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Rating Action:

Moody's downgrades Austin, TX's issuer and GOLT ratings to Aa1; outlook revised to stable

03 Sep 2020

Concurrently downgrades contract revenue bonds to Aa3 and assigns Aa1 to various GOLT issuances

New York, September 03, 2020 -- Moody's Investors Service has downgraded the City of Austin, TX's issuer rating and outstanding general obligation limited tax (GOLT) debt rating to Aa1 from Aaa. Concurrently Moody's has downgraded the rating for the Mueller Local Government Corporation, TX's Contract Revenue Bonds issued in 2006 to Aa3 from Aa2. Moody's has also assigned a Aa1 rating to four new GOLT debt issuances: $87.2 million Public Improvement and Refunding Bonds, Series 2020, $49.9 million Public Improvement and Refunding Bonds, Taxable Series 2020, $23.4 million Public Property Finance Contractual Obligations, Series 2020 and $110.4 million Certificates of Obligation, Series 2020. Post sale, the city has $1.6 billion in outstanding general obligation limited tax debt and $39.8 million in contract revenue (appropriation) debt. The outlook has been revised to stable from negative.

RATINGS RATIONALE

The downgrade to Aa1 from Aaa for the city's issuer and GOLT ratings reflects the high leverage and fixed costs attributable to the city's pension and other post employee benefit plans that have increased to levels that are inconsistent with Moody's highest rating category. The Aa1 rating also incorporates that pension reform is currently in progress to help subdue long-term unfunded liability growth, and will likely include new benefit tiers and contribution increases. The likely contribution increases will add to the city's already high fixed costs and funding levels will still remain below Moody's tread water indicator over the coming years, signaling liability growth. The Aa1 rating recognizes the city's strong and large economy anchored by multiple institutions as well as high educational attainment levels that have led to significant economic growth in recent years. The rating additionally reflects a history of stable financial performance and reserves, above average income levels, and a manageable direct debt profile.

The lack of distinction between the issuer rating and general obligation limited tax debt ratings reflects the city's ample headroom available under its current taxing capacity, providing roughly 9.7 times debt service, which offsets the limitation under the existing property tax caps, and the inability to override the statutory tax cap.

The downgrade to Aa3 on the Mueller Local Government Corporation's, TX contract revenue bonds follows the downgrade of the city's issuer rating given our notching convention for appropriation backed securities. The Aa3 rating is based on the City of Austin's pledge to make any deficiency payments on the bonds if sales taxes within the tax increment financing zone are insufficient. Although the city has never been called upon to make a deficiency payment, the rating reflects Austin's pledge, which is subject to annual appropriation by the city, as well as the less essential nature of the financed project.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for Austin, TX given healthy liquidity and proactive management. However, the situation surrounding Coronavirus is evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of Austin, TX changes, we will update the rating and/or outlook at that time.

RATING OUTLOOK

The stable outlook assumes that the city's economy will continue to exhibit relative resiliency to the coronavirus pandemic given year to-date revenue projections and ongoing economic development. The outlook also reflects the expectation that the city's experienced administrative team will continue to produce stable financial performance and metrics. Finally, the stable outlook assumes that expected near term pension reform will help subdue the growth in unfunded liabilities, but overall leverage and fixed costs will remain high in comparison to peers over the long term.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Significant moderation of pension and other post employment benefits liabilities through taxable value growth, revenue growth, and/or reform

- Upgrade of the city's issuer rating (contract revenue)

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Continued material increases in pension and fixed cost burdens; continued weakness of annual contributions that results in growing unfunded liabilities

- Poor financial performance leading to a significant decline or prolonged weakness in reserve levels

- Significant increase in direct debt absent corresponding tax base growth

- Downgrade of the city's issuer rating (contract revenue)

- Failure to appropriate if sales taxes within the tax increment financing zone are insufficient (contract revenue)

LEGAL SECURITY

Each series of the new issuances constitutes a direct obligation of the city, payable from a continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the city in an amount sufficient to provide for payment of principal of and interest on all ad valorem tax debt. The certificates are additionally secured by and payable from a limited pledge of the surplus revenues (not to exceed $1,000) of the city's solid waste disposal system.

USE OF PROCEEDS

Proceeds from the sale of the tax-exempt and taxable obligations will be used to finance various capital improvements throughout the city and to refund certain outstanding bonds for debt service savings.

PROFILE

The City of Austin is roughly 326 square miles and is in central Texas (Aaa stable) primarily in Travis County (Aaa stable) with smaller portions spanning into Williamson (Aa1 stable) and Hays counties. The city serves as the State Capital and the most recent population estimate is 1,014,490.

METHODOLOGY

The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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