Fitch Rates Harris County, TX LT & ULT Bonds 'AAA'; Outlook Stable
Fitch Ratings assigns an 'AAA' rating to the following Harris County, Texas bonds:
--$67.6 million unlimited tax (ULT) road refunding bonds, series 2012A;
--$47.8 million ULT road refunding bonds, series 2012B (taxable);
--$77.7 million permanent improvement refunding bonds, series 2012A;
--$42.8 million permanent improvement refunding bonds, series 2012B (taxable).
The bonds are expected to sell via negotiation during the week of Nov. 12, 2012. Proceeds will be used to refund outstanding debt for interest cost savings.
In addition, Fitch affirms its 'AAA' rating on the following:
--$1.1 billion outstanding Harris County, TX limited tax (LT) bonds;
--$1.3 billion outstanding Harris County, TX ULT bonds.
The Rating Outlook is Stable.
The unlimited tax bonds are payable from an annual unlimited property tax levy. The permanent improvement bonds are payable from an annual property tax levy, limited to $0.80 per $100 taxable assessed valuation (TAV).
KEY RATING DRIVERS
STRUCTURAL BALANCE RESTORED: The county has made considerable progress in restoring structural balance to its financial operations. Substantial budget cuts in fiscal 2012 enabled the county to replenish its financial cushion, and favorable progress in the current fiscal period leads Fitch to expect continued improvement in the county's financial position.
IMPROVED LIQUIDITY: Year-end cash balances recovered notably in fiscal 2012 and are projected to increase further in fiscal 2013 due to significant budget cuts. A new fund balance policy that allows departments to roll over up to 15% of their budget allocation is also expected to curb year-end spending and boost cash balances. Additional borrowable funds, including the public improvement contingency (PIC) fund and mobility fund, have ample balances to bolster the county's interim cash position.
PRACTICAL TAXING LIMITATIONS: Although ample total taxing margin remains, political considerations and the allocation of taxing capacity to numerous component units will continue to restrict the taxing flexibility for county operations.
MANAGEABLE DEBT PROFILE: The large and expansive property tax base should allow the county to address its sizeable capital needs and keep debt service tax rates at modest levels. The overall debt profile is high and amortization is average. Prudently, the county maintains an entire year's worth of debt service in reserves.
UNINCORPORATED AREAS GROWING RAPIDLY: Harris County remains one of the fastest growing counties in the U.S., aided by affordable home prices and ample developable land. Spurred by an expanding toll road system, the majority of growth in the last census occurred in the unincorporated areas of the county. Reliance on the county to provide services to these outlying communities remains a challenge.
ENERGY SECTOR STILL DOMINANT: While diversification into biomedical research, aerospace, and international trade via the Port of Houston is evident, energy and petrochemical manufacturing remain major determinants of employment and tax base growth.
WHAT COULD TRIGGER A RATING ACTION
RETURN TO STRUCTURAL IMBALANCE: Failure to maintain structural balance and an adequate financial cushion could cause downward pressure on the county's long-term credit quality.
SIGNIFICANT BUDGET CUTS ENABLED STRUCTURAL BALANCE
Recent right-sizing by the county has enabled the return of structural balance to its financial operations. The county's significant fiscal 2012 budget cuts, in which 1,090 positions (5.4% of total positions) were eliminated (including 887 positions in the general fund) enabled the county to achieve balanced operations. As a result, fiscal 2012 posted a large $84.5 million (5.2% of spending) general fund surplus, leading to an unrestricted fund balance (sum of committed, assigned, and unassigned according to GASB 54) of $127.5 million or 9.7% of spending. Favorably, the fiscal 2012 ending cash balance also rose, by $111.3 million, due to a $73 million gain in total revenues, enabled by a modest 1.3% increase in TAV, non-recurring transfers from the county's mobility fund, and substantial budget cuts. At $156.9 million, this cash balance far exceeded the county's prior projection ($34.1 million) and represented 13% of spending.
