OREANDA-NEWS. Fitch Ratings affirms the ratings for Houston Community College System, Texas' (HCCS or the system) outstanding maintenance tax notes as follows:

--$58.5 million maintenance tax notes, series 2006, series 2008, and series 2009 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

Maintenance tax notes are payable from the M&O portion of the tax rate, not to exceed $0.50 per $100 AV. The total tax rate cannot exceed $1.00 per $100 AV per state statute.

KEY RATING DRIVERS

SOUND FINANCES MAINTAINED: HCCS' financial position remains sound and stable despite prior fiscal years' state funding pressures and some enrollment loss. Consistently positive operating margins, a relatively diverse revenue base, and a strong reserve cushion maintained well in excess of policy characterize the profile.

LARGE, DIVERSE REGIONAL ECONOMY: HCCS benefits from its location in the broad Houston metropolitan statistical area (MSA) economy and employment base. The expansive regional economy has continued to show solid gains in recent months, although the recent plunge in oil prices is expected to slow the pace of growth over the near term.

ROBUST TAV GAINS: Relatively brief recessionary stagnation in the tax base was followed by solid annual TAV growth, which is again estimated for fiscal 2016. Taxpayer concentration is minimal, although some energy sector concentration exists. The overall tax rate remains low and stable.

MODERATE LONG-TERM LIABILITIES: Overall debt levels and other long-term liabilities of the system are moderate. Amortization of tax-supported principal is slow. Carrying costs are expected to remain manageable.

RATING SENSITIVITIES

FINANCIAL POSITION: Maintenance of its solid financial position and ample revenue-raising flexibility is key to credit quality. The Stable Outlook reflects Fitch's expectation that near-term changes to these credit factors are unlikely.

CREDIT PROFILE

FOURTH LARGEST COMMUNITY COLLEGE IN NATION

HCCS encompasses about 2.3 million residents in the Houston metropolitan statistical area (MSA), inclusive of much of Harris County and some portions of Fort Bend County. The metro population continues to expand at an annual rate of roughly 2%, in line with state growth trends and double the U.S. average. The city's population has increased more slowly due to its land-locked boundaries. County income levels slightly exceed those of the state and are generally on par with the nation's.

MODEST REVERSAL OF PRIOR YEARS' ENROLLMENT DECLINES

HCCS operates 21 campuses or centers throughout its service area. Moderate annual enrollment losses that were a cumulative 9% occurred over fiscals 2012-2014 due largely to the counter-cyclical nature of community college enrollment trends relative to a strengthened local economy.

Enrollment has subsequently begun to modestly reverse course. Enrollment grew by about 2.4% in fiscal 2015 to date according to management, although this fell slightly short of the 3% gain budgeted. Stable to growing attendance in various workforce certification and training programs has served to partially mitigate some loss in traditional credit programs. Management projects a relatively modest pace of 1.5%-2% growth in students over the near to intermediate term. Fitch believes this is a reasonable assumption given fiscal 2015 enrollment performance, HCCS' comparatively low tuition/fees, and a large, rapidly growing population base.

OIL PRICE COLLAPSE CLOUDS OTHERWISE STRONG ECONOMIC PICTURE

The post-recession recovery of Houston's regional economy has outpaced that of many other large U.S. cities, as a robust energy sector, the Port of Houston and healthcare all contributed to recent population, tax base, and employment gains. Regional employment continued to register moderate gains, posting a 1.3% increase in the 12-month period ending in March 2015; Harris County's unemployment rate of 4.2% for the month was down from 5.2% in the same period last year and on par with the state, but below the U.S. rate (5.6%). Recent tax base trends have also been robust. HCCS' fiscal 2014 TAV totaled nearly $147 billion, or a 10% increase from the prior year and management reports preliminary estimates from the appraisal district are for a similarly-sized gain in fiscal 2016.

