OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following obligations of El Paso, Texas:

--$202 million general obligation (GO) bonds, series 2016;
--$119.3 million GO refunding bonds, series 2016;
--$100 million combination tax and revenue certificates of obligation (COs), series 2016.

Fitch also has assigned an 'AA-' rating to the following obligations of the El Paso Downtown Development Corporation (DDC):

--$18.6 million DDC special revenue refunding bonds (Downtown Ballpark Venue Project), series 2016.

The bonds are scheduled to sell via negotiation as early as May 18. The GO, CO and special revenue bond proceeds will be used to either fund various capital improvements city-wide or refund a portion of the city's outstanding obligations for savings.

In addition, Fitch has affirmed the following ratings:
--$677.2 million (pre-refunding) GO bonds at 'AA';
--$542.6 million COs at 'AA';
--The city's Issuer Default Rating (IDR) at 'AA'.

Fitch has also upgraded the rating on $60.8 million (pre-refunding) El Paso Downtown Development Corporation (DDC) special revenue bonds to 'AA-' from 'A+'. The upgrade reflects application of Fitch's revised criteria for U.S., state, and local government credits, which was released on April 18, 2016. The revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt; the DDC bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR under the revised criteria.

The Rating Outlook for all of the above ratings is Stable.

SECURITY
The GOs and COs are payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV) . The COs are additionally payable from a de minimis (limited to $1,000 per year) pledge of surplus revenues from the city's waterworks and sewer system.

The special revenue bonds are payable from annually appropriated lease payments made by the city to the DDC from lawfully available revenue, which includes most city operating revenue except property taxes. The rating is one notch below the city's IDR, reflecting the slightly higher degree of optionality associated with appropriation payments.

KEY RATING DRIVERS

The 'AA' rating reflects the city's strong revenue growth prospects, ample revenue-raising ability, and sound budgetary flexibility amidst a growing and moderately diversifying economy. These strengths are tempered by Fitch's expectation of rising fixed costs in the near term due to the currently accelerated and future debt issuance plans. Continued underfunding of the city's pension plans and anticipated growth in the overall debt burden to accommodate further population gains is likely to drive further growth in the liability burden and could create a spending pressure going forward.

Economic Resource Base
El Paso is the sixth largest city in Texas with an estimated population of about 700,000. Population gains since 2000 have been solid at an average annual rate of 1.4%. City income levels are below average, but continue to grow at a faster pace than state and U.S. averages. Government and educational entities comprise most of the top civilian employers. The city's economic activity has historically come from its position as a key NAFTA trade corridor near Mexico's maquiladora assembly plants and from the presence of Fort Bliss, the Army's second largest installation.

Revenue Framework: 'aaa' factor assessment
Fitch expects solid revenue performance going forward due to ongoing population expansion, bolstered by positive local economic development. The city retains significant ability to raise tax rates to generate additional revenue.

Expenditure Framework: 'a' factor assessment
Spending growth should remain comparable to or slightly above revenue trends given the city's spending profile. Management maintains moderate control over its public safety labor costs given negotiated, multi-year agreements. This is balanced against fixed carrying costs that Fitch expects will rise to become moderately high in the near term given the currently accelerated and future debt issuance plans.

Long-Term Liability Burden: 'aa' factor assessment
The city's combined liability burden of debt and pensions is presently moderate when considering resident wealth levels at 15.5% of personal income. Fitch expects the liability will rise, but remain a moderate burden on resources. Repayment of principal is slightly below average.

Operating Performance: 'aa' factor assessment
Fitch expects that management would use its ample revenue-raising ability and strong gap-closing capacity to preserve its financial position throughout the economic cycle at a level consistent with the current rating level. Despite a demonstrated ability to respond effectively to economic downturns, the city's ongoing practice of underfunding its pension plans, even in times of economic recovery, is expected to drive growth in this liability and related demands.

RATING SENSITIVITIES
Escalating Long-Term Liabilities: Further increases to the long-term liability burden as reflected by material increases in fixed carrying costs that limit the city's overall financial flexibility would result in negative rating pressure.

Maintenance of Reserves: Failure to maintain the city's adequate reserve cushion could apply downward pressure to the rating.

CREDIT PROFILE

Recent investments in the medical sector and the opening of the Texas Tech University Health Sciences Center further help diversify the city's economic base. The Pentagon's 2005 base realignment and closure (BRAC) recommendations led to the addition of troops at Fort Bliss with corresponding relocation of family members. The ongoing expansion of military facilities has boosted residential and commercial construction citywide. A large downsizing of troops from federal sequestration measures would have a material economic impact on the city. However, significant recent investments by the military, including the ongoing $1 billion expansion of the Beaumont Army Medical Center, support prospects of near-term stability. Unemployment, which was 4.4% in March 2016, has been consistently near or below national averages.

El Paso's diverse tax base is a credit strength. The city's tax base exhibited modest to moderate growth in recent years despite recessionary pressures. Recent TAV performance since fiscal 2014 has been relatively flat, however. This is attributable in part to city council's decision to increase local tax exemptions for seniors. Fitch believes management's assumptions of a return to modest to moderate levels of growth over the medium term are reasonable given recent development trends and growing commercial values.

Revenue Framework
Property taxes provide the bulk of the city's total operating revenues (41% in fiscal 2015) followed by sales taxes (23%). Sales tax performance was relatively resilient over the recession, flattening for one year before regaining positive growth, although this revenue stream remains sensitive to cross-border traffic and associated retail sales.

Historical revenue growth has kept pace with U.S. economic performance. Fitch expects future revenue growth prospects to be solid given the area's ongoing population expansion and economic activity.

