Fitch Affirms Galveston County, TX's ULTGOs and LTGOs at 'AA+'; Outlook Stable

Fitch Ratings has affirmed its 'AA+' rating on the following Galveston County, Texas' outstanding obligations:

--$83.6 million unlimited tax general obligation bonds (ULTGOs);

--$150.1 million limited tax general obligation bonds (LTGOs);

--$34.3 million pass-through toll revenue and limited tax refunding bonds series 2012.

The Rating Outlook is Stable.

SECURITY

The ULTGOs are payable from an unlimited ad valorem tax levied against all taxable property in the county. The LTGOs are backed by a property tax limited to $0.80 per $100 of taxable assessed value (TAV). The pass-through toll revenue bonds, in addition to the limited tax pledge, are further payable from payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation (TxDoT).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The county has weathered storm recovery costs well through tight budget controls and strong management practices, as reflected in consistently solid general fund balance levels.

LONG-TERM LIABILITY BURDEN MODERATE: Overall debt levels are above average. However, amortization is fairly rapid and overall carrying costs are manageable. The county has no near-term borrowing plans, which Fitch views positively.

GROWING TAX BASE: Following modest declines in fiscal years 2009 and 2010, the county's tax base has recorded healthy gains the past five fiscal years, reaching $24.5 billion for fiscal 2016.

CONCENTRATED BUT COMMITTED TAXPAYERS: The tax base is somewhat concentrated, as the 10 leading taxpayers constitute roughly 15% of TAV. However, the properties of these taxpayers represent massive industrial investments that demonstrate a long-term commitment to the area.

RATING SENSITIVITIES

CONTINUED FINANCIAL STABILITY: The rating is sensitive to material deterioration in the county's financial profile, including reserve levels and debt and long-term liability burden. Maintenance of healthy reserves offers a cushion against natural disaster risk.

CREDIT PROFILE

Located on the upper Texas coast of the Gulf of Mexico and part of the greater Houston metropolitan statistical area (MSA), Galveston County encompasses 430 square miles and had an estimated population of roughly 314,000 in 2014.

CONSERVATIVE MANAGEMENT BOLSTERS GENERAL FUND RESERVES

The county has been able to maintain its historically strong general fund balance levels, despite recovery costs associated with Hurricane Ike in 2008 and subsequent loss of tax base (due both to recessionary effects and hurricane damage).

The county has recorded operating surpluses after transfers five of the last seven years, going back to fiscal 2008. Fiscal 2014 results included a $4.25 million loss, which was attributable to repayment of a $5 million U.S. Federal Emergency Management Agency (FEMA) note. Otherwise, operations would have generated a surplus. At fiscal 2014 year-end the unrestricted general fund balance totaled a healthy $41.6 million or 34% of spending.

The county tends to budget conservatively, as evidenced by actual general fund results that have consistently outperformed the budget. Fiscal year 2015 general fund results (fiscal year ending Sept. 30) are projected to show a $2.5 million surplus after transfers and a comparable addition to fund balance; this projection compares favorably to the original budget projection of essentially balanced operations. Management also reports $16.2 million in FEMA receivables for Ike-related assistance, which will be collected once audits are completed.

AVERAGE ECONOMIC INDICATORS

County per capita income of roughly $31,000 is comparable to the surrounding Houston MSA and higher than both the state (114%) and national (107%) levels. Employment growth since the last recession has tracked regional gains and outpaced both the state and U.S.; the county's December 2015 unemployment rate of 4.9% was slightly above the MSA (4.6%) and state (4.2%) averages and essentially on par with the national (4.8%) average.

The local economy relies upon a combination of petrochemical manufacturing, tourism, healthcare, and port activities. The county's leading employer, the University of Texas Medical Branch, a teaching hospital, lost a considerable number of jobs after the 2008 hurricane; however, most support facilities have been rebuilt and a new hospital tower is nearing completion.

Port of Galveston cruise-related activities have expanded markedly since beginning in 2000, and the three major cruise lines that sail from the Port of Galveston carried more than 800,000 passengers from the city in 2015.

TAV for fiscal year 2016 posted a robust 13% increase over prior year levels, reflective of the improving local economy and continued hurricane recovery. The county's tax base has expanded at an average annual rate of roughly 3% since fiscal year 2008 and now stands at $24.5 billion.

The tax base is concentrated with oil refineries and petrochemical-related enterprises comprising most of the leading taxpayers, but the sizable, long-term capital investments at these facilities coupled with the facilities' proximity both to oil resources and the Port of Houston largely alleviate the concentration concern.

IKE RECONSTRUCTION WINDING DOWN

Hurricane Ike caused significant damage to the county's infrastructure and displaced nearly one fifth of the population of the City of Galveston, the county seat. Since then, the county has recovered its population loss, and the infrastructure repairs funded primarily by FEMA grants are winding down. Management reports FEMA will provide $28 million in funding for the last remaining projects, which are expected to start in the next 12 months.

MANAGEABLE DEBT BURDEN

Overall debt levels are moderately elevated, both as a percent of market value (6%) and per capita ($5,338), driven by the numerous underlying cities and school districts within the county. Amortization is above average with more than 65% of principal retired within 10 years. The county has no remaining GO debt authorization and does not plan to issue additional bonds for at least the next few years.

The county provides pension benefits through TCDRS, an agent multiple employer plan. The county's portion was 86.9% funded as of the last TCDRS valuation in January 2013 (78.2% funded using Fitch's more conservative 7% investment return assumption). The county routinely funds 100% of its annual required contribution (ARC) to TCDRS.

The county contributes to other post-employment benefits (OPEB) on a pay-go basis and the OPEB unfunded actuarial accrued liability (UAAL) is small. Total carrying costs, including pension contributions, OPEB pay-go, and debt service, were 21.3% of total governmental spending in fiscal 2014, which Fitch considers moderate.

Fitch does not believe the pledged pass-through toll revenue provides any additional value to credit quality. As such there is no enhancement to the ratings on the bonds with that additional pledge.

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

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and

Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999401

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999401

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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