Fitch Ratings assigns an 'F1+' rating to the following Houston, Texas securities:
--Estimated $230 million tax and revenue anticipation notes (TRANs), series 2011.
The notes are expected to sell competitively on June 15, 2011.
In addition, Fitch takes the following action:
--$2.98 billion in outstanding limited tax general obligation bonds (GOs) and certificates of obligation (COs) affirmed at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE (TRANs):
--The pledged revenue base is broad, representing the majority of general fund revenues;
--Coverage of the note repayment is sound;
--Year-end cash balances for fiscal 2012 are projected to increase modestly based on proposed budget cuts;
--The city's projection of revenues and expenses appears reasonable;
--Additional funds are available to meet any interim cash flow shortfalls.
RATING RATIONALE (GOs and COs):
--Although operating reserves are projected to decline further at the close of fiscal 2011, balances remain satisfactory and credit concerns are somewhat mitigated by the proposed fiscal 2012 budget, which is balanced;
--Direct debt levels remain manageable and the pace of repayment is above average;
--Capital needs are sizable, but near-term borrowing plans are minimal;
--The city's $142 billion taxable assessed valuation (TAV) has declined modestly over the last two years but remains solid, and Fitch believes any further declines will be modest and short-lived;
--The regional economy, while weaker, has fared better than many other U.S. cities due largely to historically high energy prices.
KEY RATING DRIVERS:
--Sound financial results and maintenance of fund balance targets are critical to preservation of the current rating level;
--Maintenance of a manageable debt burden given the city's large capital needs combined with budgetary pressures related to large unfunded liabilities of the city's pension and other post employment benefit programs.
SECURITY:
The TRANs are secured by a lien on certain current revenues, consisting of ad valorem taxes, sales and use taxes, franchise charges and fees, and certain other general revenues (remaining after required deductions of amounts for payment of bonded indebtedness of the city). The outstanding GOs and COs are secured by a limited ad valorem tax levied against all taxable property in the city. In addition, most of the COs are also secured by a subordinate lien on mixed beverage tax revenues.
CREDIT SUMMARY:
TRAN proceeds will be used to finance a portion of general operating expenditures for fiscal 2012 in anticipation of the collection of taxes and revenues. Projected pledged revenues total $1.67 billion (after deducting the amount to be applied to long-term debt), a modest 1.5% decline from fiscal 2011 projected levels. These revenues provide more than 7 times (x) coverage of the TRAN principal, and the projected June 30, 2012 cash balance (plus TRAN proceeds) provides 1.47x coverage. The city is authorized to borrow additional amounts for cash flow needs throughout the year, subject to a $350 million limitation in the aggregate for such purposes, although no additional borrowing is planned.
The projected beginning cash balance for fiscal 2012 is estimated to be roughly $101 million, approximately $51 million less than the beginning balance for fiscal 2011. This decline in cash balance is due primarily to weakening property tax and other economically sensitive revenues coupled with ongoing expenditure pressures. The city's financial reserves continued to erode in fiscal 2011 with a total projected fund balance drawdown of $62 million by June 30, 2011, approximately $10 million over the originally budgeted decline. Despite the drawdown, reserves are expected to remain within the city's formal policy to maintain unassigned reserves at a minimum of 5% of spending. Fitch takes comfort from the city's aggressive budgetary cuts proposed to be implemented to balance the fiscal 2012 budget and management's commitment to restore fund balance to its 7.5% fund balance target with any non-budgeted revenue sources that become available throughout the year. But, Fitch also cautions that failure to restore structural balance in the near term and further declines in reserves could result in negative rating action. Fitch notes that in addition to this near term budgetary pressure the city also faces longer term pension and retiree healthcare challenges, as the liabilities for these programs are large.
The fiscal 2012 proposed general fund budget totals $1.8 billion, about 5% lower than fiscal 2011 spending levels. The proposed budget includes substantial personnel cuts of about 1,840 full-time equivalents achieved through departmental and operational consolidations. Elimination of a number of community programs are also proposed in order to retain the level of public safety initiatives at a steady state. The budget calls for no tax rate increase, while assuming a modest 1% decline in property tax receipts resulting from valuation declines. Sales tax receipts are assumed to increase by 5.4% from fiscal 2011 collections, which may be somewhat aggressive in the current economic climate.
Fitch considers Houston's direct debt levels affordable at roughly $1,800 per capita and 2% of TAV. Overall ratios, which include debt issued by area school districts and numerous special districts, are above average at nearly $4,700 per capita and 5.1% of TAV. The pace of retirement of tax-supported debt is about average, with slightly more than 50% retired in 10 years. The city's five-year capital improvement plan (CIP) totals approximately $1.6 billion, with streets, bridges and traffic control the largest component at nearly $800 million. The city anticipates that roughly 55% of the $900 million in tax-supported components of the plan will be funded through the existing voted bond authorization, with the remainder funded with grants, other governmental agencies and various other sources. The city maintains multiple commercial paper programs to provide interim capital financing. The total authorized amount is $851 million.
Houston's economy appears to be faring better than those of many other large U.S. cities, as relatively high energy prices are providing a significant cushion against other recessionary forces. The city's employment base has remained essentially flat at one million over the past 12 months. The unemployment rate has improved slightly - to 8% in March 2011 - compared with 8.2% in March 2010 and remains about on par with the state but better than the U.S. average. In addition to energy, the Port of Houston, healthcare and NASA are important components of local economic activity.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, and LoanPerformance, Inc.
Applicable criteria available on Fitch's website at www.fitchratings.com:
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010);
--'Rating U.S. Municipal Short Term Debt' (Dec. 23, 2010).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
Rating U.S. Municipal Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=592885
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