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2017-033 CO Go Refund Imp Bond Sale Date: May 12, 2017 Report No. 2017-033 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: City's most recent competitive General Obligation and Certificates of Obligation bond sales. BACKGROUND: The purpose of this report is to provide the City Council with details regarding the sale of Series 2017 General Obligation Refunding & Improvement Bonds and Certificates of Obligation authorized on April 18, 2017. DISCUSSION: On May 9, 2017 the City along with its financial advisor, First Southwest Company, conducted a competitive sale of$29,105,000 in General Obligation (GO) Refunding and Improvement Bonds and $90,800,000 in Certificates of Obligation (CO). The delivery date of the funds to the City will be on June 13, 2017. The participating underwriting firms for the GO bond sale were: Citigroup Global Markets Inc.; Morgan Stanley & Co. LLC; Bank of America Merrill Lynch; Robert W. Baird & Co., Inc.; Wells Fargo Bank, N.A.; J.P. Morgan Securities LLC and Hutchinson, Shockey, Erley & Co. The participating underwriting firms for the CO sale were the same bidders as above with the exclusion of the firm Hutchinson, Shockey, Erley & Co. The GO bonds and the COs were awarded to Citigroup Global Markets, Inc. as the lowest true interest cost bidder for each competitive sale. The GO bonds included the issuance of $4.0 million to fund the fifth and final year of street improvement and public art projects approved by voters in the November 2012 bond election, $13.16 million to fund the third year of projects approved by voters in the November 2014 bond election, and also refunded outstanding GO Refunding Bonds, Series 2007 for savings. As approved by the City Council on April 18, 2017 the bond sale met all of the following required parameters listed below: 1) The maximum principal amount of bonds shall not exceed $30,700,000; 2) Final stated maturity of February 15, 2037; 3) Maximum net effective interest rate of 3.50% 4) Refunding must produce savings of at least 3.00%; 5) The sale must occur prior to October 18, 2017. The present value savings for the GO refunding was $828,732.85 or 6.38% of the refunded bond amount, which was well in excess of the established criteria. The annual savings averages approximately $144,000 over six years. The all-in true interest cost for the GO bonds, which includes the cost of issuance, is 2.807%. Concurrently the City also completed the competitive CO sale for general government, solid waste, and electric projects. As approved by the City Council on April 18, 2017, the CO sale met all of the following required parameters listed below: Date: May 12, 2017 Report No. 2017-033 1) The maximum principal amount of the certificates of obligation shall not exceed $102,000,000; 2) The final stated maturity shall not exceed February 15, 2047; 3) The maximum net effective interest rate shall not exceed 4.00%; 4) The sale must occur prior to October 18, 2017. The all-in true interest cost for the COs is 3.372%, which factors in the cost of issuance. City staff was pleased with the results of both sales. In mid April, City staff and the City's financial advisor, First Southwest Company, participated in conference calls with analysts from Fitch Ratings (Fitch) and Standard & Poor's (S&P) to discuss the City's financial condition and intent to sell COs and GO bonds. 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 debt issuance. There is no change to either rating from the prior year and both indicated a stable rating outlook for the City. For your review I have attached the rating reports from Fitch and S&P. Please do not hesitate to contact me if you have any further questions on the results of the City's most recent debt issuance. ATTACHMENT: 1. Fitch Credit Rating Report 2. Standard and Poor's Credit Rating Report STAFF CONTACT: Chuck Springer, Director of Finance (940)-349-8260 Charles.SpringerLcityofdenton.com /�� /�// �� VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV �� /�///jam/�� / �� iill 'li VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV ti gs Denton, Texas New Issue Report Ratings New Issue Summary Long-Term Issuer Default Rating AA+ Sale Date: May 9, 2017. New Issues Series:General Obligation Refunding and Improvement Bonds, Series 2017, and Certificates $94,485,000 Certificates of of Obligation, Series 2017. Obligation,Series 2017 AA+ $29,220,000 General Obligation Purpose:GO proceeds will be used to refund outstanding obligations for debt service savings Refunding and Improvement Bonds,Series 2017 AA+ and to fund street improvements and public safety facility improvements. Proceeds from the Outstanding Debt certificates of obligation will be used for vehicle and equipment acquisitions, facility Certificates of Obligation AA+ improvements, parking improvements,streets, and electric and solid waste disposal system General Obligation Bonds AA+ improvements. Rating Outlook Security:Annual