenues not to exceed $1,000 of the city's waterworks and sewer system.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Prudent fiscal policies and budgetary conservatism have resulted in solid reserve levels and positive operating results, contributing to overall financial flexibility.

TAV RETURNS TO GROWTH: City's taxable assessed value (TAV) had been essentially flat in recent years but returned to growth in fiscal years 2014 and 2015, with continued growth expected in the near term.

ADVANTAGEOUS LOCATION BENEFITS ECONOMY: The city benefits from its location within the stable and diverse economy and employment base of the Dallas-Fort Worth (DFW) metro area. Fitch views the city's long-term economic prospects as favorable.

HIGH DEBT, MANAGEABLE COSTS: Overall city debt levels are high mostly due to significant school district-related, overlapping debt. The city's direct debt service costs as a percentage of governmental spending are average and debt is rapidly amortized. Total carrying costs are manageable.

RATING SENSITIVITIES

CHANGES TO CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city of DeSoto is located 12 miles south of Dallas, and benefits from its proximity to the DFW metroplex, as well as the completed expansion of major transportation corridors that traverse the city. The estimated 2013 population of about 51,500 reflects a 37% increase since 2000. Most residents work throughout the broader metropolitan area, which provides abundant employment opportunities, although the city's own employment base is growing in the manufacturing and warehouse/distribution sectors.

STRONG FINANCIAL PROFILE

The city's financial profile remains sound, characterized by solid general fund reserves, which have exceeded 30% of spending for the last three years. The city generated operating surpluses in four out of the last six fiscal years, assisted by conservative budgeting and the implementation of cost-saving measures. Past deficits have been modest and reserve drawdowns were mostly due to pay-go capital spending.

Fiscal 2014 featured a net general fund operating surplus after transfers of $2.8 million despite the planned use of $400,000 in reserves for non-recurring expenditures. The city closed the year with a $13.4 million unrestricted general fund balance, or 43% of spending, well above the city's two month formal fund balance policy.

The fiscal 2015 budget is balanced with the use of roughly $400,000 in fund balance, about half of which is for non-recurring outlays, and the remainder for capital expenditures. With year-to-date revenues running higher than budgeted and expenditures coming in close to budget, management expects fiscal 2015 to end instead with a modest surplus. Fitch believes this is reasonable as the city has a history of actuals coming in better than budgeted.

Within the general fund, the city has created a new restricted stabilization fund. The city will gradually set aside funds from future net operating surpluses in order to achieve the balance target of 10% of budgeted revenues. Preliminary fiscal 2016 budget considerations are similar to previous years with the total tax rate to remain the same for the next consecutive year and measured pay-go funding budgeted for capital and other one-time projects. The city's overall tax rate has been $0.758 per $100 assessed valuation since fiscal 2013, well below the city limit, and is expected to remain at that level in the near term.

TAV RETURNS TO GROWTH

Recessionary pressures on the housing market significantly reduced development activity and lowered home values, resulting in a trend of generally flat TAV in recent years. TAV grew cumulatively by 7.6% in fiscal years 2014 and 2015. The city is expecting continued TAV growth in the near term, which appears reasonable given ongoing economic development activity due the city's location along the Interstate Highway 35 corridor and affordable land availability. This includes construction of a new WalMart, various retail and industrial expansions, and $35 million expansion of the city's largest taxpayer, Solar Turbines.

The city's top 10 taxpayers made up a substantial 15.9% of TAV in fiscal 2014. Major taxpayers include a historically stable industrial base of various manufacturers and large retail distribution centers.

ECONOMY BENEFITS FROM ADVANTAGEOUS LOCATION

The city benefits from its proximity to the larger Dallas-Fort Worth economy and employment base. Employment trends have been positive and city unemployment is below the nation but above the region and the state. The city unemployment rate declined to 5.9% as of January 2015 from 7% a year prior, the effects of a labor force decline coupled with modest employment growth. Income and wealth indicators are mixed, with median household income and poverty rates comparing favorably to state and national levels and per capita income levels above or close to state and national levels.

HIGH OVERALL DEBT BURDEN; MANAGEABLE CARRYING COSTS

The city's overall debt levels are high at 8.3% of full market value (MV) and $5,405 per capita, due primarily to overlapping debt from DeSoto Independent School District ('AA-'/Outlook Stable). Debt service as a percentage of governmental expenditures is also high at 17%, but this is affected by the rapid pace of principal amortization - 82.8% of principal is retired in 10 years.

In November, voters authorized $19.4 million in GO debt issuance. $4.2 million will be issued later this year, with most of the remainder issued over the next six years. The city will also be issuing roughly $23 million in certificates of obligations over the same timeframe. Both will be used to finance major street and park projects, land acquisition and construction of a new fire station. Planned near-term debt issuance should not significantly increase city debt ratios.

The city provides pension benefits through the Texas Municipal Retirement System (TMRS), a state-wide agent multi-employer plan. Using a 7% discount rate assumption, funding levels have improved markedly from a funded ratio of 67% in 2009 to 88% in 2014. This improvement is due in part to a statewide accounting and actuarial restructuring of the system's available funds. The city has funded 100% of its annual actuarially required contribution (ARC) rate for the past four years and plans to fully fund its contribution in fiscal 2015. Overall carrying costs for the city (debt service, pensions, and other post-employment benefits) totaled a manageable 22.5% of governmental spending in fiscal 2014.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983177

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