DALLAS — Standard & Poor’s upgraded its rating on 250 utility districts in Texas following a change in the criteria related to the issuers’ general obligation credit.
While the agency’s fundamental methodology for rating the districts hasn’t changed, additional emphasis has been placed on their relative level of development and financial stability bolstered by maintenance of strong reserves over several years.
“Most rated Texas districts have maintained strong ratios in key GO performance measures, despite continued concern about current economic conditions,” Standard & Poor’s analysts James Breeding and Horacio Aldrete-Sanchez wrote in the upgrade report.
“Typically, we constrain the ratings on the debt issued by many of these districts because of their limited purpose and size, lack of professional management, and, in our opinion, very high debt burdens,” they said. “We believe, however, that these entities warrant a higher rating because of their historically stable financial positions, with what we consider generally high reserve levels, and low tax delinquency rates. While high debt burdens relative to other GO credits are the norm for these districts, in our view state oversight, coupled with managed debt issuance, offsets this weakness.”
In Texas, Standard & Poor’s rates the GO debt of 277 of the districts, which include municipal utility districts, water control and improvement districts, and levee improvement districts, among others.
Now with the change in ratings criteria and consequent upgrades, eight such districts are rated in the AA category and 145 in the A category. The remaining 124 are in the BBB category and just five of the issuers remain rated at BBB-minus.
“Many of these credits have been stable for some time now,” Breeding said. “They’ve got strong state oversight and tax collections continue to remain strong, so maybe these are not as risky as they once seemed to be.”
Breeding pointed to the relatively stable housing prices across Texas as another source of credit strength for these issuers.
“Texas didn’t have the bubble other places of the country experienced and the tax collections of these MUDs and other districts are still good,” he said.
There are 1,459 active utility districts in the Lone Star state with another 446 that are classified inactive by the Texas Commission on Environmental Quality. Inactive districts are either built out or have been approved and just haven’t started construction yet.
The districts are usually created at the request of real estate developers seeking to benefit from tax-exempt financing of infrastructure improvements to serve future development, according to Standard & Poor’s. The districts then have the authority to levy a property tax with an unlimited rate and issue tax-secured bonds, analysts said.
Many of the utility districts in Texas are near Houston in Harris County and Fort Bend County, and are at least partially responsible for the rapid growth of the area. Houston’s population of about 2.15 million is up about 10% from the 2000 Census.
Harris County has added nearly half a million new residents since the start of the decade. Only Maricopa County, Ariz., which includes Phoenix, has experienced a larger gain with almost 700,000 new residents.
With roughly 4.1 million residents, Harris County is more populous than 25 states and the third-largest county in the country.