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Harris County, Tex., Kicks Off First Of Three Issues Totaling $550M

DALLAS — Harris County, Tex., today will issue the first of three bond deals worth a combined $550 million.

Today’s $100 million pricing of tax-exempt permanent improvement refunding bonds will be followed by $350 million of toll revenue bonds that will be issued as taxable Build America Bonds on Dec. 7, said Edwin Harrison, the county’s chief financial officer. A third issue expected in December will be a $100 million refunding of hotel occupancy tax and road bonds.

Harrison said the county separated the first and third deals to keep the yields from blending and creating possible arbitrage issues.

“You could do it,” he said. “It’s just cleaner when you do it like this.”

Today’s deal is led by Jefferies & Co., with Cabrera Capital Markets as co-senior managers. Barclays Capital, Morgan Keegan & Co. and Piper Jaffray & Co. are co-managers, with First Southwest Co. as financial adviser and Fulbright & Jaworski as bond counsel.

With today’s deal, Harris County, which includes Houston, expects to see interest cost savings of about 3%, according to Harrison.

“The market’s been getting better and hopefully will continue,” he said last week.

Harris County’s triple-A rating from Standard & Poor’s and AA-plus from Fitch Ratings with stable outlooks serves as a gilt-edged invitation to investors seeking refuge in quality debt.

“The outlook reflects our assessment of stability in the tax base, coupled with management’s conservative budgeting practices, which have enabled the county to generate strong surpluses to support its significant capital plan,” Standard & Poor’s analysts James Breeding and Horacio Aldrete-Sanchez wrote. “This is especially important given Harris County’s above-average debt position.”

The refunding bonds will be issued as 2009 Series A, B and C.

The county’s Series 2009A bonds are secured by an unlimited property-tax pledge without legal limit.

The 2009B and C bonds are secured by a limited tax pledge, while the Series C bonds are also backed by the county’s hotel occupancy tax.

“Currently, the tax subject to the 80-cent limit is levied at a rate of just under 38 cents, providing the county with significant revenue-raising flexibility,” analysts noted.

According to Fitch, the county’s outstanding tax supported debt includes $1.1 billion of limited-tax bonds, $746.9 million of unlimited-tax bonds, and $665.6 million of toll road unlimited-tax and subordinate-lien revenue bonds.

“The direct debt profile remains favorable along with the county’s policy of maintaining an entire year’s worth of debt service in reserves,” Fitch analysts Jose Acosta and Rebecca Moses wrote.

Next month’s toll bonds give the county its first chance to take advantage of the federally subsidized Build America Bonds.

“BABs are only issued for new money,” Harrison noted. “Everything else we’ve done is refunding.”

Proceeds of the toll road bonds will be used to expand and maintain the 107-mile system.

As Texas’ most populous county, Harris County is unusual in that it operates and finances its own toll road system known as the Harris County Toll Road Authority. In the Dallas-Fort Worth area, the North Texas Tollway Authority is a regional agency covering several counties.

The HCTRA was created by Harris County Commissioners Court in 1983 after voters approved a referendum to release $900 million in bonds to construct toll roads in the rapidly growing and heavily congested Houston metro area.

The first two projects, the Hardy Toll Road and the Sam Houston Tollway-West, were completed in 1987 and 1990, respectively.

In 1994, the county bought the Jesse H. Jones Memorial Bridge toll facility from the Texas Turnpike Authority, which was renamed the Sam Houston Ship Channel Bridge.

As part of the county’s purchase of the bridge, the county reached agreements with the Texas Department of Transportation for contributions of federal funds for construction of Sam Houston Tollway-East and Sam Houston Tollway-South.

So far this year, toll revenues are up 16%, an impressive figure in a national recession.

But Harrison cautioned that revenue is being compared to 2008 that included Hurricane Ike. In September 2008, the HCTRA waived its tolls for a period of time to allow easier transit in the wake of the hurricane.

A $250 million county toll revenue bond issue sold in April carried ratings of AA-minus from Standard & Poor’s and Fitch and an equivalent Aa3 from Moody’s Investors Service.

The HCTRA is continuing a five-year capital plan worth an estimated $5.4 billion.

Among the projects under consideration is an outer loop around the Houston metro area called the Grand Parkway.

The loop would pass through seven counties, with only 10% of the road in Harris County. However, that 10% would account for 90% of revenues, Harrison said.

Because of that, Harris County is the lead negotiator with the Texas Department of Transportation that would decide funding for the project.

Harris County’s Segment E of the Grand Parkway qualifies for $181 million of federal stimulus funding, but Harrison said the county has never used federal funding for any of its toll projects.

Average annual growth in traffic and revenue on the toll system has been 5% and 9%, respectively, from fiscal 1999 to 2009. However, the rate of growth has slowed as congestion has increased, according to analysts.

Economically, Harris County has come through the recession in much better shape than most large metropolitan areas of the country. Harrison said he expects tax revenue to be flat for the current 2010 fiscal year.

With a growing population of more than 3.6 million, Harris County is fueled by Houston’s economy. The county’s $282 billion property tax base — up more than 80% from fiscal 2001 to 2009 — continued to expand for fiscal 2010, although at a slower pace, according to Standard & Poor’s.

The growth rate in recent years has averaged more than 7%, giving the county some cushion to manage growth-related issues like debt retirement and the internal funding of construction and infrastructure maintenance.

“The county’s financial position remains solid but is facing growing pressure to provide adequate staffing for its large adult and juvenile detention systems,” Fitch analysts observed. “Plus, continued rapid population growth in unincorporated areas of the county poses additional challenges to provide infrastructure and service needs.”

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