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MOODY'S ASSIGNS Aa2 RATING TO THE CITY OF COLLEGE STATION'S (TX) $1.9 MILLION GENERAL OBLIGATION IMPROVEMENT BONDS, SERIES 2011 AND $7.9 MILLION CERTIFICATES OF OBLIGATION, SERIES 2011

19 Aug 2011

Aa2 RATING AFFECTS $187.7 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT OFFERINGS

Municipality
TX

Moody's Rating

ISSUE

RATING

General Obligation Improvement Bonds, Series 2011

Aa2

  Sale Amount

$1,960,000

  Expected Sale Date

08/24/11

  Rating Description

General Obligation Limited Tax

 

Certificates of Obligation, Series 2011

Aa2

  Sale Amount

$7,935,000

  Expected Sale Date

08/24/11

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Aug 19, 2011 -- Moody's Investors Service has assigned a Aa2 rating to the City of College Station's (TX) $1.9 million General Obligation Improvement Bonds, Series 2011 and $7.9 million Certificates of Obligation, Series 2011. Concurrently, we have affirmed the Aa2 rating on the city's $177.9 million in outstanding general obligation debt. Proceeds from the sale of the bonds will be used to fund street improvements and park improvements. Proceeds from the sale of the certificates will be used to fund electric and wastewater projects.

SUMMARY RATING RATIONALE

The bonds constitute direct obligations of the city, secured by and payable from the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property located within the city. The certificates constitute direct obligations of the city, secured by and payable from a combination of the levy and collection of direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property located within the city, and a subordinate lien on and pledge of $1,000 of the surplus revenues derived from the city's combined utility system. 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.

STRENGTHS

*Large and stable tax base with an institutional presence

*History of satisfactory financial operations

CHALLENGES

*Below average socioeconomic profile

*Reduction in utility system support of General Fund operations

DETAILED CREDIT DISCUSSION

LOCAL ECONOMY ANCHORED BY HIGHER EDUCATION, HEALTHCARE

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. The presence of these students in the city's estimated 2010 population of 93,857 influences socioeconomic indicators. As such, College Station's per capita income (PCI) is lower than similar 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 June 2011 unemployment rate of 7.3% is below that of the state (8.8%) and the nation (9.3%) for the same time period. Moody's Economy reports, "...Expansion in College Station-Bryan has slowed as previously announced round of job cuts at Texas A&M was enacted." Despite reductions in the workforce at Texas A&M, 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 year 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 1%, officials report fiscal year 2012 assessed values to total $5.7 billion, a 5.2% increase over fiscal year 2011 values. Through June 2011, the city issued 294 single-family residential permits, down 8.2% from a year ago. In addition, the city has issued 32% fewer commercial permits than it did in June 2010. However, the city issued 41 multi-family residential permits, 13 times the amount issued through June 2010. According to officials, current economic development continues at Tower Point, a mixed use development anchored by a HEB grocery store, including a new multi-tenant building and construction is underway for a new 143-bed Scott and White Healthcare facility with a tentative completion date of 2013. Officials also report a concept master plan was recently released for the Research Valley Biocorridor. The university is in the midst of an $800 million capital campaign to add and renovate campus facilities. We believe expansion of the city's tax base will continue, but we expect the rate of growth in the near to intermediate term will occur at a moderate pace.

