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2019-115 CO and GO Bond RatingDate: May 31, 2019 Report No. 2019-115 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Bond credit ratings for the upcoming General Obligation (GO) and Certificates of Obligation (CO) bond sales. BACKGROUND: The purpose of this report is to provide the City Council notice of recent bond credit ratings from Fitch Ratings (Fitch) and Standard & Poor’s (S&P) for the upcoming GO and CO bond sales. The City Council is scheduled to consider adoption of bond ordinances to authorize the bond sales on June 4, 2019. DISCUSSION: On April 16, 2019, the Audit/Finance Committee received a presentation on the City’s FY 2018- 19 Adopted CIP, planned bond sales and the Notice of Intention ordinance to issue COs. The Audit/Finance Committee unanimously recommended approval to forward the upcoming bond issuance to the City Council for consideration. On April 23, 2019, the City Council adopted Ordinance No. 19-830 directing the publication of a Notice of Intention to issue COs. The City Council is scheduled to consider adoption of bond ordinances to authorize the bond sales on June 4, 2019. On May 8th and May 10th, staff and the City’s financial advisor, Hilltop Securities Inc., participated in conference calls with analysts from Fitch and S&P to discuss the City’s financials and upcoming GO and CO bond sales. As a result of these conference calls, and a review of financial information, both S&P and Fitch assigned a rating of ‘AA+’ to the City’s upcoming bond sales. This is the second highest rating offered by either rating agency. There is no change to either rating from the prior year and both indicated a stable rating outlook for the City. For your review, staff has attached the rating reports and a ratings chart for all three rating agencies which includes Moody’s. Moody’s has not rated the City for the upcoming bond sales. On May 29, 2019, staff and the City’s financial advisor participated in a surveillance rating conference call with Moody’s on the City’s outstanding general obligation debt. When their report is available, staff will provide an update to City Council on this separate rating. Please do not hesitate to contact me if you have any questions. ATTACHMENTS: 1 - Fitch and S&P Credit Rating Reports 2 - Ratings Chart Date: May 31, 2019 Report No. 2019-115 STAFF CONTACT: David Gaines, Director of Finance (940)-349-8260 David.Gaines@cityofdenton.com Public Finance www.fitchratings.com May 29, 2019 Tax-Supported / U.S.A. Denton, Texas New Issue Report New Issue Summary Sale Date: On or around June 6, 2019 Series: General Obligation Refunding and Improvement Bonds, Series 2019; and, Certificates of Obligation, Series 2019 Purpose: GO and CO proceeds will be used to finance various capital needs, including but not limited to: street, drainage and quality of life improvements. A portion of GO proceeds will be used to refund the city's series 2010 outstanding debt for interest cost savings. Security: The GO bonds are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 of taxable assessed value (TAV). The COs are additionally secured by a pledge of surplus revenues of no more than $1,000 from the city's utility system. Analytical Conclusion The 'AA+' Issuer Default Rating (IDR) and GO rating reflect exceptionally strong operating performance, supported by strong revenue growth prospects, ample revenue-raising capacity and sound expenditure flexibility. The ratings also reflect the expectation for continuation of the moderate but slightly elevated long-term liability burden. Economic Resource Base: With a population of about 136,000, Denton is located at the northern end of the Dallas-Fort Worth metro area. The local economy features institutes of higher education, a regionally prominent medical sector and a strong warehousing and manufacturing base, leveraging the city's multimodal transportation network. Key Rating Drivers Revenue Framework: 'aaa' Fitch Ratings expects Denton's diverse and expanding tax base to continue to grow at a pace in excess of U.S. GDP. Strong revenue-raising capacity is supported by a tax rate well below the statutory cap. Expenditure Framework: 'aa' The city's pace of spending is aligned with revenue growth. Discretion with respect to workforce and other operating costs provides the city with flexibility to address future uncertainties, including economic slowdowns. Carrying costs do not pressure the budget; however, debt issuances