Fitch Affirms Bexar County, Texas' Venue Project Rev, LT, and ULT Bonds; Outlook Stable

Fitch Ratings affirms the ratings on the following Bexar County, Texas (the county) obligations:

--$84.7 million venue project revenue bonds (motor vehicle rental tax) at 'A+';

--$241 million venue project revenue bonds (combined venue tax) at 'A+';

--$30.6 million unlimited tax (ULT) bonds at 'AAA';

--$1.401 billion limited tax (LT) bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

Motor vehicle rental tax bonds are payable from a first lien on the county's 5% motor vehicle rental tax (MVRT). Combined venue tax bonds are payable from a first lien on the county's 1.75% hotel occupancy tax (HOT) and a junior lien on the county's 5% MVRT. ULT bonds are payable from an unlimited annual property tax levied against all taxable property within the county. The LT bonds are payable from an annual property tax levied against all taxable property within the county, limited to $0.80 per $100 taxable assessed valuation (TAV) for operations and debt service.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: The county's solid financial position has benefited from prudent stewardship during the recent economic slowdown as evidenced by a multi-year approach to controlling expenditure growth and limiting the scale of structural imbalances.

WEAK DEBT PROFILE, SATISFACTORY PENSION POSITION: The debt profile is characterized by a high overall debt burden and slow principal amortization. However, the county fully funds the annual pension contribution requirement, its debt service tax rate is modest, and carrying costs do not present an undue burden on resources.

STABLE ECONOMY: Population growth remains rapid. The military remains a major economic factor although the local economy has diversified notably. The county is benefitting from rapid employment gains, enabling the unemployment rate to remain well below state and national averages despite robust labor force increases.

TAX BASE STABILIZED: The return to sound tax-base growth has been aided by the area's affordable home prices, ample developable land, and surging oil and gas activity at the nearby Eagle Ford Shale.

RATING PARITY: The LT bonds are rated on par with the ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined $0.28 operations and debt service tax rate compared to the limit of $0.80.

LARGE, MATURE HOSPITALITY SECTOR: Pledged revenues for the venue project revenue bonds benefit from the county's position as the top tourist destination in Texas. MVRTs and HOTs are subject to economic volatility but benefit from the county's large convention and visitor industry which markets to both regional and national audiences.

LOW COVERAGE; WEAK ABT : Annual debt service coverage (DSC) for the combined venue tax bonds is thin and will be pressured by the county's plan to issue additional bonds by 2016. DSC for the MVRT bonds is projected to remain sound. The additional bonds tests (ABTs) for both venue tax securities are weaker than average.

LARGE ACCUMULATED RESERVES: Fitch considers accumulated venue taxes in the capital improvement and coverage fund (CICF), which are restricted for debt service, capital improvements, or bond redemption, as a key mitigating credit factor. The rating assumes reserves will remain significant although a portion may be used for capital projects. The bonds have cash-funded debt service reserves equal to average annual debt service (AADS).

HIGH COMMUNITY SUPPORT: The county voters' support for the venue tax extensions was notable for its high approval margin.

RATING SENSITIVITIES

GROWING DEBT BURDEN: Rising debt beyond current expectations could pressure the rating.

CICF UTILIZATION: A reduction in the CICF to near or below AADS may result in negative rating action for the combined venue tax bonds.

CREDIT PROFILE

Bexar County, with an estimated 2014 population of 1.7 million, is home to San Antonio (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch), the seventh largest city in the U.S.

MILITARY STILL IMPORTANT WITHIN DIVERSE ECONOMY

The military and government sectors are prominent with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from past realignment and base closure decisions. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

EAGLE FORD SHALE IMPACTS EMPLOYMENT BASE

The ongoing recovery from the last recession has been aided by recent employment hikes in the leisure/hospitality and construction/mining sectors, fueled by surging oil and gas activity within the nearby Eagle Ford Shale. As a result, the county's unemployment rate declined to 5.2% in August 2014 from 6.1% a year prior and compares favorably to state and national averages of 5.5% and 6.3%, respectively, for the same period. The inherent volatility of oil and gas prices, as highlighted by the recent drop in energy prices, is a source of some uncertainty for the local economy.

