OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following city of Pasadena's (the city) bonds:

--$51.5 million general obligation (GO) refunding bonds series 2016.

The bonds are scheduled for sale via negotiation the week of December 14 to refund a portion of the city's outstanding debt.

In addition, Fitch affirms the following rating:

--$86.3 million (pre-refunding) in outstanding GO bonds and certificates of obligation (COs) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds and COs are payable from annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from net revenues of the city's combined water, sewer and electric utility system, not to exceed $1,000.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Historically ample liquidity and solid reserves have increased due to improved sales and property tax revenues since the recession and sustained, conservative fiscal practices by management.

WELL-POSITIONED INDUSTRIAL ECONOMY: The city's economy benefits from its proximity to central Houston and the Port of Houston. The tax base has shown steady expansion after a moderate contraction during the recession due to commercial and industrial investment.

BELOW-AVERAGE SOCIOECONOMIC INDICATORS: Pasadena is a mature city with minimal population growth. Income and educational attainment levels are below average.

AFFORDABLE LONG-TERM LIABILITIES: Overall debt to market value is high, driven mainly by local school district debt levels. This is balanced against rapid amortization of the city's direct debt, a moderate fixed carrying cost burden, a well-funded pension plan and no near-term debt plans. Capital needs are projected to be adequately addressed with pay-go spending.

RATING SENSITIVITIES

FINANCIAL PROFILE MAINTAINED: The rating is sensitive to the city's strong financial flexibility and conservative fiscal practices.

CREDIT PROFILE

The city of Pasadena, with a population of about 153,000, is located along the Houston Ship Channel and is part of the larger Houston MSA. The local economy benefits from its proximity to downtown Houston and the Port of Houston. The port consistently ranks first among all U.S. ports in foreign waterborne tonnage and second in the U.S. in total tonnage.

INDUSTRIAL GROWTH WITH SUBPAR SOCIOECONOMICS

A major expansion at the Panama Canal has led to the growth of various distribution and support service businesses in the city. Facility expansion is also occurring among some of the city's large industrial/commercial enterprises given their linkage to the region's energy sector. Other economic expansion opportunities for Pasadena are limited, as the city is fully developed and landlocked. The area economy leans heavily on manufacturing, petrochemical and allied industry employment, but has expanded somewhat with retail and commercial development in the southern part of the city.

The tax base has expanded at an increasing rate since fiscal 2012, averaging 5% annually, after a moderate 12% contraction post-recession. More than 50% of the $7.2 billion fiscal 2016 TAV was made up of industrial and commercial properties with the remainder residential properties. The percentage of industrial and commercial properties would be higher if the city were to annex the industrial district. Management prudently projects no growth going forward, yet Fitch believes continued investment in the area will likely lead to additional gains. Taxpayer concentration among the ten largest payers remains moderate at about 11%, with the top payers in light industrials, oil and gas, and utilities.

Income and educational attainment levels are below average. Unemployment was 5.4% in October 2015, slightly lagging the MSA (4.8%) and state (4.5%). Income levels fall below both the state and nation, with the city's per capita income at 70% of the nation's.

SURPLUSES FUND PAY-GO CAPITAL SPENDING

The city's financial profile is a credit positive. The city benefits from a diversity of revenue sources, including property taxes, utility revenues, and sales taxes as well as fees in lieu of taxes from businesses in an adjacent industrial area that the city has consented not to annex (under agreements in place through 2018). The industrial district fees make up a significant 35% of general fund revenues, and Fitch assumes that either the agreements will remain in place or the city will annex the district.

Historically these agreements have been renegotiated as they expire, and some have been in place for over 50 years.
Management's conservative budgeting practices paired with annual gains in property and sales taxes have led to sizeable net surpluses and a build-up of reserves. Unrestricted general fund reserves at fiscal 2014 year-end represented 68% of spending. Liquidity was also strong at fiscal 2014 year-end with general fund cash and investments totaling $58 million or over six months of operations.

City management plans to continue using excess reserves for pay-go capital in lieu of issuing debt. Management budgeted $16 million in pay-go capital in fiscal 2015, though estimates a lesser draw on reserves ($11 million) due in part to favorable sales tax collections. Despite the projected draw, reserves should remain well above the city's formal 60-day policy.

AFFORDABLE DEBT BURDEN

Overall debt is high at 6.7% of market value, due primarily to overlapping issuers, but remains more moderate at about $4,000 on a per capita basis. Amortization of direct tax-supported principal is rapid with 75% retired in 10 years. City officials have historically approached voters infrequently for GO bond authorizations and otherwise relied on pay-go capital spending to meet the city's seemingly manageable capital needs as a mature city.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. The funded position was 91% as of Dec. 31, 2013, based on the TMRS investment rate assumption of 7%. The city funds OPEB annually on a pay-go basis, which totaled $3 million in fiscal 2014. Carrying costs for the city (debt service net of self-supporting enterprise debt, pension, and OPEB costs) were moderate at about 17.5% of governmental spending in fiscal 2014 despite the rapid pace of principal retirement.