Fitch Rates Mueller Local Govt Corp., Texas' 2006 Contract Revs 'AA'.

AUSTIN, Texas -- Fitch has assigned an initial 'AA' rating to the Mueller Local Government Corporation, Texas (the corporation) $12 million contract revenue bonds, series 2006. The bonds are scheduled to be sold competitively on August 24. Public Financial Management in Austin serves as the corporation's financial advisor. The Rating Outlook is Stable.

The bonds are limited obligations of the corporation and are payable solely from payments to be made pursuant to a grant agreement between the corporation and the City of Austin (the city). Grant payments are to be funded from available monies in the city's general fund, including sales tax revenues from retail activity in the project area. Proceeds will finance infrastructure improvements, including streets and drainage, in the project area and to pay issuance costs.

The 'AA' rating reflects the minimal likely impact to the city's general fund should sales tax revenues in the project area not materialize as projected, as well as the prominent location of and construction commitments to the project area. The rating also takes into consideration the annual appropriation risk associated with the transfer of grant payments from the city to the corporation's trustee. The Austin area economic recovery that began in 2004 continues to gain momentum, as evidenced by continued job growth, increasing sales tax receipts and a strong local housing market. Fitch believes the strong local economy bodes well for the planned residential and commercial development in the project area.

The corporation was formed in 2004 to assist in the redevelopment of the Mueller airport site, which previously served as the municipal airport for Austin. The Austin city council serves as the corporation board, and city staff members serve as corporation officers. The city also formed a reinvestment zone in connection with the redevelopment effort, which likely will be the financing vehicle for future infrastructure improvements in the project area.

The project area is located three miles northeast of downtown Austin and comprises 700 acres, a portion of which are adjacent to Interstate Highway 35 that bisects Austin from north to south. The redevelopment plan calls for the construction of 4,600 single-family and multi-family residential units, 650,000 square feet of retail, the Dell Children's Medical Center (under construction), a University of Texas medical research facility, office space, an elementary school and 140 acres of parks and open space. Street and drainage work is underway, and residential and commercial construction is expected to begin in 2007.

The city's financial profile is very sound. For fiscal 2006, staff anticipates that general fund revenues will exceed budget totals by more than $15 million, or roughly 3%. Spending levels are expected to be consistent with budget projections. The revenue gain is led by surging sales tax receipts, which are projected to increase more than 12% for the year, roughly double original budget estimates. General fund reserves are projected to be comparable to prior year results, even after the transfer out of one-third of the budget stabilization reserve for one-time outlays pursuant to city policy.

The proposed fiscal 2007 budget is balanced, with both operating revenues and expenditures climbing roughly 9%. Staff is proposing funding to restore services in various areas (e.g. public safety, community and support services) that experienced cutbacks during the recession. These additions would require roughly $6.1 million in additional spending. The budget also includes a 3.5% performance pay increase and an additional 1.5% pay hike for exceptional service. Sales tax receipts are budgeted for a solid 8.5% increase.

Austin's debt profile is moderate, with direct and overall debt at 1.6% and 3% of fiscal 2007 TAV, respectively. Overall debt per capita is above average, reflecting primarily debt issued by local counties and school districts. The pace of debt retirement also is above average. The city maintains approximately $75 million of authorized but unissued bonds, and presently is planning for a November, 2006 bond election with a total proposed authorization of $567 million. Drainage and water quality projects, transportation, and library services are the largest components of the authorization request. The expected tax rate impact from the proposed debt, which would be issued over roughly seven years, is minimal.

The city's TAV growth has resumed following a recessionary lull. The fiscal 2007 TAV of $60.2 billion is up a robust 15% from last year, which witnessed a respectable gain of nearly 5%. These increases followed a nearly 4% decline in fiscal 2004, which represented fallout from the economic downturn. In addition to the high profile technology sector, the local economy also features state government and the main campus of the University of Texas, which historically have been stabilizing factors for the local economy. Regional employment totals have increased the past two years, with annual gains of more than 20,000 reported. This job growth continues to fuel a strong housing market, which has set new records for starts and total dollar volume each of the past four years.

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