Fitch Rates Houston, Texas' $231MM Refunding PIBs 'AA-'; Outlook Negative.
--$135.3 million series 2006D 'AA-';
--$36.0 million series 2006E 'AA-';
--$47.7 million series 2006F 'AA-';
--$12.0 million series 2006G 'AA-'.
Additionally, Fitch affirms the 'AA-' rating on the city's $1.7 billion in general obligation (GO) bonds, $81.3 million in certificates of obligation and $2.3 million in tax notes outstanding. The Rating Outlook is Negative.
The bonds are general obligations of the city, secured and payable from a limited ad valorem tax levied on taxable property within the city. Proceeds from the series 2006D, E and F bonds will refund outstanding general obligation commercial paper; series 2006G bond proceeds will refund a portion of the city's outstanding tax-supported debt. The issues are scheduled for a negotiated sale through a group led by Ramirez & Co., Inc. on or about Nov. 2.
The 'AA-' rating reflects positive credit considerations which include a broad and strengthening economy, a moderate direct debt burden, and recent growth in general fund reserves. The Negative Outlook reflects the uncertainty for general fund operations in light of a summary judgment earlier this year by a district court judge who upheld the enforceability of one of two revenue limitation measure recently approved by voters. Fitch typically views revenue limitations negatively given that they restrict financial maneuverability. The all-encompassing nature of one of the two propositions (Proposition 2) is cause for additional concern, and Fitch considers its possible implementation as a potential challenge to the city's credit quality given ongoing and future spending pressures.
The city has placed a proposed charter amendment on the November 7, 2006 ballot (Proposition G) which would exclude enterprise fund revenues from the charter revenue limitations; voter approval of Proposition G could result in a more stable credit profile. In addition to the revenue limitation measures, an additional negative credit factor is the city's large unfunded pension liabilities that are expected to increase over the near term.
The two revenue limitations, also referred to as Proposition 1 and Proposition 2, were approved by voters in November 2004 and were scheduled to take effect in fiscal 2006. Proposition 1 was a city council initiative and targets only ad valorem tax revenue and water and sewer system rates. Proposition 2, which was a citizen initiative, targets combined revenues of essentially all city operations and has the potential to more severely restrict revenue growth.
A district court ruled in January, 2006 that the city must implement both Proposition 1 and Proposition 2, despite a city attorney opinion that only Proposition 1 is legally binding since it received the larger number of votes in the 2004 election. The city has appealed the court's final ruling. In the interim, the city will return to the voters with the revenue limitation revision described above. Fitch believes the prospect of implementation of both measures has the potential to negatively affect service delivery and capital financing, including pension plan funding.
Despite recently agreed upon program changes and funding commitments that have reduced the $1.8 billion unfunded actuarial accrued liability (UAAL) of the city's municipal employee pension system by an estimated one-half, that program and the police officers' and firefighters' pension plans all face potentially sizeable increases in UAAL over the near term. In addition, Fitch views the city's debt financing of a portion of the city's annual contribution to both the municipal and police pension systems as an indication of financial stress.
The impact of pension-related borrowing as currently envisioned is expected to have a minimal effect both on the city's capital improvement plan and projected debt service tax rates. The city's debt ratios, both on a per capita basis and as a percentage of taxable assessed valuation (TAV) are moderate; the pace of repayment on the city's tax-supported debt is average.
The general fund has reported healthy net income in three of the past four fiscal years, and reserves have increased as a result. Fiscal 2005 ended with net income of more than $34.0 million, and the unreserved fund balance of $142.7 million or 9.3% of spending and transfers out was up sharply from the prior year. Preliminary results for fiscal 2006 anticipate a modest operating loss and an increase in general fund reserves of roughly $60 million. The fund balance gains in both fiscal 2005 and 2006 were aided by proceeds from offerings of pension obligation bonds. Liquidity levels also have improved markedly over the past three fiscal years; the fiscal 2005 general fund cash and investments total was nearly $112.0 million, compared to roughly $28.0 million in fiscal 2002.
After Hurricane Katrina a number of displaced residents from affected areas sought refuge in the city. The estimated number of displaced residents remaining in Houston ranges from 135,000-150,000. The city's principal expenses associated with hurricane evacuees were temporary housing, along with medical supplies, equipment, food, and emergency personnel. The city's total estimated cost through August 2006 is approximately $295 million, and city officials anticipate that payments from the Federal Emergency Management Agency will cover substantially all of the city's outlays.
Evidence of a healthy local economy is provided by various measures, including sales tax revenue collections and TAV growth. Receipts registered gains of approximately 8.0% and 7.0% in fiscal 2004 and fiscal 2005, respectively, after declining in fiscal 2003. Preliminary results suggest a robust 14% increase in receipts for fiscal 2006. The city's fiscal 2007 TAV climbed more than 9% to $121.9 billion. However, a portion of this value is under protest, and the final certified value likely will be somewhat smaller. This gain followed a 5.0% increase in fiscal 2006.
Local unemployment rates also are down from recent recessionary highs; the city's August 2006 rate of 5.5% is significantly below the 2003 average of 8.3%. Single family building permits issued by the city in 2005 reached an all-time high, both in number of permits (7,296) and dollar value ($1.2 billion). Also, estimates of 2005 Port of Houston tonnage and Houston airport passenger volume were at or near record highs.
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|Date:||Oct 27, 2006|
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