property tax levy, limited to$2.50 per$100 of taxable assessed valuation. Stable Analytical Conclusion: The 'AA+' IDR and GO bond rating reflect exceptionally strong operating performance, supported by strong revenue growth prospects, ample revenue-raising capacity and sound expenditure flexibility. The rating is also based on the expectation for a moderate but slightly elevated long-term liability burden. Key Ratingrivers Economic Resource Base: Denton (the city) is located at the northern end of the Dallas-Fort Worth metroplex and had a 2016 population of about 130,000. The local economy features institutes of higher education, a regionally prominent medical sector, and a strong warehousing and manufacturing base, leveraging Denton's multimodal transportation network. Revenue Framework: 'aaa' factor assessment. Fitch Ratings expects Denton's diverse and expanding tax base to continue to grow at a pace in excess of U.S. GDP over the medium term. Strong revenue-raising capacity is supported by a tax rate well below the statutory cap. Expenditure Framework: 'aa'factor assessment.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. Moderate carrying costs do not pressure the budget. Long-Term Liability Burden: 'a' factor assessment. Currently at 19%of estimated personal income, Fitch expects the city's long-term liabilities to 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 burden contributes a modest amount to its long-term liability burden. Operating Performance: 'aaa' factor assessment. 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. Analysts Rebecca Meyer +1 512 215-3733 Rating Sensitivities rebecca.meyer@fitchratings.com Tim Morilla Liability Burden: The rating assumes that liability levels will remain generally consistent with +1 212 908-0547 current levels, placing a slightly elevated but moderate burden on the resource base. fim.modlla@fdchratings.com www.fitchratliigs.com April 25, 2017 ` ,: / f luulup� �`IIu Q uuuuuuu 1„�/_- ;'," , ,rri IIIIIII. � �j�}u l lii:��il � IIIIIIIIIIIIIIIII IIIII�� ti on(TX) Scenario Analysis 2.02017/03/24 Reserve Safety Margin in an Unaddressed Stress 35.0% Actual if Scenario Fitch expects Denton to maintain solid financial performance through an li economic downturn.As demonstrated in Fitch's analytical sensitivity tool 30.0% ---u (FAST)1%decline in GDP scenario,the city has a strong financial cushion 25.0% a to address a moderate economic downturn.Fitch expects the city would li maintain a satisfactory cushion given its ample ability to raise revenues 20.0% p and sound expenditure flexibility. 15.0% u li The city completed fiscal 2016 with$28.2 million in unrestricted reserves, 10.0% 28%of spending.Denton projects similarly strong fiscal 2017 results I 5.0% ----II based on brisk sales tax revenues.The city's five-year forecast reflects li moderate revenue growth,with maintenance of reserves at a level o.o% µ 2014 2015 2016 Year1 Year2 Year3 consistent with the city's 20%of spending policy floor plus 5%resiliency reserve(25%combined total). Financial Resilience Subfactor Assessment: Available Fund Balance bbb ^^^^^^^^^^^a ^^^^^^^aa -aaa GDP Assumption(%Change) (1.0•�) 0.5% 2.0% Expenditure Assumption(%Change) 2.0% 2.0% 2.0% Revenue Output(%Change) (1.0•�) 3.3% 5.8% Inherent Budget Flexibility superior -'' Total Revenues 80,399 85,343 83,636 85,432 89,777 95,772 102,302 101,279 104,617 110,639 %Change in Revenues - 6.1% (2.0%) 2.1% 5.1% 6.7% 6.8% (1.0•�) 3.3% 5.8% Total Expenditures 82,424 82,039 80,834 84,701 88,608 92,523 97,686 99,640 101,633 103,666 %Change in Expenditures - (0.5%) (1.5%) 4.8% 4.6% 4.4% 5.6% 2.0% 2.0% 2.0% Transfers In and Other Sources 1, Transfers Out and Other Uses 421 516 1,557 950 1,171 1,840 3,982 4,062 4,143 4,226 Net Transfers 757 (405) (1,390) (810) (1,086) (1,722) (3,811) (3,892) (3,968) (4,041) Bond Proceeds and Other One-Time Uses - - - - - - - - - - Net Operating Surplus(+)/Deficit(-)After Transfers (1,268) 2,899 1,412 (79) 83 1,527 805 (2,253) (984) 2,933 Net Operating Surplus(+)/Deficit(-)(%of Expend.and Transfers Out) (1.5%) 3.5% 1.7% (0.1%) 0.1% 1.6% 0.8% (2.2%) (0.90%) 2.7% Unrestricted/Unreserved Fund Balance(General Fund) 21,527 24,424 25,836 25,755 25,838 27,365 28,170 25,916 24,933 27,865 Other Available Funds(Analyst Input) - - - - - - - - - - Combined Available Funds Balance(GF+Analyst Input) 21,527 24,424 25,836 25,755 25,838 27,365 28,170 25,916 24,933 27,865 Combined Available Fund Bal.