S&P Upgrades Houston GOs to AA, Citing Strong Growth, Management

DALLAS — Standard & Poor’s upgraded its rating on Houston’s general obligation debt to AA from AA-minus, citing economic growth and the strong financial management of the nation’s fourth-largest city. The upgrade applies to various series of bonds and about $2.5 billion of outstanding debt. Analysts said officials have “effectively administered the city’s financial operations and essentially dealt with some significant long-term liabilities.”Management’s ability to “control expenditure growth and deal with the city’s significant contingent liabilities,” such as the municipal employees and police pension systems, also factored in the upgrade, according to the rating report. The sale of pension obligation bonds over the past few years is one way the city has coped with the unfunded liabilities, analysts said.The economy of the Houston metropolitan area, which is home to more than 5,000 energy-related firms, continues to expand and diversify as the health care industry and other service businesses grow across the region. Standard & Poor’s also said the continued development of the Port of Houston into an international commerce center helps the city’s credit.Houston’s tax base rose 11.7% for fiscal 2008 to $122.8 billion, and the tax base has averaged about 6.1% annual growth the past five years. Since 2000, the city’s population has risen more than 9%, to 2.14 million. In the last decade, Houston has opened a new baseball stadium, an arena, and a new convention center. Standard & Poor’s said hosting the Super Bowl and Major League Baseball’s All-Star Game in 2004 was a strong boost to the regional economy.

The city is also trying to redevelop its downtown into an arts district by converting office buildings to residential status and adding entertainment and dining venues, according to analysts. Earlier this year, officials approved the capital improvement plan for fiscal 2008 through 2013, which calls for appropriations of $3.5 billion for enterprise-fund related expenditures and $2 billion for facility and infrastructure improvements.Voters approved bond propositions totaling $625 million in November 2006, and the city still has $376 million of authorized but unissued debt from a 2001 election. Houston tends to issue commercial paper notes and then refund that debt to take it out longer.First Southwest Co. and SBK-Brooks Investment Corp. are the city’s co-financial advisers and Andrews Kurth LLP and Bates & Coleman PC serve as co-bond counsel.Houston’s GO debt carries underlying ratings of Aa3 from Moody’s Investors Service and AA-minus from Fitch Ratings.A few weeks ago, Standard & Poor’s affirmed its AA rating on Texas’ GO debt, listing a steadily growing and diversifying economy, adequate revenue growth and financial position, and low tax-supported debt burden as credit strengths.Standard & Poor’s said Houston officials have ratified two propositions approved by voters in November 2006 and added them to the city charter.Proposition G is expected to lessen the effect of an older mandate by removing enterprise-related revenue from the definition of revenues limited by the city charter, according to Standard & Poor’s, which views the older proposition as “very restrictive.” Analysts said Proposition 2 — which passed in 2004 and the validity of which is being decided by the courts — “could potentially lead to rating deterioration for all types of city debt.” Officials expect a second proposition from 2004 to eventually become an amendment to the city charter while Proposition 2 will cease to exist, according to analysts.The other referendum approved last year, Proposition H, allows officials to surpass the limit level for public safety purposes by an additional $90 million, which will be added to the amount of allowable revenue in fiscal 2007 and used as part of base revenue calculations in future years, according to analysts.

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