for capital needs are expected to keep carrying costs somewhat elevated. Long-Term Liability Burden: 'a' Currently at 23% of estimated personal income, long-term liabilities place a slightly elevated but still moderate burden on the resource base over time considering likely debt issuance plans to address regional growth needs. The city's net pension liability contributes a modest amount to its long-term liability burden. Operating Performance: 'aaa' Fitch anticipates Denton would maintain strong financial flexibility in an economic downturn based on relatively stable revenues and sound expenditure flexibility. The city consistently maintains a solid financial cushion. Ratings Long-Term Issuer Default Rating AA+ New Issues $24,435,000 Certificates of Obligation, Series 2019 AA+ $43,820,000 General Obligation Refunding and Improvement Bonds, Series 2019 AA+ Outstanding Debt Certificates of Obligation AA+ General Obligation Bonds AA+ Rating Outlook Stable Analysts Emmanuelle Lawrence +1 512 215-3740 emmanuelle.lawrence@fitchratings.com Nancy Rocha +1 512 215-3741 nancy.rocha@fitchratings.com Public Finance Denton, Texas 2 May 29, 2019 Rating Sensitivities Liability Burden: Denton’s IDR and related ratings assume that liability levels will remain generally consistent with current levels, placing a slightly elevated but moderate burden on the resource base. Credit Profile Denton's location at the convergence of Interstates 35 East and West and ready access to air and rail transportation have contributed to its strong warehousing and manufacturing base. The city is home to sizable distribution centers such as Target, Aldi, Fastenal and WinCo. Its diverse manufacturers include Safran, Flowers Baking Company, TetraPak, and Peterbilt Motors. Denton is also known for its institutions of higher education (University of North Texas and Texas Woman's University) and regionally prominent medical sector. The city's growing health care facilities serve north Texas and southern Oklahoma. These institutions include Columbia Medical Center Denton, Texas Health Presbyterian Hospital, and The Heart Hospital Baylor Denton. Fiscal 2019 TAV, at $11.3 billion, represents about a 24% increase over fiscal 2017 TAV. The city's management typically budgets for an annual 4% TAV increase; however for the past several years, TAV growth has exceeded budget projections due to strong residential, commercial and industrial growth. Additional development is reported across the city's commercial, industrial and residential property base. The city's ample developable land positions it well for ongoing solid growth over the medium to long term. Revenue Framework Taxes, account for the bulk of the city's operating revenues. Based on fiscal 2018 audited results, property tax receipts accounted for 40% of general fund revenues followed by sales tax receipts (34%). Fitch believes solid revenue growth will be maintained, in line with historical performance. The city has experienced strong and continual tax base growth, mirroring the expanding regional economy. Denton's fiscal 2019 total ad valorem tax rate of $0.62048 per $100 of TAV includes a maintenance and operations rate of $0.40543 and debt service rate of $0.21505. The current tax rate is well below the constitutional and city charter cap of $2.50, thus providing ample revenue raising flexibility. If a proposed tax rate results in an 8% year-over-year operating levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. Expenditure Framework Similar to most cities, public safety is the city's largest general fund category, comprising nearly 60% of fiscal 2018 outlays. The pace of spending is likely to remain at the level of revenue growth based on the expected moderate pace of population growth and the ongoing strength of revenues, including a diverse tax base. The city maintains flexibility with respect to headcount and salary arrangements and through the discretionary nature of its pay-as-you-go capital spending program as well as its annual contributions to funding street improvements. Carrying costs represent 20% of governmental spending and reflect a 10-year debt amortization rate of 55%. The city has a sizable multiyear Rating History (IDR) Rating Action Outlook/ Watch Date AA+ Affirmed Stable 5/23/19 AA+ Assigned Stable 3/19/12 Related Research Fitch Rates Denton, TX's $43.82MM GOs and $24.44MM COs 'AA+'; Outlook Stable (May 2019) Related Criteria U.S. Public Finance Tax-Supported Rating Criteria (April 