OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Hays County, Texas' (the county) bonds:

--\$60.8 million limited tax (LT) refunding bonds, series 2015;
--\$30 million pass-through toll revenue and unlimited tax (ULT) bonds, series 2015.

The bonds are scheduled to sell during the week of March 16 via negotiated sale. LT bond proceeds will be used to refund outstanding debt for interest cost savings. ULT bond proceeds will be used for road improvements.

The Rating Outlook is Stable.

SECURITY

The limited tax bonds are payable from a limited ad valorem tax pledge of up to \$0.80 per \$100 taxable assessed valuation (TAV). The unlimited tax bonds are payable from an unlimited property tax levy. The pass-through toll revenue and unlimited tax bonds are additionally payable from payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation.

KEY RATING DRIVERS

LARGE FINANCIAL CUSHION: The county's financial position is solid, aided by prudent financial management and conservative budgeting. High reserve levels and ample liquidity have enabled recent pay-go spending on capital improvements.

NOTABLE SALES TAX TRENDS: Sales tax revenues, one of the county's main revenue sources, have shown a solid growth trend.

HIGH DEBT LEVELS: The county's debt profile, characterized by high overall debt levels, is a credit concern. However, downsized debt plans, enabled by significant construction cost savings, should keep carrying costs moderate. Principal amortization is about average.

STRONG SERVICE AREA: The county benefits from its proximity to the Austin area's diverse economy and its position along a major transportation corridor. The availability of affordable land continues to fuel TAV growth which stalled only modestly during the recession.

RATING PARITY: The LT bonds and notes are rated on par with the ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined \$0.426 operations and debt service tax rate compared to the limit of \$0.80.

RATING SENSITIVITIES

CONTINUED DEBT PRESSURES: Rising debt beyond current expectations without continued tax base growth and stability could pressure the rating.

CREDIT PROFILE

RAPID GROWTH IS TRANSFORMING TAX BASE
Situated between Austin and San Antonio, Hays County has been one of the fastest growing counties in the state and nation. With a current estimate of about 176,000, population has grown over 77% since 2000. The county encompasses roughly 678 square miles and includes the city of San Marcos, the county seat and a commercial center. A major highway, Interstate Highway 35, cuts through the eastern portion of the county. Wealth indicators are mixed but county unemployment indicators are positive, characterized by rapid growth in total employment and improvement in the December 2014 unemployment rate to 3.4%. The unemployment rate is consistently below the state and national rate.

The composition of the county tax base is being quickly transformed from rural to urban. Residential construction increased very rapidly before the downturn as the housing pressures in Austin expanded development southward, while growth in San Marcos pushed development northward. Commercial development promptly followed the population growth, particularly along the IH-35 corridor, with corporate investment in the community ranging from retail centers to health care.

San Marcos is home to a large and popular factory outlet mall and Texas State University (estimated enrollment of 35,000). The latter is expected to continue to grow rapidly in the next few years, facilitated somewhat by its recent transition to a Division 1 athletic program. TAV has ramped up steadily after declining by a modest 0.6% in fiscal 2011, posting a compound annual average growth rate of 4.3% through fiscal 2015. Over 70% of fiscal 2015's 6.3% TAV gain is due to new construction.

STRONG FINANCIAL PROFILE
The county's financial position and conservative budgeting practices are key credit strengths. The county has consistently posted unreserved general fund balances well in excess of its stated 30% minimum policy goal, which allowed significant pay-go spending on capital improvements in recent years. The fiscal 2013 audit posted a \$1.9 million operating surplus (equal to 3% of spending), aided by a large 10.8% gain in sales tax receipts. The resulting unrestricted fund balance grew to \$34.7 million, equal to a high 56.5% of expenditures and transfers out.

Sales tax receipts have grown by a strong compound average annual rate of 7.7% since fiscal 2009. County officials attribute rapid sales tax growth to similarly paced population trends and strong retail sales at the county's large outlet mall in San Marcos. The county conservatively budgets flat receipts for this revenue source despite recent surges, which Fitch views positively. Sales taxes account for the second largest revenue source at 21% of general fund revenues in fiscal 2013, exceeded only by property taxes (55%).

The county's liquidity position is also strong, with cash and investments at the end of fiscal 2013 totaling \$28.4 million, sufficient to cover more than five months of operating costs. Officials budgeted the use of about \$3.4 million (6% of appropriations) of fund balance in the fiscal 2014 budget, primarily for capital spending; however, aided by 8.4% sales tax revenue growth, management projects a \$2.4 million (4% of spending) net surplus . The fiscal 2015 budget includes a modest use of fund balance but is based on a conservative projection of a 5% decline in sales tax receipts. Year-to-date sales tax revenues are up by 8.7%, leading management to expect balanced operations or better for fiscal 2015.

HIGH DEBT, MODERATE CARRYING COSTS
The county's high debt load represents a key credit concern. Overall debt levels have trended down modestly but remain at about \$8,555 per capita and 9.1% of market value, which primarily reflects debt from overlapping school districts and the city of San Marcos. About \$28 million of unissued bonds remains from the \$208 million authorization approved by voters in 2008 for road improvements. However, due to significant construction cost savings, the county expects to need only \$8 million - \$10 million of the remaining authorization which it plans to issue in 2016. Additional capital needs in the near term include a \$30 million multi-use public safety communications and training facility which may be placed on the ballot in Nov 2015. A jail facilities study is also underway to help the county plan for increasing its diminished capacity.

Net of \$2.3 million in Texas Department of Transportation (TX DoT) reimbursements for its pass-through toll revenue and limited tax bonds, fiscal 2013 debt service totaled \$20 million or 11.4% of governmental spending. Fiscal 2014 reimbursements increased to \$3.7 million as additional road projects are completed and deemed eligible for TX DoT funds. The county's goal is to maintain the currently modest debt service tax rate of \$0.125 per \$100 AV even with the current offering and the issuance of \$8 million - \$10 million in additional bonds from its 2008 authorization. The aggregate principal payout rate for LT and ULT bonds is about average with 49% of principal retired in 10 years.

The county contributes to the Texas County and District Retirement System (TCDRS) pension plan and provides retiree health coverage as an other post-employment benefit (OPEB). The county typically makes 100% of its annual required contribution for its pension. The statewide TCDRS pension plan was solidly funded at 83% as of Dec. 31, 2012. The funded ratio is slightly lower at approximately 75% based on Fitch's adjusted rate of return of 7%. Net of TX DoT pass-through toll reimbursements, combined debt service, pension and OPEB costs in fiscal 2013 totaled \$21.9 million or a moderate 14.1% of governmental spending.