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MOODY'S ASSIGNS Aaa RATING TO CITY OF AUSTIN'S PUBLIC IMPROVEMENT BONDS, SERIES 2011A AND TAXABLE SERIES 2011B; CERTIFICATES OF OBLIGATION, SERIES 2011, PPFCO, SERIES 2011, AND PUBLIC IMPROVEMENT REFUNDING BONDS, SERIES 2011

08 Aug 2011

Aaa RATING AFFECTS 1.19 BILLION IN PARITY DEBT, INCLUDING CURRENT ISSUES

Municipality
TX

Moody's Rating

ISSUE

RATING

Public Improvement Refunding Bonds, Series 2011A

Aaa

  Sale Amount

$78,090,000

  Expected Sale Date

08/25/11

  Rating Description

General Obligation

 

Public Improvement Bonds, Taxable Series 2011B

Aaa

  Sale Amount

$8,450,000

  Expected Sale Date

08/25/11

  Rating Description

General Obligation

 

Certificates of Obligation, Series 2011

Aaa

  Sale Amount

$51,150,000

  Expected Sale Date

08/25/11

  Rating Description

General Obligation

 

Public Property Finance Contractual Obligation, Series 2011

Aaa

  Sale Amount

$26,725,000

  Expected Sale Date

08/25/11

  Rating Description

General Obligation

 

Public Improvement Refunding Bonds, Series 2011

Aaa

  Sale Amount

$66,625,000

  Expected Sale Date

08/25/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Aug 8, 2011 -- Moody's Investors Service has assigned a Aaa underlying rating and stable outlook to the City of Austin's $78.09 million Public Improvement Bonds, Series 2011A, $8.45 million Public Improvement Bonds, Taxable Series 2011B, $51.15 million Certificates of Obligation, Series 2011, $26.725 million Public Property Financial Contractual Obligation, Series 2011, and $66.625 million Public Improvement Refunding Bonds, Series 2011. The bonds and obligations are secured by an ad valorem tax levied, within the limits prescribed by law, on all taxable property within the city. The Certificates are additionally secured by a limited pledge of surplus revenues (not to exceed $1,000) of the city's solid waste system.

SUMMARY RATING RATIONALE

Assignment of the Aaa high-quality rating reflect the city's large, diverse and regionally important economy as the State's capital. The rating also continues to reflect healthy General Fund reserves and modest debt burdens supported by conservative management and prudent fiscal and debt policies.

STRENGTHS

Capital of the State of Texas

Growth in the most recent assessed valuation

Healthy General Fund reserves

CHALLENGES

State cuts putting more expenditures on the local government

Decrease in growth rate of new economic development

STATE CAPITAL REALIZES SMALL INCREASE IN FULL VALUATION FOR FISCAL 2012

The City of Austin benefits from substantial institutional presence as the capital of the State of Texas (GO rated Aaa) and home to the University of Texas with 16,500 employees and 50,000 students. Additionally, the high tech sector has developed into leading economic drivers in the area anchored by the headquarters for Dell (A2) and AMD (Ba3).

Between the 2007 and 2011 fiscal years, the city's full valuation experienced an average 8.1% growth rate annually including a 3.8% decline in fiscal 2011. In fiscal 2012, the full valuation increased 3.9% over the prior year to a sizable $80.09 billion. The increase was the cumulative impact of increases in existing properties, $3.5 billion in new construction and annexation with residential values holding flat.

Despite a national slowdown, significant revitalization of Austin's downtown area continues with a number of upscale retail, mixed use, and residential projects slated for development, and the Mueller infill project, which is located in the city's urban core, is underway and anchored by a Home Depot, Best Buy and Staples. The city's May 2011 unemployment rate of 6.3% was low compared to the 7.9% for the State and 8.7% for the US. Additionally, the city's 2000 per capita income of $24,163 was a favorable 123% of the State and 112% of the US. Moody's believes the city's importance as the state capital and economic vitality combined with healthy wealth indices support assignment of the Aaa rating.

CONSERVATIVE FISCAL MANAGEMENT MAINTAINS HEALTHY GENERAL FUND RESERVES

Moody's believes the city's fiscal policies, expenditure controls and conservative budget practices are favorable factors considered in the rating. The city's General Fund policy includes an emergency reserve equal to $40 million and a contingency reserve equal to 1% of annual budgeted expenditures which is currently estimated to be $6.1 million. The city also has a budget stabilization reserve which increases when the General Fund experiences a positive operating result. In fiscal 2010, the stabilization fund totaled $54 million and management will only appropriate one-third of the reserve to finance one-time expenditures. Finally, the city maintains $4 million in a property tax reserve to mitigate any major property valuation protests although officials report they have never needed to rely on this reserve.

In fiscal 2007 and 2008, the City utilized portions of the budget stabilization reserve (reported in the audit in the General Fund balance), for deferred capital expenses. As a result, the 2007 fiscal year ended with a $5 million deficit. Due to conservative budgeting of both expenditures and revenues, the 2008 fiscal year ended with a large $18 million deficit, but the General Fund balance totaled $88.69 million at the end of year. In fiscal 2009, the General Fund balance was $92.16 million, or 15.5% of General Fund revenues. The year ended with a $3.4 million surplus by reducing expenditures with delayed police cadet classes, instituting a hiring freeze, and suspending salary increases.

