News Column

Fitch Affirms Pasadena, Texas' LTGOs and COs at 'AA'; Outlook Stable

August 28, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms the city of Pasadena's (the city) outstanding limited tax debt as follows:

--$105.9 million general obligation (GO) bonds at 'AA';

--$4.4 million certificates of obligation (COs) at 'AA'.

The Rating Outlook is Stable.

SECURITY

Both the GO bonds and the COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a nominal subordinate lien on the net revenues of the solid waste disposal system, not to exceed $1,000.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Characteristically ample liquidity and solid reserves have increased due to improved sales and property tax revenues since the recession and sustained, conservative fiscal practices by management. Nonetheless, Fitch expects the projected spend-down of reserves for one-time capital projects over the near term to bring fund balance closer to historical norms yet remain well above the city's formal 60-day reserve policy.

BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS: Pasadena is a mature city with minimal population growth. Income and educational attainment levels are below average.

MIXED ECONOMIC PROFILE: The city's economy benefits from its proximity to central Houston, the Port of Houston, and presently robust activity in the region's energy sector, although unemployment remains slightly above the Houston metropolitan statistical area (MSA) and state.

TAV REBOUNDS: Increases in commercial and industrial property valuations have led to TAV gains after a period of moderate contraction during the recession.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt to market value is high, driven mainly by local school district debt levels. This is balanced against favorably rapid amortization of the city's direct debt, a moderate fixed carrying cost burden, and a well-funded pension plan. Near-term capital needs are projected to be adequately addressed with pay-go spending.

RATING SENSITIVITIES

FINANCIAL PROFILE MAINTAINED: The rating is sensitive to shifts in fundamental credit characteristics, including the city's historically stout reserves that provide financial flexibility in conjunction with management's conservative fiscal practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

SOCIO-ECONOMIC METRICS SUBPAR IN THIS MATURE CITY

Located along the Houston Ship Channel, the city of Pasadena is part of the larger Houston MSA with a population of about 152,000. Income and educational attainment levels are below average. Year-over-year unemployment is down at 5.3% in April 2014 from 6.9% in April 2013 and slightly below the U.S. rate, but it remained slightly above the MSA and state rates of 4.6% and 4.7%, respectively, which was in line with historical trends.

The local economy benefits from its proximity to downtown Houston and the Port of Houston. The port consistently ranks first among all U.S. ports in foreign waterborne tonnage and second in the U.S. in total tonnage. A major expansion at the Panama Canal has led to the growth of various distribution and support service businesses in the city according to management. Facility expansion is also occurring among some of the city's large, existing industrial/commercial enterprises given their linkage to the presently robust activity in the region's energy sector that drives much of the Houston economy. Other economic expansion opportunities for Pasadena are limited, as the city is fully developed and landlocked. The area economy leans heavily on manufacturing, petrochemical and allied industry employment, but has expanded somewhat with retail and commercial development in the southern part of the city.

RECENT TAV GAINS DUE PRIMARILY TO INDUSTRIAL/COMMERCIAL GROWTH

Tax base trends reversed course with a strong year-over-year gain in fiscal 2013 that restored TAV to its pre-recessionary peak of $5.9 billion and offset the moderate 12% cumulative decline realized over a three year period during the recession (fiscals 2010-2012). This was in contrast to management's conservative projections of flat TAV over the near term. Home prices are reportedly improved but remained modest as the median price for housing in Pasadena rose from approximately $80,000 in 2012 to $100,000 in 2013. Residential values contributed slightly less than 50% of TAV in fiscal 2013. Another more modest 4% gain was recorded in fiscal 2014 due largely to the continued growth in commercial and industrial property valuations. Taxpayer concentration remains moderate at just under 10%. Management reports preliminary values from the appraisal district indicate another comparable 4% gain for the 2014 tax year (fiscal 2015), which appears reasonable to Fitch given the current economic trends.

MULTI-YEAR SURPLUSES TO FUND PAY-GO CAPITAL SPENDING

The city's financial profile is a credit positive. The city benefits from a diversity of revenue sources, including property taxes, utility revenues, and sales taxes as well as fees in lieu of taxes from businesses in an adjacent industrial area that the city has consented (under an agreement in place through 2018) not to annex but to which the city provides limited services.