2018) Public Finance Denton, Texas 3 May 29, 2019 capital improvement program, and plans to issue additional debt over the near term. As such, Fitch anticipates carrying costs to remain around 20%. Moreover, the city's pension accounts for almost half of carrying costs; and, other post-employment benefits costs are minimal. Long-Term Liability Burden Fitch expects Denton's long-term liabilities, currently 23% of personal income, to remain elevated but in the moderate range based on growth in both debt and personal income. Overlapping debt makes up the bulk of the city's long-term liability burden. Denton has a robust multiyear capital improvement plan. Based on this plan, the city expects to finance more than $200 million in capital needs via tax supported debt, through 2023. Officials have expressed plans to approach voters for additional bonding authority over the next six to 12 months. Management has conducted a needs assessment and preliminary bond package figures reflect about $210 million. Moreover, the city has roughly $15 million remaining authorized, but unissued debt from its 2014 bond referendum. The city's pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined-benefit plan, and the Denton Firemen's Relief and Retirement Fund, a single-employer plan. Under GASB Statement 68, the city reports a fiscal 2018 net pension liability (NPL) of $79 million for both plans combined, with fiduciary assets covering 86% of total pension liabilities at the plans' 6.75% investment return assumption. Using a more conservative Fitch-adjusted 6% investment return assumption, the ratio of assets to liability declines to 78% and the NPL rises to $140 million. Operating Performance Fitch expects Denton to maintain the highest gap closing capacity through an economic downturn. For details, see Scenario Analysis, page 4. The city's has a history of strong budgetary management, as demonstrated by its favorable operating performance. Officials have consistently maintained reserve levels in accordance to its formal policy, which includes a 20% spending floor plus a 5% resiliency reserve (25% combined total). The city has demonstrated a practice of funding non-recurring expenditures with favorable revenue performance and taking advantage of economic upturns to maintain its financial cushion. Fitch expects the city to continue managing its resources prudently to maintain a strong financial cushion. Public Finance Denton, Texas 4 May 29, 2019 Ver 26 Denton (TX) Scenario Analysis Analyst Interpretation of Scenario Results: Scenario Parameters:Year 1 Year 2 Year 3 GDP Assumption (% Change)(1.0%)0.5%2.0% Expenditure Assumption (% Change)2.0%2.0%2.0% Revenue Output (% Change)(1.0%)3.4%5.9% Inherent Budget Flexibility Revenues, Expenditures, and Fund Balance 2012 2013 2014 2015 2016 2017 2018 Year 1 Year 2 Year 3 Total Revenues 83,636 85,432 89,777 95,772 102,302 110,167 113,324 112,191 115,980 122,795 % Change in Revenues -2.1%5.1%6.7%6.8%7.7%2.9%(1.0%)3.4%5.9% Total Expenditures 80,834 84,701 88,608 92,523 97,686 100,561 107,078 109,220 111,404 113,632 % Change in Expenditures -4.8%4.6%4.4%5.6%2.9%6.5%2.0%2.0%2.0% Transfers In and Other Sources 167 140 85 118 171 288 112 111 114 121 Transfers Out and Other Uses 1,557 950 1,171 1,840 3,982 6,293 7,811 7,967 8,126 8,289 Net Transfers (1,390)(810)(1,086)(1,722)(3,811)(6,005)(7,699)(7,856)(8,012)(8,168) Bond Proceeds and Other One-Time Uses ---------- Net Operating Surplus(+)/Deficit(-) After Transfers 1,412 (79)83 1,527 805 3,601 (1,453)(4,886)(3,436)995 Net Operating Surplus(+)/Deficit(-) (% of Expend. and Transfers Out)1.7%(0.1%)0.1%1.6%0.8%3.4%(1.3%)(4.2%)(2.9%)0.8% Unrestricted/Unreserved Fund Balance (General Fund)25,836 25,755 25,838 27,365 28,170 31,771 30,317 25,432 21,996 22,992 Other Available Funds (GF + Non-GF)---------- Combined Available Funds Balance (GF + Other Available Funds)25,836 25,755 25,838 27,365 28,170 31,771 30,317 25,432 21,996 22,992 Combined Available Fund Bal. (% of Expend. and Transfers Out)31.4%30.1%28.8%29.0%27.7%29.7%26.4%21.7%18.4%18.9% Reserve Safety Margins Minimal Limited Midrange High Superior Reserve Safety Margin (aaa)16.0%8.0%5.0%3.0%2.0% Reserve Safety Margin (aa)12.0%6.0%4.0%2.5%2.0% Reserve Safety Margin (a)8.0%4.0%2.5%2.0%2.0% Reserve Safety Margin (bbb)3.0%2.0%2.0%2.0%2.0% The city closed fiscal 2018 with a $1.5 million drawdown to its operating reserves, following one-time capital expenditures. The unrestricted general fund balance at fiscal year-end 2018 