The city's operating tax rate is limited by city charter to $1.85 per $100 TAV; the city is well below this threshold. Outside of the cap, there are no legal limits to management's ability to implement annual property tax increases up to it in the event of fiscal stress. An annual property tax increase in excess of 8% triggers the possibility of a voter-implemented rollback election.

Expenditure Framework
Public safety is the city's largest operating expenditure. Spending has steadily expanded since fiscal 2010 and presently consumes about 61% of fiscal 2015 general fund spending despite comprising only about 35% of the city's workforce. Multi-year contracts with police and fire negotiated in a collective bargaining framework outline public safety pay and benefits and the contracts have a one-year evergreen provision in the event of labor contract disputes. Firefighters maintain a three-year contract while contract length for police officers is four years, although both retain an initial end date of August 2018. Strikes are prohibited by state law. A recent contract deadlock with firefighters was resolved when city council put the issue on the ballot and voters ultimately approved labor's requested pay and benefit increases, which was subsequently funded by a tax rate increase implemented by city council.

Fitch expects the city's natural spending pace will remain equal to or slightly exceed revenue gains given its key spending responsibilities. This is somewhat obscured in recent fiscal trends that reflect various mid-year revenue pressures attributable to a tax appeal payment to a major taxpayer and revenue performance falling short of optimistic projections in addition to some one-time spending pressure (relocation of city hall for a future baseball stadium).

Fixed carrying costs--the combination of debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits (OPEB)--consumed about 25% of fiscal 2015 governmental spending, which Fitch expects to rise given the currently accelerated and future debt issuance plans. Governmental debt service totaled $98.5 million in fiscal 2015, which represented the bulk of carrying costs at about 18% of spending. Additional GO issuances are planned through fiscal 2021 and subsequent debt service costs (inclusive of the city's appropriation-backed debt) are projected to peak in 2023 at roughly $124 million.

Long-Term Liability Burden
Voters approved $473 million in bond issuance for quality of life projects (e.g. parks and recreation, zoo, open space, libraries, museum, and performing arts) in 2012 with strong 70% approval. The city has accelerated its issuance plans from previous forecasts in order to more rapidly implement larger capital projects per city council's priorities. In addition, this acceleration is reportedly reflective of a change in the city's debt management practices and a transition from reimbursement of city capital spending with debt to initially funding capital projects with debt issuances. This is expected to result in less frequent, new debt issuance going forward. This acceleration, in addition to future debt plans, is projected to be supported by a phased debt service tax rate increase that should remain just below the total amount promised voters ($0.30 per $100 TAV) based on reasonable TAV growth assumptions of steady 1%-2.5% growth over the life of the bonds. Principal amortization of tax-supported and appropriation-backed debt is slightly below average at about 45% in 10 years.

The city maintains two single-employer pension plans; a city employee pension fund (CEPF) and a fire and police pension fund (FPPF). The city issued $212 million voter-authorized pension obligation bonds in 2007 and 2009 to address underfunding in the FPPF. Public safety employees hired after July 2007 participate in a less generous second tier of pension benefits that is expected to reduce growth in the overall liability over time. A similarly structured program was also implemented for general city employees beginning in fiscal 2012.

The overall long-term liability burden for debt and pensions as compared to personal income is moderate at 15.5% with debt representing about 85% of the total burden. Fitch expects this metric to remain in this moderate range despite anticipated growth in the burden given robust gains in population and personal income levels.

Operating Performance
The city's adequate reserve cushion would be slightly pressured by an unaddressed, moderate economic decline, but Fitch expects management would continue to use its still ample revenue-raising and strong gap-closing capacity to preserve its financial position through the economic cycle.

The city's pension programs are funded on a statutory basis according to city charter and the city makes full funding on that basis. Pension obligation bonds were previously issued to boost the FPPF funded position. However, the city's current pension contributions are below full funding levels on an actuarial basis, which drives a growing unfunded liability even in times of economic recovery. Underfunding in the public safety pension plan represents about 2% of budgeted fiscal 2016 general fund spending. City management is presently studying various options with which to reduce the pension liability in the intermediate to long term.

The city implemented various cost efficiencies in fiscal 2015 and also tightened its previously optimistic revenue estimates given the prior year's reduced fiscal position (unrestricted reserves totaled 2.6% of spending or $9.2 million at fiscal 2014 year-end). One of these adjustments made included the continued underfunding of pension obligations. Public safety pension contributions fell short of actuarially required contributions by approximately $6 million. Operating performance produced a positive net surplus ($9.5 million or 2.7% of spending) year-end and moderate restoration of reserves as anticipated. Unrestricted reserves rose to $21.4 million or 6.1% of spending in fiscal 2015. The city also maintains a separate, restricted general fund reserve of 5% of prior year's spending according to city charter; the combined reserves total about $39 million or 11.2% of spending.

The $369 million adopted fiscal 2016 general fund operating budget grew by about 3% as compared to the prior year's budget and was adopted with a modest surplus. Additional property tax revenues from both modest TAV growth and an operating tax rate increase in conjunction with projected sales tax gains underpinned the year's spending priorities. These included police and fire salary increases, additional operating costs as a result of newly completed capital projects, and rising health insurance costs. Sales tax performance is running slightly above budget and operations at fiscal 2016 year-end are projected to maintain surplus results according to management. The net year-end effect however, is projected to result in a $4.2 million drawdown given council's mid-year decision to fund various non-recurring, capital projects. Nonetheless, Fitch expects reserve levels will be maintained steadily at about 8%-10% of spending going forward.