AUSTIN, Texas--(BUSINESS WIRE)--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.
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.
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.
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'.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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