As part of its continuous surveillance effort, Fitch Ratings takes the following rating actions on the city of Pasadena, TX:
--$105.5 million unlimited tax general obligation (GO) bonds affirmed at 'AA';
--$6.5 million certificates of obligation (COs) affirmed at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Sound financial operations are evidenced by adherence to conservative reserve policy and timely adjustments to revenue shortfalls.
--Above-average overall debt levels are driven mainly by overlapping entities and offset by rapid amortization of the city's direct debt and lack of future borrowing plans.
--Income and employment indicators are slightly below average.
--Some concentration in non-durable manufacturing is evident.
KEY RATING DRIVERS:
-- Stable financial operations despite recent and potential tax base contraction.
-- Direct and overall debt levels remain within current ranges.
SECURITY:
GOs are unlimited tax, full faith and credit obligations. COs are payable from a continuing, direct annual ad valorem tax levy within limits prescribed by law, and a subordinate pledge not to exceed $1,000 of the net revenues of the city's water and sewer system.
CREDIT SUMMARY:
Located in south-eastern Texas along the Houston Ship Channel, the city of Pasadena is a suburb of Houston with a population of about 149,000. Pasadena benefits from its proximity to both the Port of Houston and the metropolitan area economy. The port consistently ranks first among all U.S. ports in import tonnage and second in total tonnage. The Bayport container and cruise terminal, a $1.4 billion project under construction, will allow the port to meet expected demand growth, largely attributable to a major expansion at the Panama Canal that is anticipated to be completed by 2014. Other economic expansion opportunities for Pasadena are limited, as the city itself is fully developed. The area economy is still concentrated in petroleum, chemical, and allied industry employment, but has expanded somewhat into retail and commercial development in the southern part of the city. The unemployment rate remains above average at 9.6% in March, 2011, down from 10.3% in March 2010. Income levels are generally somewhat below average.
Financial results remain solid despite some revenue pressure brought on by declining taxable assessed value (TAV) and volatile retail sales activity. The city benefits from a diversity of revenue sources, including property, utility, and sales taxes as well as fees in lieu of taxes from businesses in an adjacent industrial area that the city consented (under an agreement in place through 2018) not to annex but to which the city provides services. The tax base showed steady growth until fiscal 2009, but declined by 3.6% and 2.9% in fiscal 2010 and 2011, respectively. Sales tax revenue grew through fiscal 2009 but declined by 11% in fiscal 2010. The clean-up and rebuilding following Hurricane Ike in September 2008 likely led to some inflation of sales tax revenue in fiscal 2009 and consequent decline in fiscal 2010. Officials report some sales tax growth year-to-date in fiscal 2011, although the budget includes a further decline. Property tax base recovery is not expected until 2104.
Fiscal 2010 ended with break-even results, but fiscal 2011 is now projected to end with a $3.5 million general fund deficit (based on a budget of $82.5 million). The unreserved general fund balance should remain quite strong, as fiscal 2010 ended with a balance of $24.7 million or 27.4% of spending, well in excess of the city's policy of maintaining an unreserved, undesignated balance of at least two months of spending. The city's budgeting is generally conservative so Fitch believes ending results may exceed the current forecast. To offset projected revenue shortfalls, the city implemented expenditure reductions in fiscal 2011 including an early retirement program expected to yield $3.6 million in annual savings as well as limiting raises and hiring. Fitch believes that the city has additional flexibility to make expenditure cuts if needed, as it has not yet taken the more severe measures that many other governments have, such as furloughs, layoffs, and wage reductions.
Direct debt levels are low but overlapping school district debt brings overall debt to an above-average 6.4% of TAV. The city has no additional debt plans and amortization is rapid. Additional issuance by area school districts and/or further TAV declines could increase overall debt ratios further. The city participates in the Texas Municipal Retirement System. The city's funded ratio for this agent multi-employer plan was somewhat weak at 71.3% as of Dec. 31, 2009, or 67.6% if a 7% investment rate of return is assumed. Pension funding comprised a sizable 12.2% of fiscal 2010 spending, but the unfunded liability was a moderate 1.1% of TAV.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 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
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