OREANDA-NEWS. Fitch Ratings has affirmed the following Victoria, TX (the city) ratings at 'AA':

--$98.2 million limited tax general obligation (LTGO) bonds;

--$2.9 million Victoria sales tax development corporation sales tax revenue bonds;

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

The Rating Outlook is Stable.

SECURITY

The LTGOs are secured by an ad valorem tax levied against all taxable property in the city, limited to the constitutional tax rate of $2.50 per $100 of taxable assessed value (TAV). The sales tax bonds are secured by the corporation's 0.5% city-wide sales tax.

KEY RATING DRIVERS

The 'AA' Issuer Default and LTGO ratings reflect the city's low liability burden, elevated fixed carrying costs for debt service and retiree benefits, and Fitch's expectation that the city will maintain healthy financial flexibility throughout the economic cycle based on its strong revenue performance and control, adequate ability to cut spending as needed, and established reserve position.

The 'AA' rating on the sales tax revenue bonds is capped by the city's IDR. The bonds benefit from continued expected growth in sales tax revenues and strong debt service coverage that provides ample cushion to absorb a cyclical downturn in revenues.

Economic Resource Base

Victoria, Texas is located 30 miles inland of the Gulf of Mexico and roughly equidistant between the cities of Houston, San Antonio, and Corpus Christi. The city also serves as the county seat for the County of Victoria. Victoria serves as the regional hub for the seven-county area known as the "Golden Crescent." Victoria county's economy is primarily comprised of the education, health, retail and agricultural industries.

Revenue Framework: 'aaa' factor assessment

The city has strong growth prospects for revenues with revenue growth above that of the rate of U. S. GDP. The city also has a high independent legal ability to raise revenues.

Expenditure Framework: 'aa' factor assessment

Fitch expects the city's natural pace of spending growth to be generally in line with to marginally above revenue growth. The city's ability to control expenditures is adequate, although fixed carrying costs for debt and retiree benefits are relatively high.

Long-Term Liability Burden: 'aaa' factor assessment

Victoria's long-term liability burden is low in comparison to its resource base.

Operating Performance: 'aaa' factor assessment

The city has exceptionally strong gap closing capacity during economic downturns and has demonstrated strong budget management at times of economic recovery.

RATING SENSITIVITIES

Solid Growth Prospects and Financial Management: A change in the solid growth prospects of the city and/or shifts in management of the city's fixed cost burdens may lead to a negative rating action.

Ample Coverage: The sales tax rating is sensitive to stable revenue trends and maintenance of an ample cushion of coverage.

CREDIT PROFILE

The city has a population of about 67,500. The population of the city has grown approximately 7.9% over the last five years and growth is expected to continue. The employment base is predominately comprised of the education, medical and chemical sectors. The city experienced moderate property tax base growth throughout the most recent economic downturn and growth strengthened in the recovery. Fitch expects the economy to continue to grow, but at a more moderate rate due to reduced activity in the current low resource price environment. Socioeconomic metrics for the city are below the state and national averages.

A barge canal connects the city and the Port of Victoria to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city is a regional center for trade and a service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service, retail, and health care sectors has complemented the industrial base and added a measure of diversity and stability to the local economy.

Revenue Framework

The revenue base is dominated by sales taxes at about 40% of total general fund revenues and property taxes comprising approximately 32% of fund revenues. Revenue from state sources is minimal at around 4.5% of total general fund revenues. Revenues have steadily increased over the last 10 years with both property and sales tax revenues seeing steady increases over time.

Victoria's historical revenue growth has exceeded U. S. economic performance. Fitch expects future revenue growth prospects to be solid given the area's ongoing population expansion and economic activity. It is anticipated that the economic impact of the low energy price environment will be limited. Sales tax revenues are expected to slow temporarily but long-term prospects remain solid.

Statutory limitations on sales tax rates do not allow for any rate increases. However, the current property tax rate offers a high level of revenue-raising flexibility, as it is well below the legal limit of $2.50 per $100 of TAV. The current tax rate is.57 per $100 of TAV.

Expenditure Framework

Public safety comprises nearly two-thirds of the city's general fund expenditures. Spending in this area has remained relatively consistent over recent years and in line with general expenditure trends.

The pace of operational spending is likely to remain generally in line with revenue growth.

The city has no collective bargaining agreements, and therefore has substantial control over headcount, wages, and benefits. Spending flexibility was evident in prior years when expenditures were cut in response to economic downturns. Carrying costs are elevated at about 25% of fiscal 2015 governmental spending. Debt amortization is rapid.

Long-Term Liability Burden

The city's long-term liability burden for debt and pensions is low at about 9% of personal income, with more than half of total outstanding debt of $238 million comprised of overlapping debt. Victoria plans to issue certificates of obligation in the amount of $7.2 million in the near term, and Fitch expects this to have a very small impact on the city's overall liability burden. The city's pension benefits are provided through the Texas Municipal Retirement System, a statewide agent multiple-employer plan. The system has an asset to liability ratio of just under 80%, and the modest unfunded portion of the pension liability is only a small part of the city's overall liability burden.

Operating Performance

Fitch expects the city to maintain reserves throughout the economic cycle at levels well above what is consistent with an 'aaa' financial resilience assessment, given the city's strong budget control supplemented by reserves. Victoria's unrestricted fund balance equaled approximately $17.6 million, 36% of spending at fiscal 2015 year-end. The city anticipates keeping reserves well above its 25% minimum fund balance requirement.

Historically, the city has managed economic downturns through adjustments to expenditures and limiting capital projects. The city anticipates employing these methods should it be faced with future downturns.

The city has demonstrated exceptional budget management at times of economic recovery. Following the most recent economic downturn the city was able to increase reserves and control spending through limiting capital expenditures and workforce expenditure management.

2016 unaudited results indicate a modest surplus. The fiscal 2017-2018 budget projects available fund balance to increase by approximately $2 million.

Dedicated Sales Tax Bond Analysis

To evaluate the sensitivity of the dedicated revenue streams to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.

The pledged revenues are sensitive to local economic trends. Based upon revenue history back to fiscal 2000, Fitch's Analytical Sensitivity Tool (FAST) generates a moderate 3% decline in pledged revenues in a 1% GDP decline scenario. Based on current coverage levels, pledged revenues could withstand 29.7x this decline and still cover maximum annual debt service (MADS). The largest cumulative year decline was approximately 8.3% from fiscal 2008 to 2009. The decline could recur 11.6x before revenues become insufficient to cover MADS. The additional bonds test allows for issuance as long as MADS is covered by pledged revenues at least 1.4x. Fitch's rating assumes additional leverage will be much limited as the city relies on sales tax revenues in excess of debt service for general government operations and has no reported plans to issue further under the security.