(%of Expend.and Transfers Out) 26.0% 29.60/6 31.4% 30.1% 28.80/6 29.0% 27.7% 25.0•� 23.60% 25.80% Reserve Safety Margin(coo) 16.0% 8.0% 5.0% 3.0% 2.0% Reserve Safety Margin(cc) 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% Notes:Scenario analysis represents an unaddressed stress on issuerfinances.Fitch'sdownturn scenario assumes a-1.0%GDP decline in the first year,followed by0.5%and 2.0%GDP growth in Years 2 and 3,respectively.Expenditures are assumed to growat a 2.0%rate of inflation.Inherent budget flexi bi lity is the analyst's assessment of the issuer's abi I ityto deal with fiscal stress through tax and spending policy choices,and determines the multiples used to calculate the reserve safety margin.Forfurtherdetai Is,please see Fitch'sUSTax- Supported Rating Criteria. Denton,Texas 2 April 25,2017 /��" �/�// �� VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV �� /�///jam/�� / �� iill IVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV ti gs Rating History—IDR, GOs and COs Credit Profile Outlook/ Rating Action watch Date Denton's location at the convergence of interstate highway (IH) 35 East and IH 35 West and AA+ Affirmed Stable 4/20/17 ready access to air and rail transportation have contributed to the city's strong warehousing AA+ Assigned Stable 3/19/12 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 heathcare facilities serve northern Texas and southern Oklahoma. These institutions include Columbia Medical Center Denton, Texas Health Presbyterian Hospital and The Heart Hospital Baylor Denton. Denton's 8.2% annual fiscal 2017 taxable assessed valuation (TAV) compound annual rate of growth (CAGR) outstripped the city's four-year CAGR of 7.2% realized between fiscal years 2012 and 2016. The city's first hotel and convention center is scheduled to open in November 2017 and to accompany further development within the city's Rayzor Ranch mixed-use Public Improvement District. 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 term. Revenue Framework Denton's property taxes contributed 39% to fiscal 2016 operating revenues, followed by sales taxes (32%). The city's revenues remained stable throughout the recession, benefitting from an expanding regional economy. The 3.9% CAGR of Denton's general fund revenues over the 10 years ending in fiscal 2016 reflects growth in excess of U.S. GDP, mirroring the expanding regional economy. Fitch expects ongoing revenue strength based on the growth in the city's diverse local economy. The city 's fiscal 2017 tax rate of $0.68 per $100 of TAV provides ample capacity below the statutory cap of $2.50. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by vote rs. Expenditure Framework Public safety accounts for 57%of fiscal 2016 general fund spending. 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, incorporating a diverse tax base and robust sales tax along the city's transportation corridors. Related Research Fitch Rates Denton, Tx's $124MM GOs The city maintains flexibility with respect to headcount and salary arrangements and through and COs'AA+';Outlook Stable(April 2017) 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 a moderate 19% of Related Criteria governmental spending and reflect a 10-year debt amortization rate of 67%. U.S. Tax-Supported Rating Criteria (April 2016) Long-Term Liability Burden Fitch anticipates Denton's long-term liabilities, currently 19% of personal income, to rise to somewhat elevated but still moderate levels (slightly over 20%)over the medium-term horizon based on the impact of regional growth on direct and overlapping issuances. Overlapping debt makes up the bulk of the burden. Denton,Texas 3 April 25,2017 ` ,: / f luulup� �`iiu Q uuuuuuu ti gs Denton's fiscal 2017 five-year capital improvement plan includes about$130 million of general government needs between fiscal years 2017 and 2021, somewhat above the scheduled debt to be retired over the same period. The city has$53.785 million of remaining GO authorization. Denton's near-term enterprise priorities include the 220 MW quick-start Denton Energy Center to support the city's transition to reliance on a greater amount of renewable energy. 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 2016 net pension liability of$106.6 million for both plans combined, with fiduciary assets covering 78.60%of total pension liabilities at the plans'6.75% investment return assumption. Operating Performance Fitch expects Denton to maintain solid financial performance throughout an economic downturn. For details, see Scenario Analysis, page 2. Denton recently updated its reserve policy to include a 5% resiliency (25% combined total) reserve component to safeguard against unexpected financial circumstances or economic downturns. The city's financial flexibility is demonstrated by its practice of funding nonrecurring expenditures with favorable revenue performance and taking advantage of economic upturns to build the city's financial cushion. Denton,Texas 4 April 25,2017 /��" �/�// �� VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV �� /�///jam/�� / �� iill IVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV ti gs The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 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For Australia,New Zealand,Taiwan and South Korea only:Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123)which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. Denton,Texas 5 April 25,2017 S&P Global Ratings Ratings0irect" ............................................................................................................. Summary: Denton, Texas; General Obligation Primary Credit Analyst: Ann M Richardson,Dallas(214)765-5878;ann.richardson@spglobal.com Secondary Contact: Sarah L Smaardyk,Dallas(1)214-871-1428;sarah.smaardyk@spglobal.com Table Of Contents ............................................................................................................. Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 25,2017 1 1837631 1302491964 Denton, Texas; General Obligation US$94.485 mil certs of oblig ser 2017 dtd 05/01/2017 due 02/15/2047 Long Term Rating AA+/Stable New US$29.22 mil GO rfdg and imp bnds dtd 05/01/2017 due 02/15/2037 Long Term Rating AA+/Stable New Denton certs of oblig ser 2016 dtd 06/01/2016 due 02/15/2046 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 rfdg bnds ser 2016 dtd 08/15/2016 due 02/15/2030 Long Term Rating AA+/Stable Affirmed Denton GO Unenhanced Rating AA+(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale S&P Global Ratings assigned its'AA+'long-term rating to the City of Denton,Texas'series 2017 general obligation (GO)refunding and improvement bonds and series 2017 certificates of obligation.At the same time, S&P Global Ratings affirmed its'AA+'rating on the city's GO debt outstanding.The outlook on all ratings is stable. The series 2017 GO refunding and improvement bonds are payable from an ad valorem tax,levied within the limits prescribed by law,on all taxable property in the city.The maximum allowable rate in Texas is$2.50 per$100 of assessed value(AV)for all purposes,with the portion dedicated to debt service limited to$1.50.The city's current levy is well below the maximum, at 68.33 cents, 21.66 cents of which is dedicated to debt service.We do not differentiate between the limited tax pledge and the city's general obligation given the significant financial flexibility.We understand that proceeds from the sale of the bonds will be used to refund a portion of the city's debt outstanding for debt service savings and to fund various capital improvements. The certificates constitute direct obligations of the city,payable from a combination of the levy and collection of a continuing annual ad valorem tax,within the limits prescribed by law,on all taxable property within the city,and a limited pledge(not to exceed$1,000)of surplus net revenues of Denton's utility system. Despite the dual pledge,we rate the series 2017 certificates based on the strength of the city's GO profile.We understand that proceeds from the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 25,2017 2 1837631 1302491964 Summary:Denton, Texas; General Obligation sale of the certificates will also be used to fund various capital projects throughout the city and for enterprise system improvements. The'AA+'rating reflects our opinion of the city's: • Strong economy,with access to a broad and diverse metropolitan statistical area(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 a slight operating surplus in the general fund and an operating surplus at the total governmental fund level in fiscal 2016; • Very strong budgetary flexibility,with an available fund balance in fiscal 2016 of 29%of operating expenditures; • Very strong liquidity,with total government available cash at 1.7x total governmental fund expenditures and 12.6x governmental debt service,and access to external liquidity we consider strong; • Weak debt and contingent liability position,with debt service carrying charges at 13.8%of expenditures and net direct debt that is 140.7%of total governmental fund revenue;and • Strong institutional framework score. Strong economy We consider Denton's economy strong.The city,with an estimated population of 124,988,is located in Denton County in the Dallas-Fort Worth-Arlington MSA,which we consider to be broad and diverse.The city also benefits,in our view,from a stabilizing institutional influence.The city has a projected per capita effective buying income of 87.0%of the national level and per capita market value of$72,947. Overall,the city's market value grew by 8.2%over the past year to$9.1 billion in 2017. The county unemployment rate was 3.6%in 2015. The city is about 35 miles north of downtown Dallas and Fort Worth,and is influenced by the presence of two universities,the University of North Texas and Texas Woman's University,both of which we view as stabilizing influences.The city's ongoing commercial and residential development has led to a growing taxable base. For 2018, we anticipate market growth to be in line with recent years due to continued growth in the commercial,office,retail, and residential sectors, and management's conservative forecast model currently projects 4%annual growth over the next five years given the overall economic health and growing needs of the region.We believe the city will continue to experience significant residential growth over the next two years,given proximity to the Dallas-Fort Worth Metroplex. 