Fitch Rates Red Oak, Texas $6.3MM GOs 'A-'.

AUSTIN, Texas -- Fitch Ratings has assigned an 'A-' rating to the City of Red Oak, Texas' $6.3 million general obligation refunding bonds, series 2007. Additionally, Fitch has affirmed the 'A-' rating on the city's $8.2 million in general obligation bonds and $11.2 million in certificates of obligation outstanding (post refunding). The bonds are scheduled to sell the week of July 9 via negotiation to a syndicate led by Banc of America Securities LLC. The Rating Outlook is Stable.

The bonds are payable from a limited, continuing ad valorem tax levied upon all taxable property within the city limits. Proceeds will be used to refund a portion of the city's outstanding tax-supported debt for annual interest savings.

The 'A-' rating reflects Red Oak's strong tax base growth, adequate financial position, and limited future general purpose debt needs. Also considered in the rating is the small but growing retail and sales tax revenue base. Offsetting considerations include recent management turnover and a slow debt amortization rate. Rapid population growth and the city's favorable location near the intersection of two major interstates has spurred both residential and commercial growth, and despite a recent slowdown in housing construction Fitch believes the prospects for additional growth and economic expansion are solid.

Located in Ellis County, Red Oak is a small but rapidly growing bedroom community situated 20 miles south of downtown Dallas. Through recent annexation, the city's boundaries now stretch to Interstate Highway 45 to the east and Interstate Highway 35 in the west, both of which offer retail corridor opportunities. The city's property tax base is diverse with its top 10 taxpayers making up 8% of total taxable value for fiscal 2007; taxable values have grown about 16% on average in each of the past five years. Only about 25% built out, the city's tax base composition is expected to reflect more diversity through the establishment of additional commercial enterprises as the city continues to grow.

The city's population grew by 38% from 1990 to 2000 to over 4,300 and has subsequently grown by more than 90% to an estimated 10,000 residents presently. The city's local employment base is small and includes numerous light manufacturers, retail, and governmental entities; the majority of residents commute to jobs in the Dallas - Fort Worth metroplex. As such, the tax base composition of the city is about two-thirds residential. Red Oak's per capita money income levels are on par with the county and state averages.

The city's finances continue to be solid with general fund undesignated reserves of more than 20% of expenditures and transfers out for fiscal 2006. For fiscal 2007, city staff anticipate a small drawdown in general fund reserves, but margins should remain healthy. Sales tax revenue growth has been steady, averaging more than 10% annually over the past four fiscal years. Fiscal 2006 receipts jumped more than 20% from the prior year, reflecting the ongoing expansion of the retail sector in Red Oak. The city budgeted a conservative 5% increase in sales tax receipts for fiscal 2007, and full year results are expected to exceed budget projections.

The city has no additional near term borrowing plans, planning instead to finance capital needs with available resources. Staffs report that streets and highway frontage projects and utility expansions are the primary infrastructure projects over the next several years. The debt burden is moderate, and the pace of debt retirement is below average at about 30% in ten years.

Following the most recent municipal election in May, the city council terminated the city manager. Subsequent to this action, the city's mayor resigned. The city presently is searching for a new city manager, and plans to hold a special mayoral election in November. Fitch views with some concern this instability at the senior management level, and will monitor developments over the coming months to see if the situation stabilizes.

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