July 16 - Fitch Ratings has assigned an ‘AA+’ rating to the following Fort Bend County Grand Parkway Toll Road Authority Texas’ (the authority) bonds: --$179.8 million limited contract tax and subordinate lien toll road revenue bonds, series 2012. The bonds are expected to price via negotiation during the week of July 23. Bond proceeds will be used to construct tolled overpasses on Segment D of the Grand Parkway Toll Road, pay capitalized interest, and issuance costs. In addition, Fitch affirms the following ratings at ‘AA+': --$303.8 million Fort Bend County (the county) unlimited tax bonds; --$190.3 million county limited tax bonds. The Rating Outlook is Stable. SECURITY The series 2012 bonds are secured by payments from the county made to the authority under the joint project agreement in addition to a subordinate lien pledge of net project revenues. The county’s obligation to make payments is secured by a pledge of the county’s limited property tax levy (up to $0.80 per $100 TAV). Given the large taxing margin within the $0.80 per $100 TAV limit, no rating distinction is made between the unlimited and limited tax secured bonds. KEY RATING DRIVERS UNCONDITIONAL COUNTY OBLIGATION: According to the formal agreement between the county and the authority (a component unit of the county), the county is unconditionally obligated to make annual payments equal to debt service on the bonds, less any net revenues of the Grand Parkway Toll Road System. TAX RATE AND DEBT STRUCTURE CUSHION: The county maintains a large taxing margin below the statutory limit of $0.80 per $100 TAV. Assuming the entire issuance is paid for out of ad valorem taxes, a modest tax rate increase of 2.5 cents at current TAV levels to the nearly $0.50 per $100 TAV total tax rate would be necessary. However, management anticipates future toll road revenues will provide sufficient debt service coverage. STRONG FINANCIAL PROFILE: The county’s prudent fiscal practices are evident in the consistent maintenance of strong financial reserves while annually investing a significant portion in pay as you go capital projects. Key to this rating is the inherent financial flexibility provided by the county’s strong financial position, offsetting Fitch’s concern, to some extent, regarding timely generation of sufficient toll road revenues. RELIANCE ON PROPERTY TAXES: Previously rapid taxable assessed valuation growth has slowed significantly in recent years, including one year of modest decline. Fitch believes the county’s affordable home prices and ample developable land will lead to resumed solid growth, although the timing is unclear. Property taxes comprise over three-fourths of the county’s general fund resources, providing some stability to the county’s financial profile and budgeting efforts. HIGH OVERALL DEBT AND SLOW PAYOUT: Direct debt ratios are low, although overall levels are very high, reflecting bond issuance by a large number of fast-growing school districts, cities, and special districts within the county. With this issuance, the pace of principal amortization repaid in 10 years declines to a slow 30%. ABOVE AVERAGE ECONOMY: The county benefits from its location within the broad and diverse Houston MSA. County wealth levels as measured by median household income are well above the MSA, state, and national levels. The county’s own economy continues to expand and diversify, with unemployment levels below state and national averages. WHAT COULD TRIGGER A RATING CHANGE WEAKENING OF FINANCIAL POSITION: Maintaining the county’s strong finances is key to this rating. The significant financial flexibility provided by the county’s financial position helps to mitigate Fitch’s concerns regarding the high debt levels, including the increased fixed cost burden this issuance would place on the county if toll revenues did not materialize. CREDIT PROFILE AUTHORITY ESTABLISHED AND MANAGED BY COUNTY The Fort Bend County Grand Parkway Toll Road Authority was created in 2010 by Fort Bend County in conjunction with plans for toll road construction as defined by state legislation and the Texas Department of Transportation. It incorporates existing roadways that include Segment D of the Grand Parkway that runs from U.S. Highway 59 South to Interstate 10. The authority is governed by a five-member board, which is appointed by county commissioners. The county commissioners must approve all significant decisions of the authority and the authority’s finances are administered by the county; the authority currently has no staff or employees. The county also operates the Fort Bend County Toll Road Authority, which manages other toll roads and is separate from the Grand Parkway Authority. CONSERVATIVE FISCAL STEWARDSHIP YIELDS STRONG PERFORMANCE The county’s financial position and conservative fiscal stewardship are important credit strengths. Over the last four fiscal years, the county consistently posted general fund balances well in excess of its policy to maintain a minimum of 15% of expenditures despite spending nearly $70 million in pay-as-you-go capital projects during the same period. Annual capital outlay spending averaged nearly 9% of general fund revenues for each year from 2008 to 2011. For the close of fiscal 2011, the county recorded an unrestricted general fund balance of $44 million or 21% of spending. Of this amount, $33.1 million is committed for completion of the county’s five-year capital improvement plan (CIP) general purpose projects. For fiscal 2012, the county is experiencing some budgetary pressure due to slower tax base growth compared with prior years’ double