Fitch Rates Pearland, TX's Limited Tax Bonds 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following bonds of Pearland, Texas (the city):

--$47.8 million permanent improvement refunding bonds, series 2015.

The bonds are scheduled for sale via negotiation on March 30. Proceeds from the bonds will be used to refund a portion of the city's outstanding debt for interest cost savings.

In addition, Fitch affirms the following ratings:

--$212.2 million permanent improvement bonds series 2005, 2006, 2007, 2008, 2009, 2012, and 2014 at 'AA';

--$54.6 million certificates of obligation (COs) series 2006, 2007, 2008, 2009, 2009A, and 2014 at 'AA'.

The Rating Outlook is Stable.

SECURITY

Permanent improvement bonds are voted general obligations of the city. Both the bonds and the COs are payable from a property tax levy that is limited to $2.50 per $100 of assessed valuation. The COs are additionally secured by a limited pledge of net revenues from the city's water and sewer system.

KEY RATING DRIVERS

PRUDENT FINANCIAL MANAGEMENT: The city maintains satisfactory reserve levels and a consistent record of conservative budget practices. Fitch expects reserves to remain healthy given the city's sound management policies.

STRONG REGIONAL ECONOMY; RAPID GROWTH: The city benefits from its location within the strong and diverse Houston metropolitan statistical area (MSA). Wealth levels are above average, unemployment is low, and the tax base is expanding.

WEAKER DEBT PROFILE: The city's high debt levels are the key credit risk. Rapid growth and development, as well as sizable overlapping municipal utility district (MUD) debt, yields a high debt burden unlikely to change given growth related needs. Retiree benefits are a manageable burden on city resources.

SALES TAX DEPENDENCE: The city relies heavily on sales tax revenues for operations. Sales taxes have generally grown steadily over time, and healthy reserve levels temper risk to future volatility driven by changes in economic conditions.

RATING SENSITIVITIES

RESERVES CREATE FINANCIAL CUSHION: Fitch expects the city to maintain its healthy reserve position to counterbalance concerns over the reliance on sales tax revenue and the high overall debt levels, credit factors that Fitch believes limit the rating to its current level.

CREDIT PROFILE

Pearland is located just south of Houston's outer loop, mostly in Brazoria County. The city experienced rapid population growth of 142% between the 2000 and 2010 census, rising to approximately 112,300 in 2014.

MANAGEMENT PRACTICES SUPPORT HEALTHY FINANCIAL PROFILE

The city's financial profile is sound, exhibiting healthy operating reserve levels in excess of its formal fund balance policy. The city's policy is to maintain reserves equivalent to two months (roughly 17%) of recurring operating expenditures. The unrestricted general fund balance at the close of fiscal 2014 was $19.3 million or 31% of spending. These results outperformed a deficit budget, benefitting from payroll and fuel cost savings. The city also carried over $1.3 million of capital spending to the fiscal 2015 budget.

The adopted budget for fiscal 2015 includes a $3.8 million general fund drawdown (5.7% of expenditures and transfers out) for both recurring and nonrecurring expenditures. The city's high fund balance position alleviates concerns with respect to the use of reserves for operations. Fitch expects the city will take actions to more closely align recurring spending and revenue over the near term.

The city's annual budget process prudently includes the preparation of a multi-year forecast. The 2015-2017 forecast anticipates use of general fund balance resulting in reserve levels reaching a low point of 17% in fiscal 2016, consistent with the city's minimum reserve policy. Fitch believes the city is likely to continue its practice of outperforming the budget and views healthy reserves as a key mitigant to sales tax volatility and a high debt load.

ROBUST SALES TAX ACTIVITY

Economically sensitive sales taxes typically comprise about 30% of general fund revenues. Receipts increased by a strong 6.5% in fiscal 2014, and year-to-date receipts for fiscal 2015 are up an additional 13% over the prior year, reflective of overall economic expansion. The city projects future annual growth of 6%, which Fitch believes is somewhat aggressive, though consistent with average growth of 8% over the past three years.

HIGH DEBT BURDEN

Fitch expects debt levels to remain high. Overall debt is $7,982 per capita and 10.3% of market value, including overlapping MUD and school district debt. The rate of amortization of direct debt is average with 52% repaid within 10 years. The five-year capital improvement plan (CIP) is expansive, though the city has adequate existing bond authorization for its near-term capital plans. The CIP includes $102 million in tax-supported borrowing, compared with $96 million scheduled to amortize during the same period.

RETIREE LIABILITIES ARE MANAGEABLE

The city participates in the Texas Municipal Retirement System for pension benefits to civil employees and has contributes 100% of its annually required contribution (ARC). The city's portion of the plan is 80% funded at Dec. 31, 2013, based on an assumed 7% rate of return, which Fitch considers reasonable. Other postemployment benefits (OPEB) are funded on a pay-as-you-go basis. The city's OPEB liability is modest, offering only an implicit rate subsidy. Carrying costs for debt service, pension, and OPEB are above average at 27% of governmental fund spending in fiscal 2014 (debt service accounts for the majority of this figure at 24%).

TRANSITIONING BEDROOM COMMUNITY WITH ACCESS TO HOUSTON MSA

Pearland's proximity to the Houston core provides easy access to major transportation arteries and the broad, diverse economy of the MSA. Residential development continues to occur throughout the city, as evidenced by the increasing number of single family permits issued in 2013 and 2014. The taxable assessed value (TAV) for fiscal 2015 is $7.6 billion, up 21% from five years ago. Tax base growth and diversification are expected to continue with recent investments from the healthcare and manufacturing sectors, including one new hospital and one scheduled to open later this year.

Wealth indicators are substantially higher than state and national levels, with median household income 74% higher than the U.S. average. Employment growth is robust, yielding an unemployment rate of 3.2% for December 2014 that is well below the state and U.S. rates of 4.1% and 5.4%, respectively.

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, the Municipal Advisory Council of Texas, and the 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=981949

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