Fitch Rates Pearland, Texas's 2014 GOs & COs 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following limited tax obligations for Pearland, Texas (the city):

--$34.475 million permanent improvement and refunding bonds, series 2014;

--$4.625 million certificates of obligation (COs), series 2014.

The bonds are scheduled for sale via negotiation as early as Aug. 21; the COs are scheduled for competitive sale Sept. 22. Proceeds from the bonds will be used to finance street and park improvements and to refund outstanding debt for interest cost savings. Proceeds from the COs will be used to finance a new fire station and other facility improvements.

In addition, Fitch affirms the following ratings for the city:

--$206.15 million permanent improvement bonds series 2005, 2006, 2007, 2008, 2009, and 2012 at 'AA';

--$57.075 million COs series 2004, 2006, 2007, 2008, 2009, and 2009A 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 secured by 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). Rapid growth within the city is of some concern but wealth levels are above average, unemployment is low, and the tax base is expanding.

LARGE 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.

SALES TAX DEPENDENCE: The city relies heavily on sales tax revenues for operations, but healthy reserve levels temper risk from volatility in sales tax performance.

RATING SENSITIVITIES

RESERVES CREATE FINANCIAL CUSHION: Fitch expects the city to retain 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 106,900 in 2014.

MANAGEMENT PRACTICES SUPPORT HEALTHY FINANCIAL PROFILE

The city maintains a sound financial profile with healthy general fund 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 year 2013 was $18.5 million or 33% of spending. Unaudited results for fiscal 2014 reflect a $3 million use of fund balance for nonrecurring expenditures, in contrast to a budgeted $4 million operating deficit.

The city's annual budget process prudently includes the preparation of a multi-year forecast. The 2015-2017 forecast anticipates use of general fund reserves resulting in reserve levels reaching a low point of 20% of spending 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; GROWTH RELATED SPENDING

Economically sensitive sales taxes typically comprise about 30% of general fund revenues. Receipts increased by a strong 7% in fiscal 2013, and year-to-date receipts for fiscal 2014 are up an additional 7% over the prior year. The city projects future annual growth of 6% which Fitch believes is somewhat aggressive though consistent with recent figures.

The city's expense base is largely driven by service related costs associated with rapid growth, reflected in increases to public safety and public works. The self-funded health insurance plan recently saw a large increase in claims, resulting in a large projected increase to premiums in fiscal 2015. The proposed budget for fiscal 2015 includes a $3.4 million general fund drawdown for both recurring and nonrecurring expenditures. Draws on the health insurance fund will be restored with proceeds from the sale of city property, and recent changes to insurance benefits are expected to reduce future costs to the city.

HIGH DEBT BURDEN; OTHER LONG-TERM LIABILITIES MANAGEABLE

Fitch expects debt levels to remain high. Overall debt is $9,014 per capita and 11.9% of market value including overlapping MUD and school district debt. The rate of amortization of direct debt is slightly below average. The five-year capital improvement plan (CIP) is expansive, though the city has adequate existing bond authorization for its near-term capital plans. The current offerings provide for a new park, soccer complex, and fire station, as well as various street improvements. The city plans to borrow an additional $28 million from existing authorization in 2015 for various public improvements.

The city participates in the Texas Municipal Retirement System for pension benefits to civil employees and has contributed 100% of its annually required contribution (ARC) for at least the last three fiscal years. The funded position of the city's plan is adequate at 82% for fiscal year 2013, based on an assumed 7% rate of return which Fitch considers reasonable. Other postemployment benefits (OPEB) are handled on a paygo basis. The city's OPEB liability is modest, offering only an implicit rate subsidy. Carrying costs for debt service, 100% funding of the pension ARC, and OPEB expense are average at 22% of governmental fund spending.

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 2012 and 2013. 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 two hospitals scheduled to open during 2015.

Wealth indicators are substantially higher than state and national levels, with median household income 68% higher than the national average. Employment growth is robust, yielding an unemployment rate of 4.2% for June 2014 that is below the state and national rates of 5.5% and 6.3%, 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=854474

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