Fitch Ratings assigns an 'AA-' rating to the following Denison, Texas (the city) bonds:

--$7.1 million combination tax and surplus revenue certificates of obligation (COs), series 2015.

The COs are scheduled for a February 2 competitive sale. Proceeds from the COs will be used to for various waterworks and sewer system capital improvements.

In addition, Fitch affirms the following ratings on outstanding city obligations:

--$5.4 million in limited tax general obligation bonds, series 2005 and series 2013 at 'AA-';

--$14.5 million in COs, (excluding series 2008) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The COs are payable from a limited ad valorem tax pledge of $2.50 per $100 taxable assessed valuation (TAV) levied against all property within the city and are further secured by a surplus revenue pledge from the city's waterworks and sewer system.

KEY RATING DRIVERS

IMPROVING FISCAL CUSHION: With positive net operating results over the past three fiscal years, the city has been able to increase and maintain reserves at its stated policy level of 20%.

SMALL BUT DIVERSE AREA ECONOMY: Major employers and taxpayers span a mix of industries across light manufacturing, healthcare, and some retail. Tourism is also an economic driver given the city's proximity to a large and popular lake. Recently stronger employment growth has resulted in a corresponding decline in the area's previously elevated unemployment rate, which is now in line with that of the state's.

TAV CONCENTRATION; MODEST GROWTH: Healthy tax base growth over the last two fiscal years reversed a brief period of fairly modest TAV decline. Tax base concentration from the city's top 10 taxpayers is moderately high.

BELOW-AVERAGE SOCIO-ECONOMIC PROFILE: Population growth, income/wealth, and educational attainment metrics are below state and national averages.

MIXED DEBT PROFILE: Debt relative to market value is above average largely due to overlapping school district debt. Amortization of direct debt is rapid and carrying costs are affordable due to significant debt support from net utility fund revenues and manageable pension liabilities.

RATING SENSITIVITIES

FISCAL TREND: The city's healthy financial position, in particular its maintenance of sound reserves while addressing operating and capital needs, underpins this rating. The Stable Outlook reflects Fitch's expectation that material shifts are unlikely.

CREDIT PROFILE

Denison is located 75 miles north of Dallas just south of the Texas-Oklahoma border on Lake Texoma. The city's population base is stable, estimated at 23,000 in 2013.

SMALL BUT FAIRLY STABLE, BALANCED ECONOMY

The city is part of the Sherman-Denison MSA and has a small but diverse economic base. Area employers include healthcare, food processing, high technology and light manufacturing, claims processing, and tourism given the city's proximity to Lake Texoma, a large recreational lake. The top 10 employ roughly 25% of the city's labor force.

Employment trends strengthened modestly beginning in 2013 after some recessionary weakness. Employment growth was balanced against a fairly stable labor force that resulted in a declining unemployment rate, reaching a low 4.8% in October 2014, which was comparable to the state (4.8%) and below that of the U.S. (5.5%). Residents' wealth indicators are below average, with 2013 median household income equal to 70% and 68% of state and U.S. averages, respectively. Market value per capita is also below average for the rating category at $58,000.

CONCENTRATED TAX BASE GROWS

Denison realized TAV growth in fiscal 2014 of 4.5% following a brief, two-year period of fairly modest TAV declines. This positive tax base performance continued with a 5.3% TAV gain in fiscal 2015. Contributing to these gains were the expansions at Texoma Medical Center and Ruiz Foods plant, improving home values, as well as a new hotel and regional event center that opened in late 2014. Two, modestly-sized, housing subdivisions are reportedly under development and management anticipates the hotel and regional event center will trigger some additional retail/commercial growth, all of which Fitch believes is likely to contribute to modest TAV growth in the near term. The top 10 taxpayers represent a good mix of industries, although taxpayer concentration is moderately high and up slightly to 20% of fiscal 2015 TAV from roughly 16% in fiscal 2012, led by Texoma Medical Center at 7.1%.

MODEST NET OPERATING SURPLUS AGAIN EXPECTED IN FISCAL 2014

The city achieved positive operating results in fiscal 2012 following a trend of moderate net deficits due to optimistic budgeting and revenue forecasting. The deficits from fiscal years 2009-2011 ranged from 2.5% to 5% of spending and required a cumulative $2.3 million from general fund balance (33% of beginning fiscal 2009 fund balance) to subsidize operations. Fitch notes that unrestricted fund balance to close fiscal 2011 was lower but provided a still sound fiscal cushion equal to 17% of spending.

