Fitch Rates Seguin, Texas' GOs 'A+'.

AUSTIN, Texas -- Fitch assigns an 'A+' rating to Seguin, Texas' (the city) $6 million general obligation (GO) bonds, series 2007. The bonds are scheduled for a negotiated sale the week of Dec. 18 via a syndicate led by First Southwest Co. Additionally, Fitch affirms its 'A+' ratings on the city's outstanding $19.25 million GO bonds and $240,000 tax notes. The Rating Outlook for both the bonds and tax notes is Stable.

The bonds are direct obligations of the city, payable from the levy and collection of a direct and continuing ad valorem tax within the limits prescribed by law, on all taxable property located within the city. The city operates under a Home Rule Charter, which adopts the constitutional provision limiting the city's maximum ad valorem tax rate to $2.50 per $100 of assessed valuation. Proceeds will be used to fund various city improvements and pay the costs of issuance.

The 'A+' rating reflects Seguin's consistent trend of strong general fund performance, a moderate debt profile, and growing tax base and local economy. The rating also considers some contraction of Motorola Inc., the city's largest taxpayer and employer. The city maintains solid general fund balances, with reserves in excess of the city's three-month goal used to fund one-time capital projects. In addition, financial flexibility is afforded through the city's relatively low property tax rate and establishment of a separate emergency fund. Historically, pay-as-you-go financing has helped keep direct debt ratios low. Despite recent voter approval for a $14.15 million bond program, anticipated gains in population and tax base should keep debt ratios manageable.

Seguin is located in Guadalupe County approximately 35 miles east of San Antonio along Interstate Highway 10 (I10). The city's population is estimated at just over 25,000 for 2006, an increase of 34% since the 1990 census. The city has a good mix between residential and commercial/industrial properties within its tax base. Gains in taxable assessed valuation (TAV) have averaged 6.1% annually since 2001, although the TAV gain in fiscal 2007 is lower than in prior years primarily reflecting a reduction in personal property values, most notably at Motorola. County unemployment rates remain well below state and national norms. Growth in area wealth levels, while below the statewide average, is outpacing the state.

Motorola remains the city's largest taxpayer and employer, although taxpayer concentration continues to decline, with the company now representing about 5% of total TAV, down from nearly 15% in 2001. The decline in the company's TAV primarily is due to reduced inventory. Motorola (which had employed at its peak up to 1,600) was recently purchased by Continental AG (senior unsecured debt rated 'BBB+' by Fitch), which recently announced that it was consolidating its Telematics manufacturing activities in Seguin with its plant in Nogales, Mexico. At the same time, Continental AG established the Seguin plant as a North America Center of Manufacturing Excellence, maintaining a good portion of its operations in the city. City officials estimate the extent of job losses at the Seguin plant to be around 100, with a workforce of approximately 1,300 maintained in Seguin. However, concern about the job losses are somewhat mitigated by the general economic health of the area as well as the extensive employment base of nearby San Antonio. In addition, a relatively recent power plant is expected to eventually assume the largest share of TAV as plant values are gradually added back to the property rolls, possibly absorbing some of Motorola's TAV losses. While power plant values will eventually create some taxpayer concentration, continued population and tax base growth will likely result in economic expansion and diversification, benefiting the city's credit profile.

Solid financial performance remains a key credit consideration. Operations have benefited from the city's conservative budgeting practices as well as growth in the local economy. Sales taxes, which represent about one-third of general fund operating revenues, rebounded in 2004 increasing 7.7%; a 9.2% increase was recorded in calendar 2005 and a 4.1% gain is projected for 2006. The fiscal 2005 general fund balance of approximately $4.7 million represents nearly 37% of operating expenses and transfers out. For the close of fiscal 2006, officials are projecting an operating surplus of $380,000 and a general fund balance representing 41% of expenditures and transfers out. This reserve level remains well in excess of the city's policy of maintaining at least three months of operations in reserve. Additional financial flexibility is afforded by the city's relatively low overall property tax rate and the establishment of a separate emergency fund. This fund typically maintains a balance of $2 million or greater. The city is prone to flooding, and the emergency fund was created to provide interim funding for damaged infrastructure pending receipt of insurance settlements or for city infrastructure not covered by insurance.

The city historically provided a sizable amount of pay-as-you-go financing for capital projects. In fiscal 2004, just over $1 million was transferred from the general fund to the capital projects fund; $2.3 million was transferred in fiscal 2005. The current offering represents the initial phase of borrowing of a $14.15 million authorization approved by the voters in May 2006. The eight propositions all received solid voter support, ranging from about 60% to 69%. The bond program will addresses a variety of capital needs including new and existing park development; fairgrounds and coliseum improvements; streets, drainage, utility, lighting, and land acquisition improvements; and structural improvements to the city's hydroelectric plant. The interest and sinking fund tax rate impact is manageable at about $0.10 for the entire authorization, assuming a conservative 2% annual increase in TAV. Direct debt ratios are moderate, and payout, which was about 50% in 10 years, is now slightly below average.

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