digit growth trend. Additionally, the county shifted some tax levy from debt service to operations and maintenance. The adopted budget assumes the use of approximately $9 million in fund balance for planned capital outlays. On a year-to-date basis, management reports financial performance has generally remained in line with budgeted expectations with a projected year-end general fund balance of $44.1 million, despite some unanticipated spending. Results have been buffered by slower than projected CIP implementation and construction savings in various bond projects that have allowed for a reduced level of annual pay-go capital spending. HIGH OVERALL DEBT The county’s direct debt burden on the budget is manageable at 12% of fiscal 2011 spending, although this could rise to a high level if the debt service for this issuance is carried in its entirety by the county without toll road revenue support. Also, Fitch notes that the pace of principal amortization repaid in 10 years declines with this issuance to a slow 30%. At approximately $8,100 per capita or 9.7% of total market value, overall debt levels are very high, reflecting significant issuance by school districts, special districts, and cities located or partially located within the county. This issuance is for the Grand Parkway Project, which consists of a series of tolled overpasses at the existing intersections on Segment D of the Grand Parkway Toll Road. Segment D will ultimately tie into the larger Grand Parkway System that consists of a multi-phased, planned system of controlled access toll lanes traversing seven counties and encircling the Greater Houston Region. Construction of the first two overpasses on Segment D began in August 2011 as the county provided some initial funding; completion of the toll system on Segment D is expected by late 2013. This is the first series of bonds to be issued under any lien of the Grand Parkway Authority. At this time, further debt plans from toll revenues remain undetermined as the lien status remains open for both senior and junior liens in the future. It is anticipated that this issuance will fund $150 million in construction to complete Segment D (including repayment of prior advances made by the county to the authority in addition to advance funding operations over the near-term at $2.5 million). Approximately $27 million of bond proceeds will be used to pay capitalized interest scheduled in the first four years of the amortization schedule that will allow time for the toll revenues to build after its expected opening. The county’s general purpose facility needs have been met with prior bond proceeds and annual pay-as-you-go funding. The county’s five-year CIP is projected to be entirely cash funded with general fund reserves. The county maintains $41 million in authorized but unissued bonds from the $156 million bond package approved by 79% of voters in 2007. The remaining authorization is entirely for county roads and will be issued sometime over the next two years. AFFORDABLE PENSION LIABILITIES, BUT HIGH OPEB OBLIGATIONS The county provides pension benefits through the Texas County and District Retirement System (TCDRS). Funding levels are satisfactory at nearly 84% (76% using a more conservative 7% investment return assumption), and the county routinely funds 100% of its annual required contribution (ARC) to TCDRS. In fiscal 2011, the county paid $11.4 million into TCDRS, or a manageable 5.7% of spending. The county also provides other post-employment benefits (OPEB) through the TCDRS. The county funds these benefits on a pay-as-you-go basis, which equaled a very low 16% of the ARC in fiscal 2011. Fitch notes the lack of pre-funding as an ongoing credit concern. The unfunded actuarial accrued liability is $240 million, or a high 228% of annual covered payroll, although management reports some changes have been implemented (e.g., increasing years before vesting new employees) that may result in a modest, favorable reduction to the liability over the near-term. HEALTHY ECONOMIC INDICATORS Fort Bend County has been one of the fastest growing counties in the state and nation. Currently estimated at more than 600,000, the county’s population grew over 70% since 2000, fueled by its location within the growing and diverse Houston metropolitan economy as well as the availability of ample and affordable housing. The county’s TAV experienced double-digit growth from fiscal 2006 - 2009. However, in fiscal 2010, growth slowed and TAV dipped modestly (less than 1%) in fiscal 2011. Tax base growth resumed in fiscal 2012, albeit at a much slower pace than historical levels. Flat TAV (1% growth) is projected for fiscal 2013. Nonetheless, the county’s TAV is diverse with the top 10 taxpayers comprising less than 6% of the total tax base. Property tax collections remain strong, with fiscal 2011 collection rates consistent with historically strong levels in excess of 99%. The county’s own economic base has grown significantly within the last decade. Substantial population gains and residential development have resulted in expansion of the retail and construction sectors. Located within the Houston MSA, the county’s economy is heavily based on mineral production and manufacturing, as well as, agriculture. The county’s unemployment rate of 6.2% in May 2012 is comfortably below the state (6.9%) and well below national averages (7.9%) for the same period. In addition, the labor force grew nearly 2.5% year-over-year in May 2012. Wealth levels of the county’s population are notably higher than those for the Houston MSA, state, and nation.