OREANDA-NEWS. Fitch Ratings has upgraded the ratings on the following bonds issued by Marble Falls, Texas to 'AA-' from 'A':

--$3.29 million general obligation (GO) refunding bonds series 2013;

--$13.146 million combination tax and revenue certificates of obligation (COs) series 2007 and 2008;

--Issuer Default Rating (IDR).

SECURITY

The bonds and COs are payable from an annual ad valorem tax levied against all taxable property in the city, limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally payable from net revenues of the city's water and wastewater enterprise fund.

KEY RATING DRIVERS

The upgrade to 'AA-' reflects the city's strong revenue raising capacity and solid expenditure flexibility coupled with conservative budget practices that have yielded ample financial flexibility while addressing growth-related needs. Long-term liabilities are expected to remain a moderate burden on resources given the city's issuance plans.

Economic Resource Base

Marble Falls is located in Burnet County in the middle of the Texas Hill Country on the Colorado River. The city is approximately 45 miles northwest of Austin (GOs rated 'AAA'/Outlook Stable). The economic resource base is predominately composed of the education, government and retail industries.

Revenue Framework: 'aaa' factor assessment

Fitch believes that population growth and business development will continue to support revenue growth at a rate greater than inflation and GDP. Despite having maximized sales tax rates, the city's low property tax rates allow for high revenue raising ability relative to revenue volatility.

Expenditure Framework: 'aa' factor assessment

Fitch expects the city's natural pace of spending growth to be in-line to marginally above its revenue growth. The city has adequate flexibility to reduce expenditures at times of economic downturn as moderate carrying costs are partially mitigated by full control over the workforce.

Long-Term Liability Burden: 'a' factor assessment

The city's long term liability is elevated but still in the moderate range, relative to its resource base. Direct debt amortization is rapid, allowing capacity for future debt, if needed.

Operating Performance: 'aa' factor assessment

Marble Falls' exceptionally strong gap-closing capacity results from its budget flexibility and solid operating reserves. Budget management is generally conservative, though the city is still below its fund balance policy and has some reliance on utility transfers.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's expectation that the city will continue its conservative financial management and budget practices that have resulted in a strong cushion against economic cyclicality.

CREDIT PROFILE

The local economy, population, and tax base are limited but stable. Residents' income levels are below average, but market value per capita is high due to the presence of second homes in the city. Sales tax revenues make up over 60% of general fund revenues and have shown strong annual improvement, indicative of the city's ability to capture economic activity.

Revenue Framework

Revenues are highly concentrated with sales tax making up approximately two-thirds of general fund revenues, followed by property tax (16%). Historically the city has experienced steady sales tax revenue growth driven in part by steady population growth. The city's low property tax rates allow for high revenue raising capacity, while the current sales tax rate is at the state's statutory maximum.

Ongoing population growth and business development support Fitch's expectation that the natural pace of revenue growth will continue at a rate greater than inflation and GDP. Revenue growth has been driven by steady increases to sales and property taxes. Fitch believes upcoming projects, including the construction of a convention center and expansion of local colleges and universities, will lead to continued growth in sales tax revenues and additional TAV growth.

The current property tax rate is $0.6483 per $100 of TAV, much lower than the state's $2.50 per $100 statutory maximum. The high flexibility associated with the property tax rate compensates for risks associated with declines in TAV and sales tax revenues. The city currently has maximized its sales and use tax rate at 8.25%.

Operations are also reliant on enterprise fund transfers, although these have declined in recent years. Such transfers have declined to about 4.4% of total general fund expenditures in fiscal 2015, well below the approximate 8% transfers in fiscal year 2013. Given the need to issue additional utility-supported debt for system improvements, the city is reducing its reliance on such transfers, which underscores the its improved financial performance.

Expenditure Framework

The city has adequate ability to limit main expenditure items. Its largest spending area is public safety, which makes up approximately 60% of total general fund expenditures. The dominance of public safety slightly limits the practical ability to make budget cuts, but strong control over the city's workforce helps to alleviate this concern.

Expenditure growth is expected to remain in-line to marginally above anticipated revenue growth. The adequate ability to lower expenditures comes primarily from its strong control over the workforce.

The city's carrying costs for debt service, pension and other post-employment benefits (OPEB) total an elevated 28% of government expenditures. The vast majority of carrying costs results from debt service as pension, and OPEB costs are very minor. The rapid debt amortization partially offsets this concern, resulting in adequate expenditure flexibility.

Long-Term Liability Burden

The long-term liabilities, consisting of debt and unfunded pension liabilities, are somewhat elevated at approximately 21% of the city's aggregate personal income. Debt plans are minimal and include mostly self-supporting debt for enterprise funds. Amortization is rapid with approximately 71% of debt retired in 10 years. Marble Falls' pension plan is administered through the Texas Municipal Retirement System and is currently overfunded with a ratio of assets to liabilities at approximately 107%.

Operating Performance

General fund performance has followed a positive but modest trajectory when utility transfers are included. These utility transfers have helped the city establish a strong financial cushion, boosting reserve levels during the most recent economic cycle after being depleted in response to flood damage. Current reserve levels, coupled with superior ability to raise revenues and adequate ability to cut expenditures give the city exceptional gap closing ability to withstand the stress of a moderate economic downturn as evaluated using the Fitch Analytical Sensitivity Tool (FAST).

Historically, the city has practiced conservative budgeting and has implemented cost savings initiatives, through mid-year budget adjustments and annual modifications to the costs of fees and services. Recognizing the risk of reliance on potentially unsustainable utility transfers and the improved cash position of the utility funds have enabled the city to reduce its transfers from enterprise funds. Fitch believes the city will continue these financial practices resulting in a high level of fundamental financial flexibility.

The fiscal 2015 unrestricted fund balance of approximately $1.5 million is over 17% of total General Fund expenditures. For fiscal year 2016, the city's expenses are coming in approximately 3% below budgeted amounts and revenues remain on par with budgetary estimates.