Fitch Affirms Missouri City, Texas' GOs & COs at 'AA'; Outlook Stable

Fitch Ratings has affirmed the following ratings on Missouri City, Texas (the city) general obligation bonds and certificates of obligation at 'AA':

--$3.1 million in aggregate outstanding permanent improvement bonds, series 2004 and 2005;

--$30 million in aggregate outstanding GO bonds series 2007, 2008, and 2008A;

--$17 million in aggregate outstanding combination tax and revenue COs series 2004, 2005, 2008, and 2008A.

The Rating Outlook is Stable

SECURITY

The GO bonds, permanent improvement bonds, and COs are direct obligations of the city, payable from an ad valorem tax levied against all taxable property in the city, limited to $2.50 per $100 taxable assessed valuation (TAV). Administratively, the state attorney general will permit allocation of $1.50 of the $2.50 maximum tax rate for all tax supported debt service with the rest for operations and maintenance. The COs are additionally payable from a secondary pledge of net revenues from the city's utility system.

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: Fund balance levels remained consistently sound through the recession, evidence of management's prudent fiscal practices and commitment to maintaining healthy reserves. Moreover, Fitch believes the city retains some flexibility to reduce expenses, if needed, because most of the cost cutting measures over the past few years involved general belt tightening and position freezes, without cutting into city services.

HIGH OVERALL DEBT LEVELS: Overall debt levels are very high due in part to substantial overlapping municipal utility district (MUD) and school district debt. The city's carrying costs, including debt service, pension contributions, and other post-employment benefit (OPEB) pay-go, are moderate.

MANAGEABLE CIP AND DEBT ISSUANCE: Capital needs over the next five years are manageable and are expected to be largely funded by future borrowing. The city's capital improvement plan (CIP) implementation and debt issuance schedule adheres to a policy that limits the debt service tax rate impact.

SOLID ECONOMY AND TAX BASE: The city's tax base has posted good growth following two years of mild declines. Wealth levels are high, and the city's economy benefits from its location within the broad and diverse Houston metropolitan area (the MSA).

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely. Fitch expects the city to retain its high reserve position to counterbalance concerns over the largely residential tax base and high overall debt levels, credit factors that Fitch believes limit the rating to its current level.

CREDIT PROFILE

The city of Missouri City is located about 14 miles southwest of Houston (GOs rated 'AA'; Outlook Stable by Fitch). Population in the city as of 2012 was 69,020.

SOLID FINANCIAL PROFILE

Prudent financial policies and practices have resulted in the maintenance of solid financial reserves totaling 25.9% of spending at the close of fiscal year 2013. In fiscal 2013, about 45% of general fund revenues came from property taxes and 22% from sales taxes. Property tax revenue to the city declined very slightly as the city weathered the modest tax base declines from fiscal years 2010 to 2012, but resumed growth beginning in fiscal year 2013. The city budgeted for modest deficits in fiscal years 2012 and 2013, but, due to tight budget controls, finished fiscal year 2012 with a smaller deficit than what was budgeted and essentially broke even in fiscal year 2013. Increased interfund loans and a delay in certain intergovernmental receivables slightly lowered liquidity; however cash and equivalents remained strong in fiscal 2013 at over 2.5 months of spending.

For fiscal 2014, the city budgeted a modest $60k surplus with an increase to the maintenance and operation property tax rate by $0.04 per $100 TAV. The city now projects to end the year with about a $1 million surplus due to higher than budgeted sales tax receipts and continued spending limits. Unrestricted reserves are expected to remain above the city's formal fund balance policy, which calls for maintenance of unrestricted fund balance to range from 15% to 25% of spending.

BEDROOM COMMUNITY BENEFITS FROM ACCESS TO HOUSTON MSA

Although commercial values now represent a larger share of taxable assessed value (TAV) than in prior years, the city's tax base composition is overwhelmingly residential and there is no concentration among the top 10 taxpayers. The city's TAV remained relatively stable as the city felt the lagged recessionary effects and TAV has posted good growth in the time since. The city participates in the broad Houston MSA employment base, with an extensive transportation network which spurred outward expansion of Houston. Many residents commute to employment throughout the Houston MSA, including the Houston Medical Center and Sugar Land. The largest employment sectors within the city itself are mostly government and education, retail, and some light industrial.

Encompassing only 30 square miles, the city's 2012 population of 69,020 grew by over 30% since the 2000 census. The city's current population estimate of over 71,000 continues the growing trend. Additionally, an estimated 24,000 people live in planned communities within the city's extra-territorial jurisdictions (ETJ). Population growth within the ETJ has been aided by development agreements between the city and the planned communities. With the expansion of transportation corridors leading from Houston and numerous high-end master planned communities in the city's ETJ, Fitch views Missouri City's prospects for continued tax base growth as promising. Although not part of the city's tax base, such developments serve to attract additional commercial and industrial activity within the city's boundaries. Future annexation of these communities, expected in the mid to long term, will likely significantly enhance the city's property tax base without major capital needs. The largest of the planned communities, the Sienna Plantation, is expected to add an additional 60,000 residents to the city when it is fully annexed within the next 20 years.

Unemployment rates for the city have historically been low; for the month of November 2013, the city's unemployment rate improved from the prior year at 5.6%, comparable to the Houston metropolitan area (5.6%) but below the state (5.8%) and nation (6.6%). City wealth levels are high, as measured by median household income, at 162% of the state and 156% of the nation.

WEAK DEBT PROFILE; OTHER LONG-TERM LIABILITIES MANAGEABLE

Direct debt levels, excluding self-supporting bonds from the city's utility system, are moderate, representing 1.3% of market values and about $1,350 per capita in fiscal year 2013. Overall debt ratios climb to very high levels, at 9.3% of market value and about $6,450 per capita. The substantial amount of overlapping debt reflects sizable issuances by the Ft. Bend Independent School District (GOs rated 'AA+'; Outlook Stable by Fitch) as well as the large number of special taxing districts located in the area. Amortization of direct debt is slightly above average.

The city's capital improvement plan is manageable and largely funded by bond proceeds from future issuance. The city maintains about $30 million in authorized but unissued bonds and the city plans to hold a $40 million bond election in May 2014. The city plans to issue the potentially $70 million over a 10-year period. The tax impact is not expected to be significant, since the city made a commitment to residents in 2003 not to increase the debt service tax rate more than $0.04 while implementing its bond program.

The city contributes to the CSME Texas Municipal Retirement System (TMRS) at a phase-in rate, and will continue to do so until fiscal year 2015, the end of its 8-year period. The city's portion of TMRS was overfunded as of the valuation on January 1st, 2013 due to a legislative restructuring of TMRS in 2011. OPEB is handled on a pay-go basis. The city's unfunded OPEB liability is considered very low as a per cent of the city's market value. Total carrying costs, which include TMRS contributions, OPEB pay-go, and debt service, were 22.7% of total governmental spending in fiscal year 2013, which Fitch considers moderate.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816896

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