TAX BASE STABILIZED

The county's tax base has returned to a steady growth mode after declining modestly in fiscal 2012 due to the steep building downturn and falling base values of the last recession. TAV grew by 5.7% and 7.5% in fiscal years 2014 and 2015, respectively, mostly due to reappraisal gains. County officials are conservatively projecting modest rates of TAV growth beyond fiscal 2015. About 70% of general fund revenue is derived from ad valorem taxes.

STRONG FINANCIAL PROFILE

The county's financial position remains strong, boosted by a multi-year strategy to control growth of or reduce general fund expenditures starting in fiscal 2009 in order to minimize any budget gaps by fiscal 2011. This proactive approach enabled the county to maintain reserves above its 10% fund balance policy level despite sluggish tax-base trends during the economic slowdown.

The county posted its fourth consecutive net operating surplus in fiscal 2013. The surplus equaled $5.1 million (1.5% of general fund spending) and increased its unrestricted fund balance to $67.3 million or a high 20% of spending. Fiscal 2013 results were aided by the county's practice of budgeting contingency appropriations.

The county estimates fiscal 2014 results will again outperform the budget which included a $14.4 million (4.2% of appropriations) use of fund balance. Preliminary indications point to a net general fund surplus of $4.8 million (1.4% of spending).

The adopted fiscal 2015 budget includes a moderate 5% increase in appropriations over the previous year's budget. The budget again includes both a draw on fund balance ($17.6 million or 4.6% of appropriations) and sizeable contingencies ($20 million or 5.2% of appropriations) which Fitch expects will support balanced results. A 3% cost of living increase and market adjustments for exempt employees is also included in the budget.

HIGH DEBT BUT MODEST PLANS

The county's overall debt burden is high at $5,872 per capita and 8.2% of market value. Direct debt includes a rising level of bonds secured by HOT and MVRT receipts which now make up 19% of the county's debt portfolio. However, overall debt levels have risen mostly from substantial debt issuances by the county's large number of overlapping jurisdictions, which include 15 school districts. The principal amortization of property-tax-supported debt remains well below average at 23% in 10 years.

Last year's numerous new money offerings, totaling $530 million, are not projected to require an increase in the county's modest combined debt service and flood control tax rate of $0.069 per $100 AV. The county's plan of finance is based on TAV growth of 2%-3% annually, which Fitch considers conservative, and includes support for the certificates of obligations (COs) debt service by Texas Department of Transportation reimbursements for outstanding pass-through toll road bonds and revenues derived from the county-wide advanced transportation district sales tax receipts.

The county's future property-tax-supported debt plans are modest, comprising up to $60 million of COs for road improvements and numerous facility improvements scheduled for issuance in fiscal 2015. The issuance of up to $48 million in pass-through toll road and limited tax bonds is planned in fiscal 2016. Continued large debt issuances beyond these expectations, without offsetting tax base growth, could result in negative rating pressure given the county's high overall debt burden.

VOTER-APPROVED VENUE TAXES

In May 2008, county voters approved the extension of the existing 1.75% HOT and 5% MVRT, originally approved in 1999 to finance the construction of the AT&T Center, home of the NBA Spurs. The extended venue taxes will finance $415 million in new tourism projects, including San Antonio River projects ($125 million), amateur sports projects ($80 million), rodeo and arena enhancements ($100 million), and cultural arts projects ($110 million). The four extension propositions received high voter approval rates ranging from 57% to 75%.

The commissioners' court later revised the plan and funded all San Antonio River projects with flood control COs payable from the county's flood control property tax. The county retains the legal authority to issue venue project revenue bonds to refund these COs although there are no such plans. The sole remaining venue project is $75 million in improvements to the AT&T Center for which combined venue tax bonds will be issued by 2016. The venue taxes will remain in effect until the final maturity of outstanding and future bonds for the voter-approved bond projects. The use of these venue taxes for additional projects would require voter approval.