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: • 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, can be made by the council,which is informed quarterly about how the budget is developing via budget-to-actual reports; • Formal debt management and investment policies are reviewed annually,with quarterly investment reporting to the city council; WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 25,2017 3 1837631 1302491964 Summary: Denton, Texas; General Obligation • An annually updated long-range capital improvement plan and multiyear financial forecast;and • A formal policy to maintain a minimum unassigned fund balance in the general fund equal to 20%of budgeted expenditures,and an additional 5%resiliency reserve(25%combined total)may be maintained 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 surplus operating results in the general fund of 0.6%of expenditures,and surplus results across all governmental funds of 6.6%in fiscal 2016. General fund operating results of the city have been stable over the last three years,with a result at least break-even results the past two years. We adjust for recurring transfers out of the general fund to other governmental funds, and for nonrecurring projects funded with bond proceeds.The city also transferred more than$3.8 million to its capital projects fund from its general fund in fiscal 2016,which was not adjusted in our calculations.The transfer will fund future nonrecurring capital needs, and was larger than previous years,which we believe is an indication of positive financial performance. If we had netted out the transfer to the capital projects fund,the city's general fund net operating result in fiscal 2016 would have been 4.6%,or about a$4.5 million surplus.After property tax revenues,the second-largest source of revenue in the general fund is sales tax,which accounted for approximately 32%of overall general fund revenue in fiscal 2016. Sales tax receipts were up 6.6%in fiscal 2016 from prior-year collections,which we believe contributed to the surplus in fiscal 2016,along with management's conservative budgeting techniques. The fiscal 2017 adopted budget is balanced and was crafted with the assumption that sales tax revenue would increase 0.7%above the previous year. Current collections suggest that sales tax revenue will exceed budgeted 2017 estimates as they are tracking 13.8%above budget,but a portion of the collections are tied to economic agreements that contain rebate offers. First-quarter year-to-date actuals indicate a positive net performance result in the general fund of about $400,000.Across all governmental funds,we do not anticipate any structural changes in fiscal 2017, and therefore expect Denton will continue to demonstrate strong budgetary performance throughout the year. City officials are currently in the initial phase of budget development for fiscal 2018;however,we believe the final budget will once again be balanced.As a result, and given management's demonstrated ability to manage balanced operations,we do not anticipate any deterioration to Denton's budgetary performance in the future year. Very strong budgetary flexibility Denton's budgetary flexibility is very strong,in our view,with an available fund balance in fiscal 2016 of 29%of operating expenditures,or$28.2 million. Over the past three years,the total available fund balance has remained at a consistent level overall,totaling 30%of expenditures in 2015 and 29%in 2014. Denton's year-end available general fund balance has remained relatively stable on a nominal basis,ranging from $25.8 million-$28.2 million over the past three audited fiscal years.As a percent of expenditures,the fund balance has consistently been about 30%. In 2017,based on current budgeted figures and year-to-date results,we believe the city's reserve levels will remain what we consider to be very strong at more 25%of budgeted expenditures.We understand the city has no plans to significantly reduce its reserve levels over the next two years, and therefore believe that Denton's budgetary flexibility will remain very strong and in compliance with the city's formal fund balance policy. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 25,2017 4 1837631 1302491964 Summary: Denton, Texas; General Obligation Very strong liquidity In our opinion,Denton's liquidity is very strong,with total government available cash at 1.7x total governmental fund expenditures and 12.6x governmental debt service in 2016. In our view,the city has strong access to external liquidity if necessary. The city's strong access to external liquidity is demonstrated through its access to the market in the past two decades. Denton has issued GO-and revenue-backed bonds frequently in recent years. It has historically had what we consider very strong cash balances and,given management's demonstrated ability to maintain balanced operations,we do not believe its cash position will worsen. Currently, all of the city's investments