totaled $30.3 million, or 26% and $31.8 million in unrestricted reserves, which equals 30% of spending. Officials adopted a fiscal 2019 general fund budget that includes another $1.5 million draw on reserves for one-time needs. Based on year-to-date results, provided by management, the current budget is trending on target. Actuals Scenario Output Inherent Budget Flexibility High 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 2012 2013 2014 2015 2016 2017 2018 Year 1 Year 2 Year 3 Reserve Safety Margin in an Unaddressed Stress Available Fund Balance bbb a aa aaa Actual Scenario Financial Resilience Subfactor Assessment: Notes: Scenario analysis represents an unaddressed stress on issuer finances. Fitch's downturn scenario assumes a -1.0% GDP decline in the first year, followed by 0.5% and 2.0% GDP growth in Years 2 and 3, respectively. Expenditures are assumed to grow at a 2.0% rate of inflation. Inherent budget flexibility is the analyst's assessment of the issuer's ability to deal with fiscal stress through tax and spending policy choices, and determines the multiples used to calculate the reserve safety margin. For further details, please see Fitch's US Tax-Supported Rating Criteria. 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Summary: Denton, Texas; General Obligation Primary Credit Analyst: Jim Tchou, New York (1) 212-438-3821; jim.tchou@spglobal.com Secondary Contact: Chase C Ashworth, Centennial + 1 (303) 721 4289; chase.ashworth@spglobal.com Table Of Contents Rationale Outlook Related Research www.spglobal.com/ratingsdirect May 20, 2019 1 Summary: Denton, Texas; General Obligation Credit Profile US$43.82 mil GO rfdg and imp bnds ser 2019 dtd 06/01/2019 due 02/15/2039 Long Term Rating AA+/Stable New US$24.435 mil certs of oblig ser 2019 dtd 06/01/2019 due 02/15/2049 Long Term Rating AA+/Stable New Denton GO Long Term Rating AA+/Stable Affirmed Rationale S&P Global Ratings assigned its 'AA+' rating to Denton, Texas' series 2019 general obligation (GO) refunding and improvement bonds and series 2019 certificates of obligation and affirmed its 'AA+' rating on the city's existing GO debt and certificates of obligation. The outlook is stable. The bonds are payable from a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the city. The certificates are payable from revenue from a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the city and a limited surplus net revenue pledge of its utility system, not to exceed $1,000. However, we rate the certificates based on the city's ad valorem pledge. State statutes limit the maximum ad valorem tax rate for home-rule cities to $2.50 per $100 of taxable assessed valuation (AV) for all city purposes. Administratively, Texas' attorney general will permit the allocation of $1.50 of the $2.50 maximum tax rate for all GO debt, as calculated at the time of issuance and based on 90% tax collections. In fiscal 2019, the city is levying 62.048 cents: 21.505 cents for debt service and the remaining 40.543 cents for operations. We understand management does not plan to raise the tax rate in fiscal 2020 to service the series 2019 GO bonds and series 2019 certificates. Based on the application of our criteria, titled "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness" (published Jan. 22, 2018, on RatingsDirect), we do not differentiate between Denton's limited-tax GO debt and general creditworthiness. We think that the city's ability to meet debt service and continue to operate successfully has a strong link to its creditworthiness and that there are no significant resource fungibility limitations. We understand officials intend to use series 2019 bond proceeds to finance various improvements--including street, stormwater drainage and flood control, and park system--and refinance the city's series 2010 combination tax and revenue refunding bonds for debt service savings. They plan to use series 2019 certificate proceeds to finance wastewater system, electric light and power system, streets, and municipal building improvements; acquire technology equipment; construct a public safety facility; and purchase vehicles and equipment. www.spglobal.com/ratingsdirect May 20, 2019 2 We expect ongoing economic development in Denton will likely continue to support property and sales tax growth, which are the city's two leading revenue sources. We believe the city will continue to benefit from its access to the broad and diverse metropolitan statistical area (MSA), which we view as a positive