OREANDA-NEWS. Fitch Ratings has assigned its 'AAA' rating to the following limited tax bonds of Harris County, TX:

--$193.4 million permanent improvement and refunding bonds, series 2015A.

The bonds are scheduled to sell via negotiation during the week of July 27. Bond proceeds will be used to construct a forensics facility and refund outstanding commercial paper notes.

The Rating Outlook is Stable.

SECURITY
The limited tax bonds are payable from an annual property tax levy, limited to $0.80 per $100 assessed valuation (AV), for limited tax bond debt service, operations and maintenance, and the public improvement contingency (PIC) fund.

KEY RATING DRIVERS
STRUCTURAL BALANCE RESTORED: The county has restored structural balance to its financial operations. Substantial budget cuts, public safety cost efficiencies, and strong tax base growth enabled the county to substantially increase its financial cushion which now exceeds its 15% fund balance goal.

HIGH DEBT PROFILE: The county's debt profile is characterized by high overall debt, average amortization, and moderate carrying costs for debt, pension and other post-employment benefit (OPEB) liabilities. The large and expansive property tax base allows the county to maintain its debt service tax rates at modest levels. The county collects the taxes used for payment of debt service primarily during the last three months of its fiscal year, so that the funds are on hand at the beginning of each fiscal year for the following 12 months of debt service.

ENERGY SECTOR STILL DOMINANT: While diversification into biomedical research, aerospace and international trade via the Port of Houston is evident, energy and petrochemical manufacturing remain major determinants of employment and tax base growth The recent plunge in oil prices is expected to slow the pace of employment growth in the near term although any impact to taxable values will occur over the medium term and is dependent on the duration of reduced oil prices.

RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating for Harris County is sensitive to shifts in fundamental credit characteristics including the county's healthy financial profile. Maintenance of solid reserves while addressing ongoing capital needs is a key credit consideration.

CREDIT PROFILE

Harris County is the largest county in Texas and the third largest in the nation, encompassing all but a small portion of the city of Houston with a population totaling 4.5 million. The county experienced a large 20% population gain in 2000-2010, of which 75% occurred in the unincorporated areas.

SIGNIFICANT BUDGET CUTS ENABLED STRUCTURAL BALANCE

Recent right-sizing by the county has enabled the return of structural balance to its financial operations. In fiscal 2012, the county eliminated 1,090 positions (5.4% of total positions), including 887 positions in the general fund. Subsequently, fiscal 2013 posted another large surplus, enabled by the county's discontinued use of out-of-county jail facilities, a significant cost driver in recent years. The commissioners court and the criminal justice courts have made progress in working toward reducing jail populations through diversion programs and improved mental health services.

A healthy 9% gain in AV and a 1.2-cent tax rate increase in the operations & maintenance (O&M) fund fueled a large 11.5% gain in general fund revenues in fiscal 2014. Despite a 7.2% increase in expenditures, the fiscal 2014 audit posted a substantial $239 million (16% of spending) net surplus and an unrestricted fund balance equal to $373 million or 27.1% of spending. Excluding a $44 million balance within the PIC fund, the county's cushion totaled $328 million or 23.9% of spending, well above the county's 15% fund balance goal.

Management's preliminary results for fiscal 2015 (fiscal year end Feb. 28) point to continued strong growth in the county's reserves. Unaudited results are not available but on a cash basis the county reports a large $173 million increase in the ending cash balance, equal to 12.3% of spending. The fiscal 2016 budget is balanced, and year-to-date expenditures and revenues are on track through the first four months of the fiscal year. Fiscal year-end 2016 revenues are expected to far exceed budgeted projections as preliminary AV growth (9.7%) is nearly twice as large as budgeted (5%).

TAX BASE REBOUNDING

Property taxes represent about two-thirds of general fund revenues. Given the current tax rate of $0.393 per $100 of AV, the county has substantial taxing margin below the $0.80 limit for operations and debt service on permanent improvement (limited tax) bonds. After declining by 4.2% in fiscal 2011, the county's AV growth has ramped up in recent years, increasing by 9% and 10.74% in fiscal years 2014 and 2015, respectively, prior to the preliminary growth for fiscal 2016 mentioned above.

The ongoing gains in AV are attributed to surging home building, as home prices were not subject to high rates of appreciation prior to the recession; the increase is also aided by ample land and limited zoning regulations. The median home sale price in Houston increased (according to Zillow) by 10.5% to $223,000 over the 12-month period ending May 2015.

ELEVATED OVERALL DEBT PROFILE

Overall debt ratios are high, particularly at the 'AAA' rating level, at $6,109 per capita and 6% of market value. The overall amount includes the county's 350 underlying jurisdictions. After the current offering, the county's remaining bond authorization is $351 million and the commissioners court is expected to consider seeking voter authorization for additional bonds this November. The size of the proposed ballot proposition (expected to be predominantly unlimited tax [ULT] road bonds) will be determined by August. It is the county's practice to issue its ULT road bond authorization over a six-seven-year period. Capital needs, while extensive, appear to be manageable given the county's history of a measured pace of debt issuance and its goal to maintain a level tax rate. The principal pay-out rate is average with 54% of bonds retired in 10 years.

County employees participate in the Texas County and District Retirement System, a cost-sharing multiple employer plan that is funded at 85.9% as of Dec. 31, 2013. Adjusted by Fitch for a 7% rate of return, the pension plan is funded at an estimated 77%. Employees' OPEB are administered by the county's own agent multiple-employer healthcare plan, which it funds on a pay-as-you-go basis. The OPEB UAAL of $1.2 billion is modest as a percentage of the county's market value at 0.26%. The county's carrying costs in fiscal 2014 for debt service, pension and OPEB equaled a moderate 15.9% of total governmental spending.

OIL PRICE COLLAPSE CLOUDS OTHERWISE STRONG ECONOMIC PICTURE

The post-recession recovery of Houston's regional economy has outpaced that of many other large MSA's, as a robust energy sector, the Port of Houston and healthcare all contributed to recent population and employment gains. MSA employment continued to register moderate gains, posting a 1.3% increase in the 12-month period ending in March 2015; the MSA's unemployment rate of 4.2% for the month was down from 5.2% in the same period last year and is on par with the state (4.2%) but below the U.S. rate (5.6%).

The 2014 plunge in oil prices may materially affect the pace of economic growth in the MSA over the near term. The Houston MSA is home to several thousand energy companies, ranging from large multi-national concerns to numerous mid-sized to smaller exploration, construction, engineering and service companies. While growth in other sectors (e.g. shipping, healthcare) has reduced dependence on the energy sector over the past several decades, direct employment in the sector was 4% of the 2014 regional total. Estimates of the oil and gas contribution to the MSA's 2014 GDP range from 15% - 20%, and when associated industries are included the share of GDP increases to 35% -40%.

A number of energy companies have announced companywide layoffs in recent months, including Schlumberger, Halliburton and Baker Hughes. Total job loss estimates vary, but projections for 2015 Houston MSA employment gains are sharply lower than the 100,000 annual increases in jobs the MSA has experienced recently.