LARGE HOSPITALITY SECTOR BENEFITS PLEDGED REVENUE BASE

The sources of pledged revenues are considered narrow by Fitch but are supported by the presence of five of the state's top 10 tourist attractions, including the Alamo, the San Antonio Riverwalk, Sea World, Six Flags over Texas, and the San Antonio Zoo. After strong growth through fiscal 2008, HOT and MVRT revenues declined by an aggregate 12.4% in fiscal 2009, before rebounding by a compound annual average of 6.9% through fiscal 2013. Combined HOT and MVRT receipts for the first 10 months of fiscal 2014 are up 3.5% over the same period a year prior. Modest growth in fiscal 2014 is attributed to sluggish bookings at the city's convention center which is undergoing major renovations.

The county's inventory of hotel rooms totals a large 45,416 rooms across 423 hotels, motels, and bed/breakfasts. In August 2014, the occupancy rate registered at 67% but is higher for downtown hotels. No major hotel projects are underway or currently planned. The county's forecast assumes flat pledged revenue growth which Fitch views favorably.

The combined HOT within the county totals an above-average 16.75%, comprised of the 1.75% pledged HOT, a 6.0% state HOT, and a 9.0% city HOT. The taxes are collected by the city of San Antonio pursuant to a contract with the county. The combined MVRT totals 15.0% on short-term rentals, comprising the 5.0% pledged MVRT and a 10.0% state MVRT, both of which are collected by the state comptroller.

ADEQUATE COVERAGE OF MVRT BONDS; NO FURTHER LEVERAGING

Maximum annual debt service (MADS) coverage totals 1.5x for the MVRT bonds based on audited fiscal 2013 revenues, which Fitch considers adequate for the rating level. Debt service is level after the current year but only 21% of principal matures in 10 years due to the long 40-year maturity of the 2009 bonds. All of the voter-approved amateur sports projects have been funded and no additional leveraging of this revenue stream is authorized.

THINNER COVERAGE OF COMBINED VENUE TAX BONDS; ADDITIONAL DEBT PLANNED

Current MADS coverage of the combined venue tax bonds is thinner at 1.3x and will be pressured by the county's plan to issue its remaining $75 million in combined venue tax bonds by 2016. Fitch considers the county's 1.25x (ABT)to be below average and is based on AADS. The bonds are structured with level debt service but also mature very slowly (18% in 10 years) due to the long 40-year maturity of the 2009 bonds.

LARGE RESERVES BUFFER THIN COVERAGE

The CICF totaled $75.6 million in fiscal 2014, equal to over five years of AADS for the combined venue tax bond debt service payments. The CICF can only be used for debt service, capital improvements, and bond redemption, which Fitch's considers a key offsetting credit strength to thin coverage levels of the combined venue tax bonds. The CICF reserves are especially important under Fitch's stress scenarios in which revenues experience declines equal to those posted during the 2009 recession.

The county may consider using a portion of the CICF to supplement its planned combined venue tax bonds. A reduction in the CICF balance to close to or below AADS may result in negative rating action for the combined venue tax bonds.

NO OPERATING IMPACT ON COUNTY

Fitch expects any county responsibility for operations and maintenance (O&M) costs of the numerous venue project bond-financed projects to be manageable. The county currently makes no O&M contributions, as costs are addressed through negotiated memorandums of understanding with third parties.

MANAGEABLE PENSION AND OPEB COSTS

The county and all of its full-time employees contribute to a statewide agent multiple-employer defined benefit pension plan administered by the Texas County and District Retirement System (TCDRS). The county fully funds the annual required contribution (ARC), leading to a solid 81.9% funded position as of Dec. 31, 2012. Adjusted to reflect Fitch's assumption of a 7% rate of return, the funded position is still adequate at an estimated 74%. The county's other post-employment benefits (OPEB) are modest and funded on a pay-as-you-go basis. Carrying costs for the county's debt service, pension ARC and OPEB payments are moderate at 15.4% of total fiscal 2013 governmental spending.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=907054

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