Fitch Rates El Paso, Texas $94MM GO Bonds 'AA-'; Outlook Stable.

AUSTIN, Texas -- Fitch Ratings assigns an 'AA-' rating to El Paso (the city), TX' $93.7 million general obligation (GO) refunding bonds, series 2007, scheduled to sell via negotiation through a syndicate led by Bear, Stearns & Co. Inc. as early as Feb. 20. In addition, Fitch affirms its 'AA-' rating on the city's outstanding debt comprised of $303.3 million GO bonds and $76.2 million certificates of obligation. The Rating Outlook is Stable.

The bonds are direct obligations of the city and are payable from the levy and collection of a direct and continuing ad valorem tax, limited to $2.50 per $100 taxable assessed valuation (TAV), on all taxable property within the city. Proceeds will be used to refund all of the city's outstanding commercial paper and pay issuance costs.

The 'AA-' rating reflects the city's satisfactory financial position, moderate debt position, and a large and diverse tax base. A recent change to a city manager form of government has allowed for the streamlining of operations and greater cost controls, enabling the first balanced budget in a decade. The rating also incorporates the future impact of the city's debt plans. The ongoing decline in the city's manufacturing base, due to relocations to cheaper Latin American or Asian labor markets, has been offset somewhat by the growth of higher wage industries that support maquiladora assembly plants in Mexico. Additionally, Ft. Bliss is scheduled to receive the largest increase in troops under the Pentagon's Base Realignment and Closure recommendations, spurring massive residential development in the northeastern part of the city. Notably, the high technology component associated with Ft. Bliss' new mission is already attracting numerous research and development concerns.

As the sixth largest city in Texas, El Paso's estimated 2007 population of 650,000 has grown by almost 15% from its 2000 census level. Along with the addition of 21,000 troops to Ft. Bliss, military family members are expected to total another 25,000. About two-thirds of the additional troops are expected to live off-base. To accommodate such rapid growth, one of the largest land owners in the county, the El Paso Public Services Board (PSB, revenue bonds rated 'AA' by Fitch), has developed a 5,800 acre master plan in northeast El Paso to enable contiguous and programmatic growth and is selling 461 acres for the development of 1,600 units of affordable housing.

The city's large $24 billion tax base is diverse and starting to grow beyond the typically modest rates of the past, increasing by over $1 billion in each of the last three fiscal years. Furthermore, the relocation of air cavalry and armored aviation units to Ft. Bliss is attracting high-technology companies for both services and research and development. As a result of increasing demand, the median sale price of existing homes rose 18% over the 2004 level and preliminary appraisal estimates point to another possible double digit TAV increase for fiscal 2008. The tax base remains diverse with its top 10 tax payers comprising only 4.8% of total values. Because of the long-running contraction in the once large apparel industry, the manufacturing component of the tax base has declined to under 7% of total values, down from previous double digit levels.

The city's debt profile is solid, characterized by a relatively moderate debt load, average amortization rate, and manageable capital plan. Plans to issue pension obligation bonds would increase debt levels but remain manageable. The current direct debt burden is $728 per capita and 2.0% of TAV and the overall debt burden totals $1,679 per capita and 4.6% of TAV. The current offering is part of the $141 million and $114 million bond authorizations approved by voters in 2000 and 2004, respectively. After the current offering, the remaining $96.7 million of authorization is scheduled for issuance by fiscal 2009. Future debt plans are substantial, comprised of $200 million of pension obligation bonds over two years and $150 million in GO bonds and certificates of obligation by fiscal 2008 for flood repair projects plus streets, major maintenance items, parks, libraries, and fire facilities. Debt will be structured to remain below the $0.25 per $100 TAV debt service tax rate promised to voters. The current principal pay out rate has declined to an average 50% in 10 years, down from 62% before this transaction.

The city's historically satisfactory financial position has declined slightly in recent years but is still sound. A structural imbalance in the city's general fund led to operating deficits in fiscal years 2003 and 2004, due in part to the absorption of over 100 formerly grant-funded public safety positions. With the elimination of 100 non-uniform positions in fiscal 2005, the city's finances stabilized with level operating results, handily outperforming its initial projection of a $9 million deficit. As a result, undesignated general fund reserves, plus the $16 million cash reserve required by the city charter, totaled $32.7 million or 12.6% of spending in fiscal 2005, down from almost 18% in fiscal 2001.

The fiscal 2006 budget represents the first budget under the new city manager form of government, approved by voters in February 2004. Under the new structure, the number of city departments was reduced from 34 to 26, new solid waste fees were imposed, and a major franchise fee was renegotiated in order to comply with the city's new balanced budget requirement. Additionally, employees were awarded the first cost of living adjustment (COLA) since fiscal 2002. Because actual sales tax receipts are more than twice the budgeted assumption of 3.6%, the mid-year appropriation of $4.2 million in undesignated reserves for one-time capital outlays may be offset to achieve level year-end results for fiscal 2006. The fiscal 2007 budget is also balanced based on 5.2% sales tax growth, well below year to date growth. The city's three-year financial forecast points to stable reserves based on conservative property and sales tax growth assumptions.

Past administrations' expansion of retirement benefits to firemen and policemen, along with underperforming investments, have resulted in low overall funding ratios for both pension systems. Automatic COLA's and a reduced minimum retirement age have led to funded ratios of 63% and 78% for firemen and policemen, respectively, and a combined unfunded actuarial accrued liability (UAAL) of $350 million. The city is planning to prefund a portion of this liability by issuing pension obligation bonds in the amount of $200 million over several years and eliminate the remaining UAAL by proposing to create a second tier of pension benefits for new hires. These plans will be monitored by Fitch to determine the impact of turning this soft liability into an annual fixed debt service expenditure.

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