Fitch Rates Harris County Flood Control Dist, TX LT and Contract Tax Revs 'AAA'; Outlook Stable

Fitch Ratings assigns an 'AAA' rating to the following Harris County Flood Control District (the district), TX bonds:

--$34.4 million improvement refunding bonds, series 2014;

--$56 million contract tax refunding bonds, series 2014A;

--$65.3 million contract tax refunding bonds, taxable series 2014B.

The par amounts are preliminary and subject to change.

Fitch also affirms the 'AAA' on the following outstanding bonds of the district:

--$96.5 million limited tax bonds;

--$563.9 million contract tax revenue bonds.

The Rating Outlook is Stable.

The bonds are scheduled to price via negotiation during the week of May 5. Bond proceeds will be used to refund outstanding debt for interest cost savings.

SECURITY

The limited tax bonds are payable from an annual property tax levy, limited to $0.30 per $100 of assessed valuation (AV) for both operations and maintenance (O&M) and debt service. Contract tax revenue bonds are payable from payments received from Harris County pursuant to a flood control projects contract. Harris County's obligation to make the payments is secured by a pledge of its tax levy, limited to $0.80 per $100 of AV.

RATING DRIVERS

LARGE FINANCIAL RESERVES: The financial profile of the district remains positive, characterized by large financial reserves, high liquidity levels, and ample taxing margin.

STRONG FINANCIAL MANAGEMENT TEAM: As a blended component unit of Harris County (limited tax and unlimited tax bonds rated 'AAA' by Fitch), the district benefits from the strong financial management and conservative budgeting practices of the county's administrative team.

MANAGEABLE DEBT PROFILE: The district's large and expansive property tax base should allow the district to address its scaled down but still sizeable capital needs and keep debt service tax rates at modest levels. The overall debt profile is high and amortization is below average. Prudently, the county maintains an entire year's worth of debt service in reserves.

UNINCORPORATED AREAS GROWING RAPIDLY: Harris County remains one of the fastest growing counties in the U.S., aided by affordable home prices and ample developable land. Spurred by an expanding toll road system, the majority of growth in the last census occurred in the unincorporated areas of the county. Reliance on the county from these outlying communities to provide services remains a challenge.

ENERGY SECTOR STILL DOMINANT: While diversification into biomedical research, aerospace, and international trade via the Port of Houston is evident, energy and petrochemical manufacturing remain major determinants of employment and tax base growth in Harris County.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to material changes in fundamental credit characteristics, including the district's strong financial management practices. The district's history of reserve adequacy and sound financial management practices suggest continued rating stability.

CREDIT PROFILE

The district is coterminous with Harris County, which includes all but a small portion of the city of Houston. Created in 1937, the district's purpose is to control storm and flood waters and to provide drainage of overflow lands.

The district is administered by the county judge and commissioner's court, who approve the budget, set tax rates, and approve contracts on behalf of the district. The commissioner's court also calls elections and determines when to issue bonds authorized by the county. The district is managed by an executive director who is appointed by the commissioner's court and reports through the county public infrastructure department.

UNINCORPORATED AREAS LEAD POPULATION GAINS

With a population totaling 4.2 million, Harris County is the largest county in Texas and the third largest in the nation. The county experienced a large 20% population gain in 2000-2010 with a notable 75% occurring in the unincorporated areas.

A resurgent energy sector aided economic recovery starting in 2011 and favorable economic trends prompted the MSA's 2013 average unemployment rate to fall to 6.2%, on par with the state average but well below the national average of 7.4%. Resurgent building activity and reappraisal gains fueled a 9% gain in AV in fiscal 2014. The county auditor, who prepares the official estimate of available resources, projects a more moderate 5% AV gain for fiscal 2015 which Fitch considers reasonable given recent building trends.

FUNDING SHIFT FOR REDUCED CIP

The district previously maintained a large rolling $1 billion five-year capital improvement plan (CIP) for work on 23 watersheds, home buyouts, flood plain acquisitions, and regional flood control projects. Due to the completion of numerous major projects, the district significantly scaled back its CIP starting with the fiscal 2014 budget. The previous goal to fund $170 million annually in local funds (via commercial paper and contract tax revenue bonds), which were used to leverage $30 million in federal funds, has been reduced to $60 million in annual pay-go capital outlays. As a result of this shift, the district does not plan to issue any additional debt for the foreseeable future.

LARGE BALANCES TO ENABLE PAY-GO OUTLAYS

The district's general fund revenues are composed almost entirely of ad valorem taxes (97% in fiscal 2013). Financial reserves have been very strong, evidenced by unreserved balances well in excess of the county's 15% fund balance goal. In fiscal 2013, the district posted a large $12.6 million general fund surplus, equal to a high 21% of spending. As a result, the district's unrestricted fund balance rose to $125 million or a sizeable 211% of spending. Liquidity levels have also been substantial, with cash and investments in fiscal 2013 totaling over two years of operating expenditures.

Although $60 million of pay-go capital outlays was budgeted in fiscal 2014, actual transfers to the capital projects fund equaled $25 million or about 42% of the budgeted total. Due to a strong 9% AV gain and growing property tax revenues, unaudited fiscal 2014 results include only a modest drawdown despite the capital outlay. The fiscal 2015 budget maintains a level tax rate and assumes a moderate 5% AV gain, resulting in additional revenues for the district's pay-go effort. If its $60 million target is met, management projects a still strong cash balance of $97 million by fiscal year end 2015, equal to more than one-and-one-half year's operating expenditures.

The $60 million in annual pay-go outlays planned for the next several years will be funded in part by projected AV and property tax revenue gains. Fitch will monitor the impact on future year's financial reserves which are likely to trend downward but remain adequate. Fitch also notes the district retains flexibility in phasing in flood control projects over time if necessary.

Notably, the district's tax rate for O&M and debt service totals less than $0.03 per $100 AV, well below the state cap of $0.30 per $100 AV. Additionally, the county's tax rate for O&M and limited tax bond debt service (which the county has pledged for repayment of the district's contract tax revenue bonds) currently totals $0.40 per $100, also well below the state cap of $0.80 per $100 AV.

ELEVATED OVERALL DEBT PROFILE

The overall debt burden remains high and totals $6,223 per capita and 6.5% of market value. The combined principal pay-out rate for the limited tax bonds and the contract tax revenue bonds is below average at 43% in 10 years. Although the refunding bonds are projected to produce net interest cost savings in the aggregate, the current offerings also provide some restructuring that will result in level overall debt service.

PENSION AND OPEB ADEQUATELY FUNDED

County and district employees participate in the Texas County and District Retirement System, a cost sharing multiple-employer plan with a published funded position of 85% as of Dec. 31, 2012. Fitch estimates a moderately lower funded position of 76% after adjusting for a 7% investment rate of return. Employees' other post-employment benefits (OPEB) are administered by the county's own agent multiple-employer healthcare plan which it funds on a pay-go basis. The county's total carrying costs for debt service, pension, and OPEB totaled $311 million in fiscal 2013, equal to a moderate 15.8% of governmental expenditures.

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

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

Applicable Criteria and Related Research:

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

'U.S. Local Government Tax-Supported Rating Criteria', dated 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=827706

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