Fitch Rates Harris County, Texas' $395MM TANs 'F1+'; Affirms L-T Rtg at 'AA+'

Fitch Ratings assigns an 'F1+' to Harris County, Texas' (the county) $395 million tax anticipation notes (TANs), series 2009, scheduled to sell competitively on June 9, 2009. Proceeds will provide short-term cash flow needs for the county's general fund operations in anticipation of receipt of property taxes, the bulk of which are collected in the latter part of the fiscal year. The notes are payable from all general fund property taxes collected in fiscal 2010, excluding taxes levied for debt service or the public improvement contingency fund.

At this time, Fitch also affirms its rating on the following long-term debt of the county:

--$1,146.0 million limited tax bonds at 'AA+';

--$1,412.5 million unlimited tax bonds at 'AA+';

Affirmed debt does not include the following limited tax bonds which were not rated by Fitch:

--Permanent improvement refunding bonds, series 2008B

--Permanent improvement refunding bonds, series 2008C

The Rating Outlook for the county's long-term securities is Stable.

The 'F1+' rating, Fitch's highest for short-term debt, is based on Harris County's long-term credit strengths, solid note coverage by pledged revenues, and strong year-end cash balances. Credit fundamentals include solid reserve levels, conservative financial management, an extensive economy and tax base, and moderate debt position. Year-end fiscal 2010 cash flow projections point to a notable decline in the ending cash balance due to the creation of a new mobility fund that will receive annual toll road transfers for connectivity projects previously accounted for in the general operating fund. However, the projected cash balance is still solid and should further benefit from conservative revenue estimates. In addition, sizable resources outside the general fund are available to meet unexpected interim needs. However, the county is facing growing financial pressure to provide adequate staffing for its large adult and juvenile detention systems. Plus, continued rapid population growth in unincorporated areas of the county pose additional challenges to provide infrastructure and service needs.

Short-term borrowing needs stem from the county general fund's reliance on property taxes. For fiscal 2010, projected property taxes represent 75% of total general fund revenues. This year's note issuance is level to last year's borrowing but substantially larger than past par values which have ranged from $150 million-$295 million. The current offering represents 43% of pledged revenues projected for fiscal 2010. Because 80% of property taxes are collected during the final two months of the fiscal year (ending Feb. 28), cash shortages typically start in June or July and extend through January. Upon receipt of the bulk of its property taxes in January and February, the county restores cash balances to favorable levels, even after note repayment.

The fiscal 2010 projected ending cash balance represents a notable $126 million or 48% decline from unaudited fiscal 2009 amounts, due primarily to the establishment of a separate mobility fund (within the general fund group) that will receive annual toll road transfers previously posted to the general operating fund. Although the projected ending cash balance of $138 million represents a solid 11% of operating revenues, it is conservatively based on flat assessed value (AV) growth, well below the actual average of almost 9% per year over the last five fiscal years. The unaudited fiscal 2009 ending cash balance fell modestly below its projected level of $272 million, posting a large total cash balance of $264 million or over 19% of disbursements, aided by an additional $92 million in toll road transfers for connectivity projects. Typically large year-end cash balances, together with substantial borrowable resources, enhance the county's ability to make full and timely note repayment and is generally less vulnerable than state and federal assistance, which may be subject to distribution changes and/or payment disruptions.

Coverage from pledged revenues is down from pre-fiscal 2006 coverage levels of over 3.5 times (x) due to much larger borrowings in recent years. Nevertheless, note repayment coverage by pledged revenues in fiscal 2010 is projected to total a strong 2.3x. Furthermore, taxes collected in January and February alone are projected to provide 1.8x coverage.

Note security is strengthened by the availability of borrowable funds. County officials report sizable reserves in several funds and the unencumbered portion of its commercial paper program. The county also reinstated the public improvement contingency (PIC) fund in fiscal 2008 with $24 million funded from a separate property tax levy; the PIC fund was budgeted to increase to $43 million in fiscal 2009 through additional property tax receipts and interest earnings. Although the county is not legally required to set aside funds in the months prior to the Feb. 26, 2010 maturity date, January and February tax receipts are typically invested in conservative short-term instruments that mature prior to note maturity.

The county's long-term credit fundamentals remain strong. Fitch's 'AA+' general obligation debt rating reflects the county's broad-based economy, expansive taxable resources, and moderate debt position. Financial performance continues to be solid but operating pressures are building due to public safety needs. In fiscal 2007, the unreserved general fund balance fell below the county's 15% policy level, totaling $128.4 million or 11.4% of general operating expenditures and transfers out. Audited fiscal 2008 results indicated a return to compliance with a financial cushion totaling $193 million or 15.7% of spending despite a $0.01 per $100 TAV operating tax rate shift to the flood control district. County officials expect balanced results for fiscal 2009. The adopted fiscal 2010 budget also is balanced as it deferred the consideration of any new positions or a cost of living adjustment until the mid-year review in September. County officials are developing cost containment proposals to ensure adequate financial reserves. Capital needs, while extensive, appear to be manageable, given the county's history of a measured pace of debt issuance.

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