When officials began the fiscal 2010 budget, they were faced with a $31.7 million deficit. The city eliminated 105 positions, increased the total tax rate to $4.209 per $1,000 of assessed value from $4.012, the police and emergency response unions voted to forego their 2010 raises and civilian employees also went without a pay increase. Additionally, sales tax revenues increased by 2.6%, or approximately $12 million, and expenditures were monitored closely supporting a $16.5 million year end surplus and a $108.7 million total fund balance which was equal to 17.3% of General Fund revenues. The unreserved fund balance of $104 million includes $40 million in the emergency reserve fund, $5.9 million in the contingency reserve fund, $4 million in the property tax reserve, and $54 million in the budget stabilization reserve fund.

The 2011 budget includes an increased maintenance and operation rate to $4.571 per $1,000 of assessed value from $4.209, 2.5% civilian raises and 3% public safety raises as well as a 10% increase to the health insurance cost but is structurally balanced. The projected 2011 General Fund balance is $97 million, or 14% of General Fund revenues, given that the budget stabilization fund will decrease from $54 million to $47 million. Additional use of the stabilization fund is planned for fiscal 2012 which will decrease it to $36 million. The total fund balance for fiscal 2012 is projected to be $87 million or 12% of General Fund revenues.

The city's fiscal 2010 General Fund operating revenues were primarily supported by property tax revenues (40%), sales tax revenues (22%), and transfers from the utility fund (20%). The transfer from the utility fund to the General Fund remains within policy guidelines that no more than 8.2% of water and sewer system revenues and 9.1% of Austin Energy (A1) revenues can be remitted back to the General Fund.

RAPID RETIREMENT AND MODEST DEBT BURDEN

We believe the city will continue to layer in additional debt to maintain modest debt levels. Inclusive of the current issues, the city's direct and overall debt burdens, net of self-supporting debt, are modest at 1.6% and 3.1%, respectively, both expressed as a percent of the FY 2011 full value. The city has $266.7 million in authorized but unissued debt including $74.7 million remaining from the $90 million that was approved by voters on November 2, 2010 for transportation. Favorably, principal retirement remains strong with 69% of principal retired in ten years.

CITY TAKES ACTION REGARDING UNFUNDED PENSION AND OPEB LIABILITY

As of December 31, 2010, the city's unfunded actuarial accrued pension liabilities were $749 million for the Employee Retirement System and $776 million for the Police Retirement System. As of December 31, 2009, the unfunded actuarial accrued pension liability for the Fire Retirement System was $589 million. The funded ratios for the three pension systems, as of the dates noted above, were 69.6%, 70.5% and 88.7% respectively. Suffering from investment losses in the stock market downturns as well as the granting of increased benefits to retirees, the Council approved a plan in 2005 to shore up the largest pension fund. The plan boosted the city's contribution to the Employee Retirement System by 1% in fiscal 2007 and 2008, 2% in fiscal 2009, and 4% in fiscal 2010. In 2010, the City Council approved adding an additional 2% each year over the next three years to reach 18% which is close to the ARC of 18.28%. Officials are planning to continue this level of funding beyond 2013 even in years when the ARC is below 18%. In addition to the increase in city contributions, the city took steps to reduce benefit levels for future employees which were recently approved by the Texas Legislature.

Moreover, the city has completed an actuarial valuation of its other post employment benefits (OPEB). As of September 30, 2008 and under the current set of benefits, accrued liability is approximately $1.13 billion, with an annual required contribution of $116 million. Current OPEB benefits include a PPO or HMO health insurance plan (with the city's portion of the premium based on years of service), a dental plan, and a death benefit. The City convened a task force to recommend benefit adjustments in August 2007 which concluded little to no change in the benefit, but if change must occur, it should be based on tenure and favor career employees. The city is currently working to develop a second tier of retiree health benefit subsidies that will help reduce the OPEB liability over time.

WHAT COULD MAKE THE RATING GO UP

WHAT COULD MAKE THE RATING GO DOWN

Significant tax base erosion

Structural imbalance resulting in a material use of reserves

Extreme economic stress from employer/taxpayer loss

Moody's outlook for the City of Austin's Aaa general obligation rating is stable, reflecting anticipated economic development, solid financial management, and a manageable debt profile.

KEY STATISTICS:

2012 Estimated Population: 813,776

Fiscal 2012 Full Value: $80 billion

Full Value per Capita: $102.353

2000 Census Per Capita Income: $24,163 (112% of US)

Direct Debt Burden (net of self-supporting debt): 1.6%

Overall Debt Burden (net of self-supporting debt): 3.1%

Payout of Principal (10 years): 69%

FY 2010 Total General Fund Balance: $108.7 million (17.3% of General Fund revenues)

Post Sale Parity Debt Outstanding: $1.19 billion

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, 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

Kristin Button
Analyst
Public Finance Group
Moody's Investors Service

Toby Cook
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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

MOODY'S ASSIGNS Aaa RATING TO CITY OF AUSTIN'S PUBLIC IMPROVEMENT BONDS, SERIES 2011A AND TAXABLE SERIES 2011B; CERTIFICATES OF OBLIGATION, SERIES 2011, PPFCO, SERIES 2011, AND PUBLIC IMPROVEMENT REFUNDING BONDS, SERIES 2011
No Related Data.
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