Management's conservative budgeting practices and cost saving measures implemented over the recession in conjunction with annual gains in property and sales taxes after a recent low in fiscal 2010 led to sizeable net surpluses of no less than $7 million in each of the last three fiscal years (fiscals 2011-2013) and a build-up of reserves. City management postponed a previously budgeted drawdown of nearly $15 million in pay-go capital spending for streets due to prioritizing FEMA-related capital projects. This resulted in a very high unrestricted $50 million general fund balance or about 60% of spending at fiscal 2013 year-end. Liquidity was also strong at fiscal 2013 year-end with general fund cash and investments totaling $53 million or over 7 months of operations.

Management expects to close fiscal 2014 with a modest $1 million addition to reserves at year-end for a total of $51 million. Additional capital project spending currently incorporated in the most recent version of the fiscal 2014 budget is projected to largely offset the year's total revenue gain in excess of budget, which includes the approximately $1.6 million or 8% growth in sales tax revenue year-to-date and $4.6 million from the sale of a city building.

The proposed $109.7 million fiscal 2015 budget incorporates a sizeable $16.7 million draw on reserves, which is due primarily to additional pay-go capital spending. Despite the draw, general fund reserves should remain favorable at approximately $34.4 million or 31% of spending, well above the city's formal 60-day reserve policy (estimated at $15.8 million). Fitch takes comfort from management's history of maintaining reserves well above its stated minimum (unreserved/unrestricted reserves have been no less than 24% of spending since fiscal 2007) and actual financial performance that typically exceeds management's conservative budgetary estimates.

OVERALL DEBT BURDEN HIGH

Overall debt is high at 5.8% as a percentage of market value due primarily to overlapping school district debt, but remains more moderate at $3,200 on a per capita basis. Direct debt for the city includes both self-supporting water and sewer revenue bonds (rated 'AA-' with a Stable Outlook by Fitch) and tax-supported debt. Amortization of tax-supported principal is very rapid at nearly 90% in 10 years. City officials have historically approached voters infrequently for GO bond authorizations and otherwise relied on pay-go capital spending to meet its seemingly manageable capital needs as a mature city. The city has no remaining GO authorization from its last bond election in 2002; prior plans for a 2013 GO bond election were postponed. Management indicates November 2015 is likely the earliest date the city would seek voter approval for new GO bond authority, although near-term water/sewer capital needs may be met with debt issuance.

MIXED PENSION & OPEB LIABILITIES POSITION

The city's pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. Structural and actuarial changes to TMRS in recent years approved at the state level have significantly boosted the city's funded position and subsequently have required a lower annual required contribution (ARC). The city has paid 100% of its ARC over the last three fiscal years (2011-2013); the city's ARC payment totaled $7.2 million in fiscal 2013, which was down from $10.4 million in fiscal 2011. The pension's funded position is a high 94.3% as of Dec. 31, 2012 (the plan assumes a 7% investment rate of return), which management expects to maintain over the near term.

Other post-employment benefits (OPEB) consist primarily of certain healthcare benefits for retirees. The city funds OPEB annually on a pay-go basis, which totaled $3.5 million in fiscal 2013. This pay-go amount has covered no more than 60% of the actuarially determined annual OPEB cost in the last three fiscal years (2011-2013) despite a declining actuarially accrued liability over the same time period due to some reduction in plan benefits. Nonetheless, Fitch recognizes the current unfunded accrued actuarial liability is relatively modest at $63 million or about 1% of fiscal 2014 TAV. Carrying costs for the city (debt service, pension, OPEB costs, net of self-supporting enterprise debt) are moderate at about 18% of governmental spending in fiscal 2013 despite the rapid pace of debt principal amortization.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, the Texas Municipal Advisory Council, and LoanPerformance, Inc.

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:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=860134

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.



Fitch Ratings

Primary Analyst

Rebecca C. Moses

Director

+1-512-215-3739

Fitch Ratings

111 Congress Avenue, Suite 2010

Austin, TX 78701

or

Secondary Analyst

Gabriela Gutierrez

Director

+1-512-215-3726

or

Committee Chairperson

Doug Scott

Managing Director

+1-512-215-3725

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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