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

Fitch Ratings affirms its 'AA' rating on the following Pearland, Texas (the city), obligations:

--$212.9 million permanent improvement bonds series 2005, 2006, 2007, 2008, 2009, and 2012;

--$60.3 million certificates of obligation (COs) series 2003, 2004, 2006, 2007, 2008, 2009, and 2009A.

The Rating Outlook is Stable.

SECURITY

Permanent improvement bonds are voted general obligations of the city. Both the bonds and the COs are secured by a property tax levy that is limited to $2.50 per $100 of assessed valuation. The COs are additionally secured by a limited pledge of net revenues of the city's water and sewer system.

KEY RATING DRIVERS

PRUDENT FINANCIAL MANAGEMENT: The city maintains satisfactory reserve levels and a consistent record of conservative budget practices. Fitch expects reserves to remain healthy given sound management policies.

STRONG REGIONAL ECONOMY; RAPID GROWTH: The city benefits from its close proximity to the strong and diverse Houston metropolitan statistical area (MSA). Rapid growth within the city is of some concern but wealth levels are above average, unemployment is low, and tax base growth has been somewhat more measured.

LARGE DEBT PROFILE: The city's high debt levels are the key credit risk. Rapid growth and development, as well as sizable overlapping municipal utility district (MUD) debt, yields a high debt burden unlikely to change given growth related needs.

SALES TAX DEPENDENCE: The city relies heavily on sales tax revenues for operations, but healthy reserve levels temper risk to volatility in sales tax performance.

RATING SENSITIVITIES

RESERVES CREATE FINANCIAL CUSHION: Fitch expects the city to retain its healthy reserve position to counterbalance concerns over the reliance on sales tax revenue and high overall debt levels, credit factors that Fitch believes limit the rating to its current level.

CREDIT PROFILE

Pearland is located just south of Houston's outer loop, mostly in Brazoria County. The city experienced rapid population growth of 142% between the 2000 and 2010 census, rising to approximately 106,500 by 2014.

MANAGEMENT PRACTICES SUPPORT HEALTHY FINANCIAL PROFILE

The city maintains a sound financial profile with healthy general fund reserve levels in excess of its formal fund balance policy. The city's policy is to maintain reserves equivalent to two months (or roughly 17%) of recurring operating expenditures. The unrestricted general fund balance at the close of fiscal year 2012 was $17.4 million or 34.8% of spending. Unaudited results for fiscal 2013 reflect an increase of $1.2 million in contrast to a budgeted $1.8 million operating deficit.

The city's annual budget process prudently includes the preparation of a five-year forecast. The 2014-2018 projections show a draw on general fund reserves reaching a minimum of 20% in fiscal 2016, consistent with the city's minimum reserve policy. Fitch believes the city is likely to continue its practice of outperforming the budget and views healthy reserves as a key mitigant to sales tax volatility and a high debt load.

ROBUST SALES TAX ACTIVITY; GROWTH RELATED SPENDING

Economically sensitive sales taxes typically comprise about 30% of general fund revenues, with such receipts increasing by 7% in fiscal 2013. Fitch views the city's 7.8% budgeted sales tax growth in 2014 as somewhat optimistic considering historical fluctuations from year to year. The fiscal 2014 budget was adopted with a planned $3.2 million drawdown for non-recurring expenditures.

The city's expense base is largely driven by service related costs associated with rapid growth, reflected in increases to public safety and public works. Carrying costs for debt service, 100% funding of the pension actuarially required contribution (ARC) and other postemployment benefits (OPEB) expense are a high 29%; debt service alone is 25%.

HIGH DEBT BURDEN; OTHER LONG-TERM LIABILITIES MANAGEABLE

Fitch expects debt levels to remain high. Overall debt is $8,595 per capita and 12.3% of market value including overlapping MUD and school district debt. The rate of amortization is slightly below average and the city's five-year capital improvement plan (CIP) is expansive. The city has adequate existing bond authorization for its capital plans in the near term. Immediate plans include $21.7 million in fiscal 2014 for facilities, drainage, streets, and parks; an increase of 5.6%.

The city participates in the Texas Municipal Retirement System (TMRS) for pension benefits to civil employees and has contributed 100% of its ARC for the last three fiscal years. The funded position is adequate at 79% for fiscal year 2012, based on an assumed 7% rate of return. OPEB are handled on a pay-go basis. The city's OPEB liability is modest, offering only an implicit rate subsidy.

TRANSITIONING BEDROOM COMMUNITY WITH ACCESS TO HOUSTON MSA

Pearland's proximity to the Houston core provides easy access to major transportation arteries and the broad, diverse economy of the MSA. Residential development continues to occur throughout the city, as evidenced by the increasing number of single family permits issued in 2012 and 2013. The TAV for fiscal 2014 is $6.99 billion; up 18% from five years ago. Tax base growth and diversification are expected to continue with recent investments from the healthcare and manufacturing sectors, including two hospitals scheduled to open during 2015.

Wealth indicators are substantially higher than state and national levels, with median household income 70% higher than the national average. Employment growth is robust yielding an unemployment rate of 4.7% for August 2013 that is below the state and national rates of 6.3% and 7.3%, respectively.

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, Zillow.com, National Association of Realtors, and the Municipal Advisory Council of Texas.

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=816659

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