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MOODY'S ASSIGNS Aa2 RATING TO THE CITY OF COLLEGE STATION'S (TX) $39.7 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 2010

28 Oct 2010

Aa2 RATING AFFECTS $191.1 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF THE CURRENT OFFERINGS

Municipality
TX

Moody's Rating

ISSUE

RATING

General Obligation Refunding Bonds, Series 2010

Aa2

  Sale Amount

$39,660,000

  Expected Sale Date

11/02/10

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Oct 28, 2010 -- Moody's Investors Service has assigned a Aa2 rating to the City of College Station's (TX) $39.7 million General Obligation Refunding Bonds, Series 2010. Concurrently, we have affirmed the Aa2 rating on the city's $151.4 million in outstanding general obligation debt. Proceeds from the current sale will refund a portion of the city's outstanding debt for a net present value savings and no extension of the final maturity.

RATING RATIONALE

The Aa2 rating reflects the city's economic stability, anchored by the presence of Texas A&M University; historically satisfactory financial operations; and manageable debt profile that is partially supported by the utility system. The bonds are secured by a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the city.

INTEREST RATE DERIVATIVES: None

HIGHER EDUCATION, HEALTHCARE PROVIDE STABILITY FOR LOCAL ECONOMY

The City of College Station is home to one of the state's flagship universities, Texas A&M University (Aaa revenue rating with a stable outlook), which enrolls approximately 49,000 students. The presence of these students in the city's estimated 2010 population of 93,859 skews socioeconomic indicators. As such, College Station's per capita income (PCI) is lower than typical Aa-rated credits as reflected by the city's PCI of only 77% of the state and 70% of the U.S. medians. However, the city's August 2010 unemployment rate of 6.7% was significantly below the state (8.4%) and U.S. (9.5%) for the same time period. The relatively low unemployment rate reflects the stability of the industries that comprise the city's top employers: higher education, healthcare and government.

The city's tax base has grown at a healthy 8.7% average annual rate over the past five years to $5.5 million in fiscal 2011. Given the substantial presence of tax-exempt property within the city, taxable values understate the extent of the city's economy. Although growth in the most recent year slowed to a modest 1%, building permit activity indicates a marginal recovery in new construction. The number of building permits issued year-to-date (single-family residential and commercial) exceeds the previous year-to-date by 19%. According to officials, current economic development includes Tower Point, a mixed use property that will be anchored by an HEB grocery store; Crescent Pointe, a master-planned mixed-use district with several financial service institutions and multi-family residential properties; and the planning phase of a medical corridor. Additionally, Texas A&M is in the middle of a $800 million capital campaign to add and renovate campus facilities. We believe expansion of the city's tax base will continue, but we expect near to medium term growth rates will continue to be impacted by national economic trends.

STABLE FINANCIAL OPERATIONS ENHANCED BY STRONG FISCAL POLICIES

Strong codified fiscal policies enhance the city's stable financial operations; such policies require adopted budgets to be structurally balanced, the maintenance of General Fund reserves equal to at least 15% of budgeted expenditures, and annual contingency appropriations (up to 3% of budgeted expenditures). After adding to General Fund reserves in both fiscal 2006 and 2007, the city drew $947,000 in fiscal 2008 and $1.8 million in fiscal 2009 for one-time expenditures. The fiscal 2009 General Fund balance was $9.4 million, or 16.7% of General Fund revenues. Sales tax receipts made up 35% of General Fund revenues while property taxes contributed 18% in fiscal 2009. Additionally, transfers from the city's utility funds (Aa2 revenue rating) accounted for 27% of revenues. The transfers from the utility funds represent payments-in-lieu-of franchise-fees and return on investment payments; fiscal policy mandates the transfers are not to exceed 10.5% of total operating revenues for the Electric Fund, 10% for the Water and Wastewater Funds, and 10% for the Sanitation Fund. The transfers have historically been set at these maximum levels; however, management plans to budget the transfer from the utility funds constant for three to five years (beginning in fiscal 2011) to ensure maintenance of the system's financial flexibility. We believe the city's reliance on utility transfers for operations is high but note the risk is somewhat mitigated by healthy operations throughout the utility system; the utility system's fiscal 2009 net revenues (after transfers to the General Fund) provide a sufficient 1.06 times maximum annual debt service coverage for all revenue and utility-supported general obligation debt outstanding. System rates were increased for fiscal 2011 to ensure continued healthy operations.

Reflective of national economic weakness in sales tax collections, the city made $2.2 million in midyear budget reductions in fiscal 2010. However, favorable variance from the adjusted budget on both the revenue and expenditure side allowed the city to post an operating surplus. Therefore, unaudited fiscal 2010 results reflect an increase in the General Fund to $13 million. The fiscal 2011 budget is structurally balanced but includes approximately $700,000 of appropriated fund balance to finance one-time capital projects. We believe maintenance of ample reserves is critical due to the city's heavy reliance on economically sensitive revenues and utility fund transfers; future rating actions will reflect the city's ability to restore reserves to historical levels more consistent with the Aa rating category.

OUTSTANDING DEBT PARTIALLY SUPPORTED BY UTILITY SYSTEM

The city has $191.1 million in outstanding general obligation debt, yielding elevated debt burdens of 3.5% direct and 7.6% overall, both expressed as a percentage of fiscal 2011 assessed valuation. However, when taking into account the utility system supports approximately 25% of outstanding GO debt, the debt burdens are more manageable at 2.6% direct and 6.8% overall. Amortization is favorable with 59.7% of principal retired in ten years. There is no exposure to variable rate debt or interest rate swaps. The city has $60.1 million remaining in debt authorization, which officials report will be issued annually on an as-needed basis over the next six years. Additionally, the city plans to issue approximately $72 million in certificates of obligation over the next five years to finance future capital needs of the utility system. Given the city's demonstrated willingness to increase utility rates as necessary, we expect GO-secured debt issued for utility system purposes will remain self-supporting in nature.

KEY STATISTICS

Estimated Population: 94,669

FY 2010 Taxable Value: $5.5 billion

Full Value per Capita: $57,627

2000 U.S. Census per Capita Income: $15,170 (77.3% of state, 70.3% of U.S.)

Direct Debt Burden (adjusted for self-supporting utility debt): 2.6%

Overall Debt Burden (adjusted for self-supporting utility debt): 6.8%

Principal Payout (10 years): 59.7%

FY 2009 General Fund Balance: $9.4 million (16.7% of General Fund revenues)

Post-sale Parity Debt Outstanding: $191.1 million

WHAT COULD CHANGE THE RATING-UP:

*Significant tax base expansion and strengthened socioeconomic profile

*Trend of operating surpluses, substantially bolstering financial reserves

WHAT COULD CHANGE THE RATING-DOWN:

*Reduction of General Fund reserves for one-time or recurring expenses

*Failure of utility system net revenues to cover utility-supported GO-secured debt

PRINCIPAL METHODOLOGY

The principal methodology used in rating College Station (City of) TX was General Obligation Bonds Issued by U.S. Local Governments rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Leslie Lukens
Analyst
Public Finance Group
Moody's Investors Service

Michelle Smithen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS Aa2 RATING TO THE CITY OF COLLEGE STATION'S (TX) $39.7 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 2010
No Related Data.
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