Charges for services have historically been the city's largest operating revenue source (33.5% in fiscal 2012), followed by property taxes (24.5%) and sales taxes (18%). Year-over-year, revenues grew by about 7% in fiscal 2012 while spending declined by 2.3%. Transfers to the general fund were also increased in fiscal 2012 and enhanced bottom-line results. Several non-major funds reimbursed the general fund to account for expenses for those funds paid out of the general fund. The city produced a $1 million net operating surplus after transfers, which brought unrestricted fund balance to $4.7 million or a sound 22% of spending in fiscal 2012.

A roughly 6% gain or $230,000 in sales taxes above budget in fiscal 2013 assisted in producing a net operating surplus comparable to 2012. Unrestricted reserves improved to $5.9 million or 22.4% of spending at year-end. The year's positive surplus allowed city management to meet its formally adopted reserve floor of unassigned fund balance totaling at least 20% of general fund revenues as established in 2011. In addition, Fitch views as prudent the city's policy of appropriating 5% of sales tax revenues directly to fund balance. General fund cash and investments in fiscal 2013 totaled $4.9 million or about 2.5 months of operational spending. Management anticipates a further boost to reserves in fiscal 2014 with a $1.1 million net operating surplus, bringing unrestricted general fund balance to $6.9 million or 30.8% of spending on an unaudited basis.

BUDGET BALANCE MAINTAINED IN FISCAL 2015

The city adopted the fiscal 2015 budget with a small net operating surplus of about $60,000 that assumes a 4% revenue increase and a reasonable 3.4% spending increase from the adopted 2014 budget. Sales taxes were budgeted flat from 2014 near-actual receipts, but are up about $160,000 or 12% from prior-year receipts through December, providing some upside potential for actual results compared to budget in conjunction with some fuel cost savings. Other revenues and expenditure are reportedly tracking closely with the budget according to management. Fitch expects the city will continue to maintain fiscal stability in line with its established reserve policy.

HIGH OVERALL DEBT RATIOS BUT AFFORDABLE FIXED COST BURDEN

Fitch considers the city's overall debt burden above average at 6.3% of fiscal 2015 market value, mostly due to the debt outstanding of an overlapping school district. Somewhat offsetting the concern over the higher debt-to-market value is the city's above-average pace of principal amortization (71% in 10 years, including this issuance) and affordable debt costs equal to only 5.4% of fiscal 2013 governmental fund expenditures. Net utility fund revenues currently repay about two-thirds of tax-supported debt that has been issued for the city's utility system capital needs; the utility fund retains sufficient capacity for this debt repayment.

Various utility system upgrades, improvements, and rehab needs in the amount of roughly $35 million were identified from a recently completed engineering study as the city's most pressing capital projects. About $7 million in utility fund pay-go was used to start such projects in fiscal 2013; the remaining portion is expected to be debt funded. To that end, utility rate increases were approved by council and implemented in December 2014 (the first since 2007) that included automatic rate increases triggered annually through 2018 in support of the capital plan. The series 2015 COs are the first of the planned debt issuances for utility system capital projects; the remaining $20.5 million is projected to be phased in with roughly even annual CO issuances thru 2020.

The city is also a participant in the Texoma Area Solid Waste Authority (TASWA; contract revenues rated 'A+' with Stable Outlook by Fitch) for the operation and maintenance of a landfill. TASWA's contract revenue bonds are payable from its gross revenues, which primarily consist of payments from the member cities of Denison, Sherman and Gainesville. Denison's obligation to pay its proportionate share of TASWA's annual debt service and operating costs is unconditional and is paid through tipping fees. This cost to the city has trended at or around $700,000 in recent years (3% of spending), which management indicates is not expected to materially change over the near term.

MANAGEABLE PENSION LIABILITIES

The city provides pension benefits through two plans: the Texas Municipal Retirement System (TMRS), a statewide, agent multiple-employer plan, and the Firemen's Relief Pension Fund, a single-employer plan. Contribution rates are determined each calendar year; the city paid 99% of the annual required contribution (ARC), which totaled $1.2 million in fiscal 2013 and made up only 6.4% of governmental fund expenditures. Structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position in recent years; the funded position was a strong 93.5 % at actuarial date Dec. 31, 2012 (using a 7% investment rate of return) as compared to a below-average 66.8% a few years prior at Dec. 31, 2009.

The funded position of the city's Firemen's plan is weaker at an estimated 71% using Fitch's more conservative 7% investment return (77% using the plan's 7.75% return rate). The city has typically paid its full ARC, which totaled $471,000 at actuarial date Jan. 1, 2012. The combined unfunded actuarial accrued liability is equal to less than 1% of full market value. Carrying costs for the city (pension and debt service costs, net of self-supporting utility debt) totaled a fairly low 12.2% of governmental spending in fiscal 2013.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=972275

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