Lone Star College System to Issue $150 Million Tranche

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DALLAS - The Lone Star College System will issue the first tranche of a $420 million authorization approved by voters in May with next week's negotiated sale of $150 million of limited-tax general obligation bonds.

The bond sale is the first one under the new name for the community college district that was established in 1973. The system expects to issue the remaining authorized bonds with three more sales by 2011.

The debt will be issued as 30-year current interest bonds.

The district changed its name in January from North Harris Montgomery Community College District. It serves the northern suburbs of Houston.

The sale, which is set for Aug. 6, follows an upgrade of its debt rating by Standard & Poor's to AA-plus from AA. The system's GO bonds are rated Aa2 by Moody's Investors Service. Outstanding debt includes $173 million of GO bonds.

Underwriters on the issue include are Morgan Keegan & Co., First Southwest Co., Southwest Securities, Siebert Brandford Shank & Co., and Rice Financial Products Co.

Vinson & Elkins LLP is bond counsel. The system's financial adviser is RBC Capital Markets.

Proceeds from the bond sale will be used to build and expand facilities at each of the district's seven campuses, and purchase land for future campus sites needed to meet the demand of the area's rapidly growing population, said Cynthia Gilliam, vice chancellor of business affairs and chief financial officer of the Lone Star College System.

"The bonds will fund projects at all our locations," she said. "We're scrambling to meet the demand caused by the growth in the area's population."

No decision has been made on bond insurance, Gilliam said. All previous district bond issues have been insured to bring them to triple-A status, but she said turmoil in the bond insurance business has caused the district to reconsider its procedures.

"We're still debating that," she said. "It is probably going to depend on if the benefits outweigh the expense."

The improved credit rating, which Standard & Poor's analysts said was based on the district's "ongoing trends of strong financial performance, low direct debt, and a growing tax base," is significant, Gilliam said.

"We think it will save us at least $1.5 million in interest over the full $420 million authorization," she said.

The district serves an area that includes all of Montgomery County and portions of Harris, Liberty, and Waller counties. It covers more than 1,400 square miles and encompasses 11 school districts. Total population is estimated at 1.5 million, up from less than 700,000 in 1998.

Gilliam said the district's available classroom space has lagged behind the growth in population because voters rejected a $200 million bond issue in 2006.

"We're really behind the eight-ball now because of that failed election," she said.

Because of the urgency of the situation, she said, work will begin on the projects almost immediately after the bonds have been sold.

"We've interviewed 27 architectural firms," Gilliam said. "We told them we plan to sell the bonds on Aug. 6, the board will award the architectural work at its meeting on Aug. 7, and we expect them to begin work on Aug. 8. We want to get orders placed for steel, concrete, and other materials before the prices go up any more."

The district had 44,000 students registered for the fall semester in 2007, and Gilliam said early numbers indicate enrollment will top 50,000 in fall 2008. Enrollment is expected to reach 70,000 by 2015.

The bonds will be supported by the district's tax rate of 11.34 cents per $100 assessed value, of which 3.35 cents are dedicated to debt service. Debt service will go from $33.4 million in fiscal 2008 to $40.6 million in fiscal 2011.

Property tax revenues provided more than 43% of the system's operating revenues in fiscal 2007, with collections of more than $102 million. Assessed property values in the district have gone from $20.9 billion in 1998 to $102.4 billion in fiscal 2008. Preliminary figures for fiscal 2009 put the assessed value at more than $110 billion.

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