Fitch Affirms Harris County Flood Control District, TX Bonds at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the 'AAA' on the following Harris County Flood Control District (the district), TX bonds:

--$83.1 million limited tax bonds;

--$532.6 million contract tax revenue bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

Fitch rates the limited tax bonds as dedicated tax bonds with the 'AAA' rating based on the tax base's strong revenue growth prospects as well as ample revenue-raising flexibility within the tax limit, which provide significant cushion against potential tax base declines and offsets any concern about tax base volatility. The contract tax revenue bonds, as they are backed by a pledge of the county's property tax levy, are rated on par with the general credit quality of Harris County as expressed by its 'AAA' Issuer Default Rating (IDR). This release focuses on the analysis underlying the limited tax bond rating. For more information on Harris County, see 'Fitch Affirms Harris County, TX's IDR at 'AAA'; Outlook Stable' dated Sept. 27, 2016.

ECONOMIC RESOURCE BASE

The district is coterminous with Harris County, the largest county in Texas and the third largest in the nation, encompassing all but a small portion of the city of Houston, with a population totaling about 4.5 million. The county features a large, diverse economy that remains exposed to the energy sector. Expansion of the healthcare, biomedical research, aerospace, port, and petrochemical industries over the past several decades has reduced the historically strong reliance on the energy exploration sector.

DEDICATED REVENUE STREAM

Fitch expects a healthy pace of revenue growth to continue over time as cyclical contraction within the energy sector is balanced against continued expansion of the county's increasingly diverse economy.

SENSITIVITY AND RESILIENCE OF SECURITY THROUGH ECONOMIC DECLINES

Using AV as a proxy for revenues, Fitch expects the district's taxable values to exhibit modest volatility through economic cycles. The district's/county's independent legal ability to raise property tax revenues is ample, boosting resilience for the limited tax security.

RATING SENSITIVITIES

HARRIS COUNTY IDR: The bond ratings are sensitive to changes in the county's 'AAA' rating which hinges on strong revenue-raising and expenditure flexibility and a solid financial position that Fitch expects the county to maintain throughout economic cycles.

REVENUE GROWTH PROSPECTS: An extended deviation from the district's historical ability to rebound from energy sector downturns may lead to negative rating pressure.

CREDIT PROFILE

Houston's regional economy decelerated in 2015 and 2016 due to the significant contraction of the energy exploration sector that was triggered by plunging oil prices in late 2014. The Houston MSA is home to several thousand energy companies, ranging from large multi-national concerns to numerous mid-sized-to-smaller exploration, construction, engineering and service companies, many of which have cut operating costs via layoffs.

Due to substantial diversification of the economy, Fitch expects current cyclical pressures will not be as pronounced as those experienced in previous oil busts. Considerable growth in non-energy sectors has enabled year-over-year employment trends to remain positive albeit modest leading to an uptick in the MSA's unemployment rate. The significant presence of downstream users of oil and natural gas, such as petrochemical refineries, also provides some protection from shifts in volatile energy prices. An estimated $50 billion worth of petrochemical projects are underway in the MSA, whose construction payrolls and direct employment have helped counter losses in the mining and manufacturing sectors.

IHS projects the MSA's total employment will rebound beginning in 2017 as oil prices trend higher. Trade and transportation is projected to benefit from additional activity at the Port of Houston due to the recent expansion of the Panama Canal. The port is ranked second in the U.S. in total tonnage.

The county experienced a large 12% population gain in 2010-2015, the majority of which occurred in the unincorporated areas. Fitch expects the MSA's strong population growth trend to continue. Continued population gains have helped stabilize the MSA's housing market, allowing median home prices to continue to grow despite the energy sector downturn. AV growth for the county is expected to moderate somewhat after posting double-digit growth over the last two fiscal years. Preliminary AV estimates for fiscal 2017 point to a still solid 7.5% increase although Fitch expects near-term AV growth to be more modest.

DEDICATED REVENUE STREAM

Debt service on the limited tax bonds is paid from an annual property tax levy limited to $0.30 for operations and debt service. For the dedicated tax bond analysis of property tax-supported debt, AV is used as a proxy for revenues in assessing growth prospects.

For the ten-year period ended in fiscal 2014, AV grew by a strong compound annual average of 5.3%, in excess of the level of inflation and U.S. GDP growth. Fitch expects the district's revenues to moderate somewhat in the near term due to cyclical pressure but rebound quickly. AV increased by 11.8% in fiscal 2016 and, as noted above, the preliminary AV for fiscal 2017 points to a 7.5% gain. The fiscal 2017 budget conservatively assumed a 5.8% gain.

SENSITIVITY AND RESILIENCE OF SECURITY THROUGH ECONOMIC DECLINES

To evaluate the sensitivity of AV to cyclical decline, Fitch considers both the AV sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in Harris County's IDR framework) and the largest decline in AV over the period covered by the revenue sensitivity analysis. Based on the district's 15-year AV history, Fitch's analytical sensitivity tool (FAST) generates a modest 1% scenario decline in AV. The largest actual cumulative decline in historical AV is a 4.2% decline in fiscal 2011.

As the actual district tax rate is under $0.03 in fiscal 2017, ample taxing margin remains under the $0.30 per $100 AV cap for district operations and debt service. For the county, the actual tax rate is less than $0.40 in fiscal 2017, providing ample taxing margin under the $0.80 per $100 AV cap for county operations and limited tax debt service.

OPERATING RISKS INCORPORATED IN COUNTY'S IDR

The district was created in 1937 to control storm and flood waters and to provide drainage of overflow lands.

As the district is a blended component unit of Harris County with limited operations, Fitch believes that operating risk exposure for the bonds is best reflected in the county's IDR of 'AAA'. The district is administered by the county judge and commissioners' court who approve the budget, set tax rates, and approve contracts on behalf of the district. The commissioners' 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 commissioners' court and reports through the county public infrastructure department. The district benefits from the strong financial management and conservative budgeting practices of the county's administrative team.

The district's remaining bond authorization totals $64 million and will be issued over the next seven to 10 years in conjunction with the county's large authorization for road improvements, some of which are flood control-related road projects. Capital needs, while extensive, appear to be manageable given the district's reliance on pay-go capital outlays, history of a measured pace of debt issuance and its goal to maintain a level tax rate

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014949

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014949

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Assistant Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Assistant Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com