Fitch Affirms Brazoria County, TX’s ULT & LT Bonds at ‘AA+’; Outlook Stable

NEW YORK

Fitch Ratings affirms at ‘AA+’ the following ratings for Brazoria County, Texas (the county):

–$32.1 million unlimited tax (ULT) bonds;

–$36.7 million limited tax (LT) bonds and certificates of obligation (COs);

–Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The Unlimited Tax (ULT) bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the county.

The Limited Tax (LT) bonds and Certificates of Obligation (CO) are secured by a limited ad valorem tax pledge on all taxable property within the county, not to exceed $0.80 per $100 of assessed value.

KEY RATING DRIVERS

The ‘AA+’ ratings reflect strong revenue-raising ability and solid expenditure flexibility. These factors have supported maintenance of stable financial operations, including sound reserve levels, even in periods of economic weakening. Carrying costs related to long-term liabilities are expected to remain a moderate burden on county resources.

Economic Resource Base: Brazoria County (population of about 346,000) is located immediately south of Houston and bordered by the Gulf of Mexico and Fort Bend, Galveston, and Matagorda Counties. Pearland (Fitch IDR of ‘AA’, Stable Outlook) is the largest city in the county, with a population of about 103,000. The county economy is centered on chemical manufacturing and petroleum processing but also includes several other industries including fishing, tourism, government, and agriculture. Recent tax base trends have been positive, and Fitch expects continued growth.

Revenue Framework: ‘aaa’ factor assessment

Substantial property tax rate margin remains under the county’s $0.80 limit for operations and debt service. Continued growth in property and sales tax revenues is expected due to ongoing economic development. Property tax revenue growth will be augmented by previously abated properties that will be added to the tax rolls over the next several years.

Expenditure Framework: ‘aa’ factor assessment

The county’s solid expenditure flexibility reflects moderate carrying costs, control over headcount, and the absence of labor contracts. This flexibility should allow the county to address spending pressures related to basic services and capital needs while maintaining stable financial operations.

Long-Term Liability Burden: ‘aa’ factor assessment

The county’s long term liability burden, largely related to debt, is moderate at about 14% of personal income and should remain so even with potential additional debt issuance currently being considered. The county’s unfunded pension liability is low.

Operating Performance: ‘aaa’ factor assessment

Fitch expects continued strong operating performance given the county’s prudent budgeting and revenue and expenditure flexibility, with maintenance of reserves adequate to address potential economic downturns.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL POSITION: The rating is sensitive to shifts in the county’s strong financial management practices and capabilities. These include strong revenue-raising ability, solid expenditure flexibility, and maintenance of adequate reserves.

SIGNIFICANT ECONOMIC CONCENTRATION: The rating is sensitive to fundamental changes within the county’s dominant industrial sector, primarily chemical manufacturing and petroleum processing. A noncyclical decline in this sector could have a strong negative impact on county finances and lead to downward rating pressure.

CREDIT PROFILE

Brazoria County’s economy is centered on chemical manufacturing and petroleum processing. The top 10 taxpayers (about 25% of taxable assessed value [TAV]) are largely in these sectors, with Dow Chemical Co. the largest employer and taxpayer at about 11% of TAV. The local economy also includes the presence of several other industries including fishing, tourism, government, and agriculture.

Dow Chemical’s investment in the community continues to expand, along with other chemical manufacturers including Germany-based BASF and Chevron Phillips Chemical Company. The Port of Freeport provides critical transportation access for the region’s dominant chemical manufacturing and petroleum processing businesses. The historical stability of these industries and the ongoing diversification of the regional economy somewhat offset concentration concerns.

County TAV has experienced annual growth since fiscal 2012, with continued growth expected due to ongoing economic development. County income indicators are generally above or close to state and national averages. Unemployment is below the national average and close to the state average.

Revenue Framework

The bulk of the county’s general fund revenues are derived from property taxes, followed by sales taxes. Steady annual increases have allowed the county to post general fund revenue gains above U.S. GDP and CPI growth averages over the past 10 years.

Positive tax base trends are enhanced by tax abatements scheduled to end over the next several years. Sales taxes have seen good annual growth since 2011, which is also expected to continue due to economic development.

The county is permitted to levy property taxes up to $0.80 per $100 AV for general governmental services including debt service and maintenance of roads and bridges. Taxing margin relative to the cap is ample given the current county tax rate of about $0.486.

Expenditure Framework

The county’s largest general fund expenditure areas are public safety related, including judicial and corrections, and together make up over half of general fund spending.

The county’s natural pace of spending is expected to remain in line with revenue growth. A history of prudent budgeting has resulted in a trend of operating surpluses even in periods of economic weakening.

Solid expenditure flexibility is supported by manageable carrying costs (about 11% of governmental spending, reflecting in part rapid debt amortization), control over headcount, and the absence of labor contracts. Spending flexibility should support the maintenance of stable finances even as the county addresses basic operating and capital expenditure needs.

Long-Term Liability Burden

The county’s long term liability burden, largely related to its debt, is moderate at about 14% of personal income and should remain moderate even with potential additional debt issuance currently being considered. Pensions are provided through the Texas County and District Retirement System, a multiple employer agent defined benefit plan. The county’s unfunded pension liability is low at less than 1% of personal income.

The county is considering additional debt issuance in the next year of about $90 million in limited contract tax and toll road revenue bonds and about $50 million in Transportation Infrastructure Finance and Innovation Act (TIFIA) borrowing to fund State Highway 288 toll road construction. As currently contemplated, the potential debt would be backed by both toll road revenues and a contractually obligated limited tax back-up pledge. The debt is expected to be self-supporting from toll road revenue. Issuance of the debt is not expected to require an increase in the county’s property tax rate.

Operating Performance

The county’s strong budget flexibility supports a high level of financial resilience, allowing for the maintenance of strong reserves through economic cycles. The county has seen a trend of operating surpluses even in periods of economic weakening.

Prudent budgeting has resulted in operating surpluses and increased reserves, while providing for operating and pay-go capital needs and fully funding required pension contributions. Fiscal 2015 operations yielded a budget surplus that increased the general fund unrestricted balance to $65.1 million or about 62.3% of spending. The fiscal 2016 budget is balanced, but management has indicated that due to better than budget year-to-date performance, another surplus is expected. This seems reasonable to Fitch given historical financial trends.

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

In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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