Fitch Rates Sugar Land, TX Ser 2008 GOs, COs 'AA+'; Upgrades Outstanding Debt

AUSTIN, Texas--(BUSINESS WIRE)--Fitch assigns its 'AA+' rating to the City of Sugar Land, Texas' (the city) $6.925 million general obligation (GO) bonds, series 2008 and $4.46 million combination tax and revenue certificates of obligation (COs), series 2008. Additionally, Fitch upgrades to 'AA+' from 'AA' the rating on the city's outstanding $78 million GO bonds and $35.5 million COs. The bonds and certificates are to be sold competitively on June 17th. The Rating Outlook is Stable.

The bonds and certificates are direct obligations of the city, payable from a limited ad valorem tax levied on all taxable property in the city. The certificates are secured further by a limited pledge of a subordinate lien on certain revenues of the water and wastewater system of the city. Proceeds will be used for various municipal improvements and to pay issuance costs.

The upgrade to 'AA+' from 'AA' results from Sugar Land's ongoing economic expansion, which has been fostered by transportation improvements that have facilitated access to Houston. Also factored into the upgrade is a continuation of strong financial performances, as well as steady tax base growth, relatively high wealth levels, and a very low property tax rate. The capital plan is manageable, given ongoing and anticipated growth as well as the city's declining debt service schedule. An offsetting credit factor is the city's heavy reliance on sales tax revenues for operations, but this concern is largely mitigated by sizeable operating reserves and the low property tax rate.

Located approximately 20 miles southwest of Houston in Fort Bend County, Sugar Land is a mixed residential and commercial community of nearly 78,000. Expansion of U.S. Highway 59, which is the direct route from Sugar Land to downtown Houston, along with other roadway improvements in and around the city, have spurred healthy commercial and residential development activity in recent months. City officials report that transportation improvements over the past decade, including the U.S. 59 expansion, have approximated $500 million. The benefit is evidenced in building permit totals, which set records for both residential ($155 million) and commercial ($223 million) properties in fiscal 2007.

Sales taxes represent the largest share of general fund operating support, typically constituting between 55%-60% of general fund operating revenues. After recording only modest growth in collections in fiscal 2002, total sales taxes rebounded from this recessionary lull and posted solid annual increases averaging over 9% over the past five fiscal years. Although a slowdown in fiscal 2008 sales tax receipt growth is a reminder of the economic vulnerability of this revenue source, Fitch believes the city's extensive financial planning efforts and conservative budgeting practices, as well as allocation of a portion of sales tax revenue to one-time capital spending, mitigate much of the associated risk.

The general fund has recorded surpluses in each of the past four fiscal years, including net income of $2.6 million in fiscal 2007. General fund reserves remain substantial, with an unreserved general fund balance for fiscal 2007 of more than $25 million representing slightly less than 50% of operating expenditures and transfers out. Sales tax revenues climbed nearly 7% in fiscal 2007 over prior year collections.

Current fiscal 2008 estimates call for a drawdown of operating reserves (in line with budget projections), but the projected fund balance will exceed the minimum three-month reserve set by city policy. Fitch views positively the city's conservative budgeting practices, which usually generate actual results better than original projections. The fiscal 2008 total property tax rate is $0.30 per $100 of taxable assessed value (TAV), and the city has reduced the total rate for eight consecutive years. Sugar Land's tax rate reportedly is the second lowest in the state for cities in its population range.

While still above average, Sugar Land's overall debt levels are not considered a weakness due to a rapid amortization schedule, utility system support of debt payments, and above average wealth levels. Debt levels have increased with the annexation of several municipal utility districts (MUDs) and the assumption of their debt, but the city also has benefited from the increase in the tax base that accompanied these annexations.

Population and TAV increases reflect the growth pattern of recent years. The city's population has expanded more than 20% since the 2000 census, and TAV has climbed by an average of more than 7% annually over the past five fiscal years. Fitch anticipates ongoing developments like the recently opened Town Square (which includes a new city hall), Lake Pointe Town Center and Telfair will produce continued TAV growth over the near and intermediate term.

Unemployment rates historically have been lower than regional, state and national averages, and the most recently available monthly statistics (March 2008) continued this trend. Local wealth levels, as measured by median household buying income and per capita buying income, comfortably exceed both state and national averages.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.