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% 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 down the General Fund balance by $947,000 in fiscal year 2008 and $1.8 million in fiscal year 2009, both for one-time expenditures. The fiscal year 2009 General Fund balance was $9.4 million, or 16.7% of General Fund revenues. The city made $2.2 million in mid-year budget reductions in fiscal year 2010, reflective the slowing national economy in sales tax collections. Due to these adjustments, the city added $2.5 million to General Fund reserves in fiscal year 2010, yielding a total General Fund balance of $13.8 million, or a healthy 23.2% of revenues. Sales taxes made up 33% of General Fund revenues while property taxes made up 19% in fiscal year 2010. Additionally, transfers from the city's utility funds (Aa2 revenue rating) accounted for 27% of revenues. The transfers from the utility funds represents payments-in-lieu-of-franchise fees and return on investments 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 established maximum levels; however, management indicates eliminating the "return on investment" portion and capping the "payment-in-lieu-of-franchise fees" portion of the transfer from the Electric Fund at 6% beginning in fiscal year 2011. This will reduce the aggregate transfer from the Electric Fund to the General Fund by $1.5 million in fiscal year 2011, $2.0 million in fiscal year 2012, and $1.0 million in fiscal year 2013. The "return on investment" and "payment-in-lieu-of-franchise fees" portion of the transfers from the Water, Wastewater, and Sanitation Funds will remain unchanged. We believe the city's reliance on utility system transfers for operations is elevated, but note the risk is somewhat mitigated by satisfactory operations throughout the utility system. The utility system raised electric rates by 6% in fiscal year 2011; water rates were increased 2% for residential users and 10% for commercial users; and wastewater rates increased by 3% for all users. Historically, the utility system has provided sum sufficient debt service coverage for outstanding utility-supported general obligation debt and revenue debt. However, fiscal year 2010 net revenues of the utility system provided 0.67 times maximum annual debt service coverage. According to preliminary, unaudited fiscal year 2011 results, coverage is expected to be 1.19 times maximum annual debt service. Future rating actions will consider the ability of the utility system to provide sum sufficient coverage of utility-supported general obligation debt and revenue debt.

For fiscal year 2011, officials estimate drawing down the General Fund balance by $1.03 million due to reduced transfers from the Electric Fund and one-time capital expenditures. Furthermore, the city eliminated 27 positions in fiscal year 2011, which is estimated to save $1.5 million in expenditures. Sales tax collections are up approximately 3% over fiscal year-end 2010, yielding $19.9 million in total sales tax collections. The General Fund balance at fiscal year 2011 is estimated to total $12.8 million (23.6% of estimated fiscal year 2011 revenues). Officials budgeted a $940,000 draw on reserves for fiscal year 2012 with a projected year-end General Fund balance of $11.8 million. We believe maintenance of reserves is critical due to the city's heavy reliance on economically sensitive revenues and utility fund balance transfers. Future rating actions will reflect the city's ability to restore reserves to historical levels more consistent with the current rating category.

OUTSTANDING DEBT PARTIALLY SUPPORTED BY UTILITY SYSTEM

The city has $187.7 million in outstanding general obligation debt, yielding elevated debt burdens of 3.5% direct and 7.5% overall, both expressed as a percentage of fiscal year 2011 assessed valuation. However, when taking into consideration the utility system supports approximately 40.4% of outstanding general obligation debt, the debt burdens are more manageable at 2.1% direct and 6.1% overall. Amortization is favorable with 66.9% of principal retired in ten years. The city is not exposed to variable-rate debt or party to any derivative instruments. The city has $59.1 million remaining in debt authorization, which officials report will be issued annually on an as-needed basis over the next four to five years. Given the city's demonstrated willingness to increase to utility rates as necessary, we expect general obligation-secured debt issued for utility system purposes will remain self-supporting in nature.

WHAT COULD MAKE THE RATING GO - UP

*Significant tax base expansion with strengthened socioeconomic profile

*Trend of operating surpluses, substantially bolstering financial reserves

WHAT COULD MAKE THE RATING GO - 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

KEY STATISTICS

Estimated population: 93,857

FY 2011 Taxable Value: $5.5 billion

FY 2011 Full Value Per Capita: $58,125

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): 2.1%

Overall Debt Burden (adjusted for self-supporting utility debt): 6.1%

Principal Payout (10 years): 66.9%

FY 2010 General Fund Balance: $13.8 million (23.2% of revenues)

Post-sale Parity Debt Outstanding: $187.7 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Nathan Phelps
Analyst
Public Finance Group
Moody's Investors Service

James Hobbs
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 RATING TO THE CITY OF COLLEGE STATION'S (TX) $1.9 MILLION GENERAL OBLIGATION IMPROVEMENT BONDS, SERIES 2011 AND $7.9 MILLION CERTIFICATES OF OBLIGATION, SERIES 2011
No Related Data.
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