The fiscal 2013 budget is balanced and year to date expenditures are a notable 12.7% or $114.4 million below budget for the first eight months of the fiscal year. The use of out-of-county jail facilities, due to overcrowding of the county's own facilities, has been a significant cost driver in recent years. However, the commissioner's court and the criminal justice courts have made progress in working toward reducing jail populations through diversion programs and improved mental health services. As a result, the county has not utilized any out-of-county jails in the first eight months of fiscal 2013, and its own jails have some capacity below the thresholds required by the state.
Also notable is the county's new fund balance policy that allows departments to roll over up to 15% of their unspent budget allocation to the following fiscal year, providing an incentive to avoid year-end spending sprees.
PUBLIC SAFETY PRESSURES AND ACCOUNTING ISSUES IMPACT RESERVES
Operating pressures, due primarily to rapidly growing public safety expenditures, led the county's financial reserves to fall below its 15% fund balance policy in fiscal 2009. Tax base stagnation and declines in fiscal years 2010 and 2011, respectively, led to additional thinning in the county's financial reserves. Fiscal 2010 posted a $26.3 million drawdown, but an accounting change caused the unreserved fund balance to decline by $107.7 million. This significant drop from prior years is attributable to an accounting change to separately account for road maintenance in a mobility fund which previously was accounted for in the general operating fund. Subsequently, transfers from the mobility fund have reimbursed certain expenses of the general operating fund but are not a recurring revenue source. A delayed transfer in fiscal 2011 led to a negative unreserved fund balance that was later restored during fiscal 2012.
TAX BASE REBOUNDING MODESTLY
Property taxes represent about two-thirds of general fund revenues. Given the current tax rate of $0.377 per $100 of TAV, the county has substantial taxing margin below the $0.80 limit for operations and debt service on permanent improvement (limited tax) bonds. After declining by 4.2% in fiscal 2011, the county's TAV grew modestly by 1.3% and 1.5% in fiscal years 2012 and 2013, respectively. Notably, the county conservatively budgeted a 2.6% TAV decline in the fiscal 2012 budget. Such stabilization is attributed to relatively constant residential taxable values as home prices were not subject to high rates of appreciation prior to the recession, aided by ample land and limited zoning regulations. Within Houston, building permits are up by a large 48% for a total of $1.47 billion for the first four months of calendar 2012 compared to last year.
ELEVATED OVERALL DEBT PROFILE
Overall debt ratios are high, particularly at the 'AAA' rating level, at $6,301 per capita and 7.2% of market value including the county's 350 underlying jurisdictions. However, overall debt ratios do not account for substantial state support for local school district debt. The county's remaining bond authorization is large at $490 million, although the county does not plan to issue any new money debt in the next 12 months. Capital needs, while extensive, appear to be manageable, given the county's history of a measured pace of debt issuance. For fiscal 2012, limited and unlimited tax secured debt service represented a manageable 12.5% of general and debt service fund spending.
County employees participate in the Texas County and District Retirement System, a cost sharing multiple employer plan which is adequately funded at 79% using Fitch-adjusted measures. The county's contribution in fiscal 2011 totaled $89.5 million, equal to 5.4% of general fund spending and transfers out, which Fitch considers manageable. Employees' other post employment benefits (OPEB) are administered by the county's own agent multiple employer healthcare plan which it funds on a pay-go basis.
UNINCORPORATED AREAS OF COUNTY LEAD POPULATION GAINS
Encompassing the city of Houston and with a population totaling 4.2 million, Harris County is the largest county in Texas and the third largest in the nation. The county experienced a large 20% population gain in 2000-2010 of which a notable 75% occurred in the unincorporated areas. Before rising last year, falling oil prices took their toll on the job market of the Houston metropolitan statistical area (MSA), pushing unemployment above 8% starting in the latter half of 2009. A resurgent energy sector aided economic recovery starting in 2011 and favorable economic trends have led the MSA's unemployment rate to fall to 7.0% by August 2012, on par with the state average but well below the national average of 8.2%.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Schiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Jose Acosta, +1-512-215-3726
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Austin, TX 78701
Gabriela Gutierrez, +1-512-215-3731
Chris Hessenthaler, +1-212-908-0773
Elizabeth Fogerty, +1-212-908-0526
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