credit factor. In our opinion, Denton's very strong management, which has resulted in consistently strong budgetary performance, further supports the city's credit quality. We think very strong management will likely be key to Denton successfully navigating challenges of rapid growth. The rating reflects our opinion of the city's: • Very strong economy, with access to a broad and diverse MSA and a local stabilizing institutional influence; • Very strong management, with strong financial policies and practices under our Financial Management Assessment (FMA) methodology; • Strong budgetary performance, with operating results we expect could improve in the near term relative to fiscal 2018, which closed with a slight operating deficit in the general fund but an operating surplus at the total governmental fund level in fiscal 2018; • Very strong budgetary flexibility, with available fund balance in fiscal 2018 at 28% of operating expenditures; • Very strong liquidity, with total government available cash at 146.4% of total governmental fund expenditures and 12.1x governmental debt service, and access to external liquidity we consider strong; • Weak debt and contingent liability position, with debt service carrying charges at 12.1% of expenditures and net direct debt that is 108.4% of total governmental fund revenue; and • Strong institutional framework score. Very strong economy We consider Denton's economy very strong. The city, with an estimated population of 131,388, occupies roughly 90 square miles in Denton County, 35 miles north of Dallas and Fort Worth, at the convergence of east and west Interstate 35. It is in the Dallas-Fort Worth-Arlington MSA, which we consider broad and diverse. The city also benefits, in our view, from a stabilizing institutional influence. It has a projected per capita effective buying income at 90.3% of the national level and per capita market value of $86,134. Overall, market value has grown by 9.5% during the past year to $11.3 billion in fiscal 2019. County unemployment was 3.3% in 2017. The local economy--largely based in retail, manufacturing, distribution, education, and health care--has recently grown in tandem with robust geographic and economic expansion in the Dallas-Fort Worth Metroplex. As home to both the University of North Texas and Texas Women's University, the city also benefits from a stabilizing institutional presence, in our view. Primary leading city employers include: • University of North Texas (5,416 employees), • Denton Independent School District (4,417), • Peterbilt Motors Headquarters & Plant (2,314), • The Denton State Supported Living Center (1,778), and • Denton County government (1,681). www.spglobal.com/ratingsdirect May 20, 2019 3 Summary: Denton, Texas; General Obligation The local property tax base is very diverse with the 10 leading taxpayers accounting for just 5.4% of taxable AV in fiscal 2019. Taxable AV has demonstrated steady year-over-year growth since fiscal 2014, and management conservatively expects this trend to continue at a rate near 4% annually. Both residential and commercial developments have contributed to strong AV growth recently. Officials expect commercial development will likely remain strong during the next few years with an assortment of new manufacturing and distribution, retail, hotel, and restaurant employers coming online. United States Cold Storage closed on a 40-acre site in 2018; it plans to offer storage, repacking, case picking, distribution, and transportation solutions for production facilities in the U.S. and Mexico. The company estimates it will invest $34 million in the project; city estimates have the project adding $28 million of new ad valorem value. Denton is also negotiating with Cole & Hunter Ranch representatives for a coordinated 6,000-acre, master-planned development that would have an estimated 40-year buildout and include an estimated 15,717 single-family units, 5,090 multifamily units, 424 commercial acres, and 101 industrial acres. Very strong management We view the city's management as very strong, with strong financial policies and practices under our FMA methodology, indicating financial practices are strong, well embedded, and likely sustainable. Key policies and practices include management's: • Conservative revenue and expenditure assumptions when compiling the annual budget, which typically allows for favorable budget variance by fiscal year-end; • Budget amendments that, if needed, the city council can