Fitch Rates Bexar County, Texas' Series 2013 COs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Bexar County, Texas obligations:

--$92 million combination tax and revenue certificates of obligation (COs), series 2013.

The COs are expected to price via negotiated sale during the week of Jan. 28, 2013. Proceeds of the COs will be used to finance street improvements.

In addition, Fitch affirms the following ratings:
--Approximately $962 million in outstanding unlimited tax (ULT) and limited tax (LT) bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY
The COs and LT bonds are secured by an annual property tax levied against all taxable property within the county, limited to $.80 per $100 taxable assessed valuation (TAV). Additionally, the COs are payable from a subordinate lien on net revenues from the county's parking facilities. ULT bonds are secured by an unlimited annual property tax levy.

SENSITIVITY/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.

Elevated Debt Ratios: The county's debt profile is characterized by an elevated overall debt burden and slow principal amortization, partially offset by its practice of fully funding the annual pension contribution requirement and historical reliance on conservative debt instruments.

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

Stalled Tax-Base Gains: Slower residential building activity and modest tax base declines stalled previously rapid tax base growth. However, Fitch expects that the area's affordable home prices, ample developable land, and surging oil and gas activity at the nearby Eagle Ford Shale will aid the area's ongoing recovery.

Rating Parity: The long-term general obligations (LTGOs) are rated on par with the ULTGOs due to the significant rate raising flexibility under the rate limitation supporting the LTGOs. The county currently levies a combined $0.29 operations and debt service tax rate compared to the limit of $0.80.

CREDIT PROFILE

Bexar County, with an estimated 2012 population of 1.7 million, is home to San Antonio (GO bonds rated 'AAA' with a Stable Outlook by Fitch), the seventh largest city in the U.S.

Military Still Important Within Diverse Economy
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 recent 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 sector and the construction/mining sector, fueled by surging oil and gas activity within the nearby Eagle Ford Shale. As a result, the county's October 2012 unemployment rate of 6% still compares favorably to state and national averages of 6.2% and 8.1%, respectively, for the same period.

Stalled Tax-Base Growth
Tax-base growth flattened in fiscal 2011, following numerous years of double-digit growth, due to the steep building downturn and falling base values during the last recession. The modest 1.6% decline in fiscal 2012 was recovered in fiscal 2013 and compares favorably to management's conservative forecast of a second 1.6% decline. County officials are projecting modest rates of TAV growth beyond fiscal 2013. 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 cut 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 its reserves above its 10% fund balance policy level despite sluggish tax-base trends during the economic slowdown.

The county posted a solid operating surplus after transfers in fiscal 2011 equal to 2.0% of general fund spending and increased its unrestricted fund balance to $55.7 million or 17.5% of spending. Unaudited fiscal 2012 results point to a modest operating surplus after transfers, aided by the county's practice of budgeting contingency appropriations, resulting in an unrestricted fund balance approximating 19% of spending. Notably, the fiscal 2012 budget included a net reduction of 228 positions (4.8% of county workforce) and included contingency appropriations, equal to 3.6% of total appropriations.

Public safety expenses dominate the general fund budget, with 50% of appropriations for law enforcement and jail operations. Average annual expenditure growth of 3% just outpaced 2.1% revenue growth from fiscals 2007-2011. Fitch views favorably the county's success in controlling expenses starting in 2009; fiscal 2011 expenditures returned to fiscal 2008 levels.

The adopted fiscal 2013 budget is balanced at a level tax rate, increases general fund appropriations by a manageable 4.0% over estimated fiscal 2012 expenditures, and continues the practice of appropriating meaningful contingencies ($14.6 million or 4.3% of total appropriations).

Appropriation increases are led by a new collective bargaining agreement with the deputy sheriff's office, totaling $23 million over three years and contributing to 1.6% of the 4.0% growth in spending between fiscals 2012 and 2013. All other county employee pay is determined annually and a 3% COLA was adopted for fiscal 2013.

Elevated Debt Ratios
The county's debt profile is characterized by a high overall debt burden due to substantial debt issuances by the county's large number of overlapping jurisdictions. Overall debt has also risen due to declining state support for local school district debt as a result of rising property values in recent years. This trend has increased the effective overall debt level for the county, which includes 15 different school districts. Including the current offering, the principal amortization of property tax-supported debt is below average at 28% in 10 years. The current offering is not projected to require an increase to the debt service tax rate.

Large Future Debt Plans
The county has issued more than half of its planned $680 million in non-voter approved COs for drainage improvements planned in conjunction with the city of San Antonio, the San Antonio River Authority (SARA), and other regional participants. Previously funded through contractual obligations to SARA, the county now issues the debt directly, although SARA continues to provide technical assistance and manage the main river project.

Planned issuances for drainage improvements of $75 million in each of the next two years will keep the county's debt ratios elevated. However, management reports that its goal is to maintain a modest level debt service tax rate of $0.03 per $100 TAV, which Fitch views positively. Annual issuances of $20 million for general capital improvements are also planned in each of the next two years.

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, leading to an adequate 76% funded position, adjusted to reflect Fitch's assumption of a 7% rate of return, as of Dec. 31, 2010. 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 is elevated at 22.8% of fiscal 2011 general fund spending.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the 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:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Inc.
111 Congress, Suite 2010
Austin, Texas 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Inc.
111 Congress, Suite 2010
Austin, Texas 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com