OREANDA-NEWS. Fitch Ratings affirms the following Schertz, TX (the city) outstanding bonds at 'AA':

--\$30.4 million limited tax general obligation (LTGO) bonds outstanding, series 2006, 2007, 2008, 2009, and 2011;
--\$5.3 million combination tax and revenue certificates of obligation (COs) outstanding, series 2007.

The Rating Outlook is Stable.

SECURITY
The COs and GOs are payable by a pledge of ad valorem taxes, limited to \$2.50 per \$100 taxable assessed valuation (TAV). The COs are further payable from a limited, de minimus pledge (\$1,000) of the surplus net revenues of the city's waterworks and sewer system revenues.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: Recent year-over-year revenue growth, in conjunction with management's conservative budgeting practices has allowed Schertz to restore its operating fund balance to a sound level.

STRONG ECONOMIC FOUNDATION: The stable presence of government and warehouse/distribution industries supports a well-diversified economy that is part of the larger San Antonio metropolitan statistical area (MSA). Rapid population growth is of some concern, but wealth levels are above average and unemployment is low.

NEW DEVELOPMENT CONTINUES; TAX BASE CONCENTRATION: Ongoing development within the rapidly growing city is projected to result in further tax base gains, providing the city with tax levy flexibility for operations and debt service. Recent expansions at major employers have resulted in moderately high top taxpayer concentration.

HIGH DEBT BURDEN: The overall debt burden is elevated due primarily to the overlapping debt of the local school district. Fitch believes the debt load currently is manageable due to the reasonable prospects for continued expansion of the tax base. The city's capital needs and carrying costs remain moderate.

WEAKER PENSION FUNDED POSITION: The funded level of the city's pension is up slightly given management's practice of consistently funding the required contribution, but it remains somewhat below-average due to plan enhancements provided over the last decade.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's sound financial position and manageable carrying costs. Maintenance of satisfactory reserves while addressing ongoing, growth-related operating and capital pressures will be a major credit determinant over the near-term.

CREDIT PROFILE
The city is located roughly 15 miles east of downtown San Antonio and is part of the sizeable San Antonio metro area. The city's estimated population base of about 35,000 in 2014 represents a doubling of residents since 2000. Above-average wealth and educational attainment levels characterize city residents. Market value per capita is strong at \$86,000 and median household income is roughly 35%-40% higher than U.S. and state averages.

ROBUST ECONOMIC PROFILE
The city's location at the intersection of two major highways has proven advantageous in attracting large warehouse, manufacturing, and distribution oriented businesses, such as Amazon.com, Caterpillar, and Sysco Foods. The local economy benefits from extensive retail activity along its transportation corridors. Nearby Randolph Air Force Base is another positive economic influence.

New residential and commercial construction trends have strengthened since the recession and various development projects are presently underway. The city's active housing market has driven development of new lots and the median home value is up year-over-year to \$174,000. New and expanding service and retail businesses along with some additional commercial growth appear likely to further boost the local economy. City unemployment remained low at 3.9% in October 2014, well below the Texas (4.8%) and U.S. averages (5.5%) for the month, despite a nearly 2% year-over-year growth in labor force.

Taxable assessed valuation (TAV) grew modestly thru the recession and has continued to strengthen in line with the aforementioned economic development. TAV totaled roughly \$3 billion in fiscal 2015 after realizing steady annual gains of 7-8% over the last three fiscal years (fiscals 2013-2015). City officials project another 5% TAV gain in fiscal 2016, which Fitch believes is feasible given ongoing activity. The city's top 10 taxpayers represent a relatively diverse mix of businesses. However, tax base concentration increased given recent industrial/commercial expansions to a moderately high 17.6% of fiscal 2014 TAV as compared to 9% in fiscal 2011, led by Caterpillar at 6%.

STEADILY IMPROVING RESERVES
The city has managed to meet the service demands of a growing population while maintaining a sound financial profile. Operating revenues are relatively diverse with property taxes comprising 33% and economically sensitive sales taxes comprising about 29% of total general fund revenues in fiscal 2014. Sales tax revenues dipped modestly during the recession, but quickly regained their growth momentum in subsequent years.

The city historically maintained healthy general fund reserves, although one-time capital spending over fiscals 2008-2009 significantly reduced reserves to well below the city's informal reserve policy of 25% or three months of spending. Strong year-over-year revenue growth (particularly sales tax performance) in conjunction with management's conservative budgeting practices has allowed for the steady restoration of reserves since the fiscal 2009 low point.

Fiscal 2013 ended with a healthy \$2 million net surplus, boosting the 2013 general fund balance to \$4.7 million or nearly 23% of spending. Liquidity was also strengthened in fiscal 2013, reaching \$5.5 million in general fund cash and investments or slightly more than three months of spending. Management expects to add another approximately \$2 million to unrestricted reserves with fiscal 2014 audited results, due in part to strong sales tax growth of 10%. This net surplus is projected to fully restore reserves to the 25% target level, which is in line with management's previous projections.

Spending in the \$25.7 million fiscal 2015 budget grew by about 9% from the prior year and was adopted with a modest surplus. The year's budget includes a mid-year merit pay increase and modest pay-go capital spending under a fairly conservative assumption of 4% sales tax growth. The city also generated additional property tax revenue from a modest shift of its nominally flat total tax rate (just under \$0.50 per \$100 TAV) towards operations. Management indicates operations are running in line with budget and year-end results are expected to remain comparable, given year to date sales tax collections are about even with actual fiscal 2014 revenues.

Fitch does not foresee substantial changes to the city's solid financial performance and position given its past practices and results. Fitch anticipates the city will utilize both its revenue and expenditure flexibility to manage budgetary growth pressures while maintaining reserves according to policy.

HIGH OVERALL DEBT BURDEN; MANAGEABLE CARRYING COSTS
Overall debt levels are high at approximately \$6,700 per capita and 7.7% of fiscal 2014 market value. The high debt burden is driven mainly by substantial overlapping borrowing by the Schertz-Cibolo-Universal City Independent School District (GO debt rated 'AA-'/Stable Outlook by Fitch). Repayment of tax-supported debt is rapid, with nearly 70% retired in 10 years.

The city's capital needs remain manageable despite its population growth pressures and quality of life projects. The city recently sold about \$1.6 million in tax notes and \$5 million in COs to meet some of its public safety and water/sewer capital needs. Management expects to approach voters in November 2015 for approximately \$20 million in GO borrowing authority as part of its next five-year authorization cycle; the current expectation is the additional debt will not require a tax rate increase. The city also expects to issue \$2 million in COs towards expanding the city's new natatorium.

BELOW-AVERAGE PENSION FUNDED POSITION
The city's pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Other post-employment benefits (OPEB) are also provided by the city through TMRS, but limited to group-term life insurance benefits. Contribution rates are determined each calendar year. The city routinely funds 100% of its annual required contribution, which totaled \$2.2 million in fiscal 2013. However, the pension's funded position is below average at 67.8% as of the Dec. 31, 2012 actuarial valuation (a 7% investment rate of return is assumed), which was up very modestly from 63% the prior year. This relatively low funding level is due in large part to some plan enrichments that occurred for all retirees over the last decade. Nonetheless, city management projects a slow but steady improvement in the funding position to 80% by 2021. Carrying costs for the city (pension, OPEB costs, and debt service, net of self-supporting enterprise debt) totaled a moderately high but manageable 24% of governmental spending in fiscal 2013 driven largely by the city's annual debt service payment.