make--management informs the council quarterly on how the budget is developing through budget-to-actual reports; • Formal debt and investment management policies, reviewed annually, with quarterly investment reports to the council; • Annually updated, long-range capital improvement plan and multiyear financial forecast; and • Formal policy of maintaining a minimum unassigned general fund balance at 20% of budgeted expenditures and an additional 5% resiliency reserve, for 25% combined, to safeguard against unusual financial circumstances or economic downturns. Strong budgetary performance Denton's budgetary performance is strong, in our opinion. The city had slight deficit operating results in the general fund at 1.5% of expenditures but surplus results across all governmental funds at 5.3% of expenditures in fiscal 2018. Our assessment accounts for the fact that we expect budgetary results could improve from fiscal 2018 results during the next few fiscal years. We have adjusted our ratios for what we view as recurring expenditures out of the general fund and capital outlay across all governmental funds financed with debt. Management attributes fiscal 2018 performance largely to strong sales tax collections and other revenue and reduced expenditures that helped decrease the planned use of reserves for one-time capital needs to just $1.45 million from $5.68 million. We believe budgetary results during the next two fiscal www.spglobal.com/ratingsdirect May 20, 2019 4 Summary: Denton, Texas; General Obligation years could improve somewhat. The city's fiscal 2019 projected results are no worse than break-even operations, and officials expect to adopt a balanced fiscal 2020 budget. In fiscal 2018, property taxes generated 48% of general revenue, followed by sales taxes at 27% and franchise fees at 19%. All have been reliable revenue sources for the city recently. Very strong budgetary flexibility Denton's budgetary flexibility is very strong, in our view, with available fund balance in fiscal 2018 at 28% of operating expenditures, or $30.3 million. The city has historically maintained very strong reserves, exceeding 28% of operating expenditures since fiscal 2011 and providing flexibility over its formal policy of maintaining 20% of budgeted expenditures. With fiscal year-end 2019 expectations of near break-even operations, coupled with an expected balanced budget for fiscal 2020, we expect budgetary flexibility will likely remain very strong during the next few fiscal years. Very strong liquidity In our opinion, Denton's liquidity is very strong, with total government available cash at 146.4% of total governmental fund expenditures and 12.1x governmental debt service in fiscal 2018. In our view, the city has strong access to external liquidity if necessary. Denton's access to the market during the past two decades, including numerous GO and revenue-backed bond issuances, demonstrates its strong access to external liquidity. It has historically maintained what we consider very strong cash; we do not believe cash will likely materially weaken during the next few fiscal years. All city investments comply with Texas statutes and its own formal policy. Investments were in treasuries, agencies, certificates of deposit, commercial paper, municipal bonds, and local government investment pools at fiscal year-end 2018; we consider none of these aggressive. In addition, we have not identified any contingent liabilities that could pose a material liquidity risk. Therefore, we do not expect liquidity will likely deteriorate from its very strong position during the next few fiscal years. Weak debt and contingent liability profile In our view, Denton's debt and contingent liability profile is weak. Total governmental fund debt service is 12.1% of total governmental fund expenditures, and net direct debt is 108.4% of total governmental fund revenue. Following these issuances, overall net debt was 9% of market value. We understand Denton expects to issue roughly $21 million of tax-supported debt in fiscal 2020 for various citywide improvements. While we do not currently view the amount as significant, due to the rapid pace the city is growing, we expect the city and school districts serving the city will have ongoing growth-related capital needs that could inflate overall net debt-to-market value ratios above 10%, which could weaken our assessment of the debt profile. Denton's combined required pension and actual other postemployment benefit (OPEB) contributions totaled 10.1% of total governmental fund expenditures in fiscal 2018. The city made its full annual required pension contribution in fiscal 2018. www.spglobal.com/ratingsdirect May 20, 2019 5 Summary: Denton, Texas; General Obligation Denton participates in the state-administered Texas Municipal Retirement System (TMRS), which is the city's largest plan. Denton's required pension contribution is its actuarially determined contribution, calculated at the state level based on an actuary study. Using updated reporting standards in accordance with Governmental Accounting Standards Board Statement No. 68, the city's net pension liability, measured at Dec. 31, 2017, was $61.6 million. TMRS maintained a funded level of 86.83%, using the plan's fiduciary net position as a percentage of total pension liability. Denton also participates in a single-employer, contributory, defined-benefit retirement plan: the Denton Firefighters' Relief & Retirement Fund. This fund, established to provide pension benefits to full-time firefighters, recorded a net pension liability of $17.4 million at Dec. 31, 2017, with a reported funded ratio of 83.03%. While we do not expect short-term fixed-cost pressure resulting from pension obligations, our amortization methodology contains potential for unexpected escalations. However, we expect any near-term increases should be manageable due to the city's strong finances and budgetary performance. As part of its OPEBs, Denton provides defined-benefit, group-term life insurance through the TMRS-administered supplemental death benefits fund. Denton funds this on a pay-as-you-go basis. It contributed $156,539 to the fund in fiscal 2018. Furthermore, Denton provides retiree health care, which it also funds on a pay-as-you-go basis; the city contributed $763,313 toward the plan in fiscal 2018. Strong institutional framework The institutional framework score for Texas municipalities is strong. Outlook The stable outlook reflects S&P Global Ratings' opinion of Denton's growing economy within the broad and diverse Dallas-Fort Worth-Arlington MSA; very strong budgetary flexibility and liquidity; and strong budgetary performance, supported by very strong management. The outlook also reflects our opinion that Denton's debt profile will likely remain elevated, corresponding with expected growth and planned additional debt issuance. Consequently, we do not expect to change the rating within the two-year outlook period. Upside scenario We could raise the rating if continued economic expansion were to result in improved wealth and income we consider comparable with those of higher-rated peers, coupled with reduced debt, while management maintains strong finances. Downside scenario We could lower the rating in the unlikely event growth-related or fixed-cost pressure were to weaken budgetary performance, leading to sustained and significant reserve drawdowns. Related Research • S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 • Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local Government GO Criteria, Sept. 2, 2015 www.spglobal.com/ratingsdirect May 20, 2019 6 Summary: Denton, Texas; General Obligation • 2018 Update Of Institutional Framework For U.S. Local Governments Ratings Detail (As Of May 20, 2019) Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Long Term Rating AA+/Stable Affirmed Denton GO Unenhanced Rating AA+(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. www.spglobal.com/ratingsdirect May 20, 2019 7 Summary: Denton, Texas; General Obligation www.spglobal.com/ratingsdirect May 20, 2019 8 Summary: Denton, Texas; General Obligation STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC. 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Classification Moody's S&P Fitch Meaning Aaa AAA AAA Prime Grade Aa1 AA+AA+ Aa2 AA AA High Grade Aa3 AA-AA- Investment Grade A1 A+A+ A2 A A Upper Medium Grade A3 A-A- Baa1 BBB+BBB+ Baa2 BBB BBB Lower Medium Grade Baa3 BBB-BBB- Ba1 BB+BB+ Ba2 BB BB Non-Investment Grade Speculative Ba3 BB-BB- B1 B+B+ B2 B B Highly Speculative B3 B-B- Junk Caa1 CCC+CCC+Substantial Risks Caa2 CCC CCC Extremely Speculative Caa3 CCC-CCC-In Default with Little Ca CC CC+Prospect of Recovery C CC CC-In Default D D D BOND RATING CHART Note: City's current ratings for all general obligation debt are: AA+ from S&P and Fitch. Moody's has not rated the City's new bonds since 2011 but maintains a surveillance rating of Aa2 for any outstanding general obligation debt (2011 and prior).