OREANDA-NEWS. Fitch Ratings has upgraded the following ratings for Montgomery, TX to 'A+' from 'A-':

--$2.5 million general obligation refunding bonds, series 2012;

--the city's Issuer Default Rating (IDR).

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The bonds are payable from an ad valorem tax levy limited to $1.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

The rating upgrade to 'A+' reflects the city's solid financial performance and budget management practices that have maintained financial flexibility while addressing growth needs. An elevated debt burden is offset somewhat by well-funded employee pensions. The rating also reflects the very small size and commercial concentration of the city, which Fitch believes makes it somewhat susceptible to an unpredictable change in profile and is a limiting rating factor.

Economic Resource Base

Montgomery is a very small city located about 40 miles north of Houston in rapidly growing Montgomery County. The city encompasses 4.5 square miles with an estimated population of 849. The city is a regional commercial and tourist destination, and daytime population reportedly swells with shoppers and local school activity.

Revenue Framework: 'aaa' factor assessment

Fitch expects sales tax revenue trends to outpace U. S. economic growth given regional development underway. The city has significant property tax revenue-raising ability.

Expenditure Framework: 'aa' factor assessment

The city has solid workforce flexibility and manageable carrying costs and Fitch expects spending growth to generally trend with revenues.

Long-Term Liability Burden: 'a' factor assessment

Montgomery's long-term liability burden is elevated but still in the moderate range and pensions are well-funded. Principal amortizes fairly rapidly and tax-supported debt plans are limited.

Operating Performance: 'aaa' factor assessment

Fitch expects the city's solid operating reserves to provide financial resilience through the economic cycle. Management has demonstrated a commitment to building and maintaining a healthy fiscal cushion.

RATING SENSITIVITIES

Financial Management: The Stable Outlook reflects Fitch's expectation that the city's strong financial and budget management practices will maintain financial flexibility through foreseeable events.

CREDIT PROFILE

Montgomery's commercial sector serves the relatively affluent region of northwest Montgomery County, including high-end communities along nearby Lake Conroe. Tax base growth in Montgomery has been strong over the past decade, due in part to annexations of undeveloped land. Further growth prospects are positive, as a relatively large shopping center is scheduled to open this year, accompanied by some light retail and single-family residential construction. The high market value per capita of $223,000 reflects the largely commercial tax base within the city, while wealth and income metrics are below average for the state and U. S.

Revenue Framework

Sales taxes are the largest source of general fund revenue at over 60%, reflective of the sizeable commercial population served by the city.

General fund revenues grew at an average annual rate of 6.5% over the 10 years through fiscal 2014. This growth, well in excess of U. S. GDP, is largely attributable to strong sales tax gains over the same period, as Montgomery's commercial sector has expanded to serve population growth in the city and surrounding area. Fitch expects that revenues will continue to trend above national GDP given ongoing regional development.

Montgomery's property tax rate of $0.42 per $100 of TAV is well below the constitutional cap of $1.50, providing ample legal ability to increase revenues. If a proposed tax rate results in an 8% year-over-year increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Expenditures are led by public safety and general government at around 35% of total general fund spending each. The city maintains contracts with Montgomery County and the neighboring city of Conroe for streets and vehicle fleet maintenance, respectively.

Fitch expects spending growth to generally track with revenue trends over the near term. Anticipated revenue growth from an expanding area economy will fund increased service demands.

The city derives spending flexibility from significant management control over its workforce and from pay-as-you-go funding of capital projects. Montgomery's intergovernmental service agreements provide some flexibility in their ability to be adjusted or canceled annually by the city. Carrying costs for debt and retiree benefits are moderate at 18% of fiscal 2015 spending, and the city annually budgets for a transfer of excess economic development sales taxes to reduce debt service if needed.

As recent development has occurred just outside of the city limits, some sales tax collections have been improperly allocated by the state to the city. Montgomery is currently responsible for monthly repayments of $7,600 to the state for prior misallocations, and Fitch expects that some misallocations are likely to continue as business development occurs around the city. Fiscal 2015 repayments totaled $68,000 or less than 3% of governmental fund spending.

Long-Term Liability Burden

Montgomery's long-term liability burden is elevated at 32% of personal income, reflecting the large nonresident population served by the city and includes overlapping county and school district debt. Remaining capital needs are limited, and future debt is expected to be repaid primarily from utility revenues.

Pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined benefit plan. Under GASB 68, the city reports a fiscal 2015 net pension asset of $175,000, with fiduciary assets covering 121.5% of total pension liabilities at the plan's 7% investment return assumption.

Operating Performance

The city's operating reserves, though nominally low, provide a notable degree of financial flexibility to manage through economic downturns. The unrestricted general fund balance ending fiscal 2015 equaled $1.2 million, a robust 52% of spending.

Montgomery has demonstrated prudent budget management during times of economic recovery, adding to reserves while contributing to pensions at or above the annual actuarial requirement. Management currently projects that the general fund will end fiscal 2016 with a modest surplus that marginally outperforms the balanced budget. The city also anticipates adoption of a balanced budget for fiscal 2017, with a projected 10% sales tax increase from the new shopping center to fund planned staff additions.