Fitch Rates Harris County, TX's $229MM ULT & LT Refunding Bonds 'AA+'; Outlook Stable.

AUSTIN, Texas -- Fitch Ratings assigns its 'AA+' rating to Harris County, TX's offerings comprised of up to $100 million unlimited tax (ULT) road refunding bonds, series 2009A, up to $100 million permanent improvement refunding bonds, series 2009B, and $29.3 million permanent improvement limited tax (LT) and revenue refunding bonds, series 2009C, which are scheduled to sell during the week of Nov. 16, 2009 via negotiation. In addition, Fitch affirms its ratings on the county's outstanding tax-supported debt comprised of:

-- $1.1 billion limited tax bonds at 'AA+'; -- $746.9 million unlimited tax bonds at 'AA+'; -- $665.6 million toll road unlimited tax and subordinate lien revenue bonds at 'AA+'.

Fitch also affirms its ratings on the following debt issued by the Harris County Flood Control District, TX:

-- $108.9 million general obligation bonds at 'AA+'; -- $421.2 million contract tax revenue bonds at 'AA+'.

The 2009A bonds are payable from an unlimited property tax levied on all taxable property within the county. The 2009B&C bonds are payable from a property tax levy, limited to $.80 per $100 taxable assessed valuation (TAV) for both operations and debt service, on all taxable property within the county. In addition, the 2009C bonds are payable from a subordinate lien on the county's hotel occupancy tax (HOT) revenues (totaling 1.85%). To date, the debt service on all bonds with the same double-barreled pledge as the 2009C bonds has been supported by HOT receipts only. The county has no outstanding bonds payable from a senior lien on its HOT revenues. The Rating Outlook is Stable for all county and flood control district bonds.

The 'AA+' ratings reflect Harris County's sound financial position, conservative fiscal management, and substantial taxable resources. The county's financial position remains solid but is facing growing pressure to provide adequate staffing for its large adult and juvenile detention systems. Plus, continued rapid population growth in unincorporated areas of the county poses additional challenges to provide infrastructure and service needs. Recent sluggish TAV growth will further limit financial flexibility; however, the recently reinstated public improvement contingency fund will serve as a valuable buffer in the interim. The direct debt profile remains favorable along with the county's policy of maintaining an entire year's worth of debt service in reserves. Although the economy has diversified into biomedical research, aerospace, and international trade via the Port of Houston, energy and petrochemical manufacturing remain major determinants of employment and tax base growth. The abrupt end of the energy boom in 2008 continues to contract the local economy, although at a slower pace; however, the housing market remains relatively healthy as evidenced by steady home prices, which Fitch believes will aid the economy's return to growth.

Encompassing the City of Houston, Harris County is the largest county in Texas and the third largest in the nation. With a population totaling 3.9 million, the county experienced solid continued growth since the 2000 census with the majority occurring in the unincorporated parts of the county. Falling oil prices have taken their toll on the job market of the Houston metropolitan statistical area (MSA). The county's unemployment rate rose notably to 8.5% in September 2009 from 5.1% in the same period in 2008, slightly above the state average but well below the national rate.

Financial performance continues to be solid but operating pressures are building due to public safety expenditures that have grown by double digit percentages annually since fiscal 2007. As a result, the county's financial reserves fell below its 15% fund balance policy level in fiscal 2007 and 2009. In fiscal 2009, the general operating fund (excluding debt service for the county's limited tax bonds) posted essentially balanced results; however, growing encumbrances reduced the unreserved fund balance to $166.7 million, equal to 12.1% of general operating expenditures. Due to increased attention to expenditure control, management projects fiscal 2010 to post nearly balanced operations despite sluggish property tax revenue growth. A reallocation of mobility-related expenditures to a new mobility fund is expected to further increase the unreserved fund balance to $180 million.

In fiscal 2008, the county reinstated the public improvement contingency (PIC) fund, which Fitch views favorably; the fund totaled $29 million in fiscal 2009, funded with a dedicated levy of about 6/10ths of $0.01 per $100 TAV. For fiscal 2010, the PIC fund is projected to grow modestly to $31.5 million.

Property taxes represent about two-thirds of general fund revenues. Given the current tax rate of $0.39 per $100 of TAV, the county has substantial taxing margin below the $0.80 limit for operations and debt service. Although slowing notably during the recession, the county's TAV growth remains positive due to relatively stable home prices which were not subject to high rates of appreciation prior to the recession. As in many parts of the country, residential building permit activity is down, with values posting a 35% decline in 2008.

Excluding $666 million in self-supported toll road unlimited tax bonds, the county's direct debt position remains favorable at $652 per capita and under 1% of TAV, including $222.9 million in outstanding tax supported commercial paper debt. The county's limited debt service tax rate is also funding large flood control district projects via contract payments. The principal payout rate remains slow at about 39% in 10 years. Due to 350 overlapping entities, overall debt ratios are high at $5,399 per capita and 7.5% of TAV. 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 $553.6 million. The county plans to issue $100 million of such authorization in the next 12 months. Credit concern over a substantial increase in debt levels is offset by the county's very large and expanding tax base that could service such debt with a modest tax rate increase.

Additional information is available at 'www.fitchratings.com'.

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