comply with Texas statutes and the city's internal investment policy.At year-end fiscal 2016,the city's investments included U.S.treasury securities, commercial paper,municipal bonds,and certificates of deposit,none of which we consider aggressive. Weak debt and contingent liability profile In our view, Denton's debt and contingent liability profile is weak.Total governmental fund debt service is 13.8%of total governmental fund expenditures,and net direct debt is 140.7%of total governmental fund revenue. Debt supported through the city's enterprise fund has been adjusted in our direct debt-to-revenue calculations.Using the city's total direct debt we estimate that about 58%of debt will be retired over the next 10 years,which is above average. The city's overall net debt,however,is 9.6%of market value. Should this figure increase above 10%, our view of the debt could be further weakened;however,should this occur, our view of the rating would likely be unchanged, all else being equal. Excluding self-supported debt,the city's net tax debt to 2017 assessed value is less than 2%. Management plans to issue about$54.8 million of additional tax-supported debt over the next two years,and about $296 million in self-supported debt. Despite the additional debt plans,we do not believe the city's key debt ratios will materially change our view of the debt profile. Denton's combined required pension and actual other postemployment benefits(OPEB) contributions totaled 13.3%of total governmental fund expenditures in 2016. Of that amount, 12.7%represented required contributions to pension obligations, and 0.6%represented OPEB payments.The city made its full annual required pension contribution in 2016. The city participates in the Texas Municipal Retirement System(TMRS),which is administered by the State of Texas, and is the city's largest plan. Denton's required pension contribution is its actuarially determined contribution,which is calculated at the state level,based on an actuary study. Using updated reporting standards in accordance with Governmental Accounting Standards Board(GASB) Statement No.68,the city's net pension liability was measured as of Dec. 31, 2015,and was$88.7 million. The TMRS plan maintained a funded level of 79.3%,using the plan's fiduciary net position as a percent of the total pension liability. For additional details on GASB 67 and 68,see our report, "Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard&Poor's U.S. Local Government GO Criteria,"published Sept. 2, 2015,on RatingsDirect.The city also provides health care benefits to retirees,which it funds on a pay-as-you-go basis. In addition, Denton provides pension benefits to firefighters through the Denton Firemen's Relief and Retirement Fund and OPEB in the form of retiree health care,which it funds on a pay-as-you-go basis. Although the city's combined pension and OPEB costs equated to a high 13.3%of fiscal 2016 adjusted total WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 25,2017 5 1837631 1302491964 Sunnnary. Denton, Texas; General Obligation governmental fund expenditures,we view these charges as somewhat skewed because funds generated from the city's ownership and operations of an electric utility system are used to offset the retiree costs of the system's employees. Most of Denton's peer cities,by contrast,do not benefit from such an arrangement.When adjusting for retiree costs attributed to utility funds, combined pension and OPEB costs for governmental funds equate to a more manageable 7.9%of adjusted fiscal 2016 expenditures. Strong institutional framework The institutional framework score Texas municipalities is strong. Outlook The outlook reflects our view of the city's very strong reserves and management's ability to historically operate within a balanced budget. In addition,the outlook reflects our opinion that Denton will continue to benefit from its participation in the broad and diverse Dallas-Fort Worth MSA, allowing for continued economic growth and subsequent tax revenue gains.As a result,we do not expect to change the rating over the next two years. Upside scenario A higher rating would likely follow an expansion of the economic base,which enables the city's wealth and income levels to compare favorably with those of similarly rated higher peers,and if the city sustains debt levels we consider to be at least adequate. Downside scenario We would likely lower the rating if reserves deteriorated and fell to levels we viewed as adequate,triggered by a weakening in the city's budgetary performance. 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 * 2016 Update Of Institutional Framework For U.S. Local Governments 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.globalcreditportal.com.All ratings affected by this rating action can be found on the S&P Global Ratings'public website at www.standardandpoors.com.Use the Ratings search box located in the left column. 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