Nonetheless, the recent plunge in oil prices will materially affect the pace of economic growth in the area over the near term. Houston 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 Houston'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 layoffs in recent weeks, including Schlumberger, Halliburton and Baker Hughes. Total job loss estimates vary, but projections for 2015 Houston employment gains are sharply lower than the 100,000 annual increases in jobs the city has experienced recently.

REVENUE-RAISING FLEXIBILITY AND DIVERSITY SUPPORTS OPERATIONS

HCCS' financial performance is enhanced by a diverse revenue stream and revenue-raising capacity, comparable to all Texas community colleges. The revenue-raising flexibility has generally allowed the system to successfully offset much of the fiscal pressure associated with recent state funding cuts and moderate enrollment declines.

About one-third of the system's total revenue (or $143 million) came from property taxes in fiscal 2014, which includes property taxes for operations and debt service. HCCS' total tax rate has remained low and stable at approximately $0.10 per $100 TAV, well below the state's statutory tax rate ceiling for community college districts of $1.00 (not to exceed $0.50 for debt service. Federal revenues (largely Pell grants for low-income students) were the second largest source at 25%. Tuition/fees have remained a fairly consistent portion of total revenues (16% or $71 million in fiscal 2014) due to the periodic increases implemented by HCCS in its attempt to offset revenue loss from recent enrollment declines and a generally reduced level of state support. About 19% or nearly $82 million of total revenues came from HCCS' state appropriation in fiscal 2014; this was down from about 26% in fiscal 2008. Management expects a very modest, 1% increase in its state appropriation with the new biennium (fiscals 2016-2017).

STRONG FISCAL PERFORMANCE AND RESERVES MAINTAINED

HCCS has consistently produced positive operating margins since fiscal 2008, largely a function of multi-year expenditure cuts, additional property tax revenue for operations, and tuition/fees increases. Also, HCCS, like most community colleges, maintains healthy spending flexibility against declining enrollment trends with the employment of largely part-time, non-tenured faculty.

The fiscal 2014 operating margin was strongly positive at 8%, up from 4% in fiscal 2013. Unrestricted reserves at year-end (audited) totaled a strong $103.5 million or about 35% of fiscal 2015 projected revenues, well in excess of policy (9% - 11% of projected revenues) and at a level of financial flexibility consistent with the system's high-grade rating. Management's reported consideration of materially improving the formal reserve target, if approved, would be a positive credit factor

For fiscal 2015, the $306.7 million unrestricted funds/operating budget was adopted as balanced and spending remained fairly flat as compared to the prior year's budget. The year's effective tax rate was increased by about 7%, slightly below the 8% rollback rate. The budget included a modest use of reserves ($8 million or 3% of spending), however, the new financial leadership quickly addressed this imbalance with a comparably-sized budget freeze that was later offset by higher than budgeted actual property tax revenue. The year's operations are reportedly running favourably to budget; management indicates a $7-$8 million (3% of spending) addition to reserves is projected by fiscal 2015 year-end.

Preliminary planning for the fiscal 2016 budget has begun. Adoption of a structurally balanced operating budget is assumed, balanced against projections of strong TAV and modest (1.5%) enrollment growth over fiscal 2015 actuals. Management expects to closely examine the large system's current baseline spending for additional efficiencies and cost savings, in part to counter the increased operating costs from new facilities coming online, which Fitch believes reflects prudent fiscal practices.

MODERATE OVERALL DEBT LOAD

The overall debt burden is moderate at about 4.2% of fiscal 2015 market value or $3,560 on a per capita basis. Outside of its GO bond elections, many of the system's capital needs have previously been met through issuance of a sizable amount of revenue, lease revenue, and maintenance tax note debt. Relatively new senior leadership (a new Chancellor was appointed in 2014) is presently working towards completion of those capital projects approved in the 2012, $425 million GO bond authorization, largely directed towards program (particularly health care, workforce, and early college) expansion. All projects are expected to be completed within a 5-year window despite some prior slowing due to the transition in leadership. Management reports a renewed focus on the long-range plans and costs associated with the new facilities and their programs.

Principal amortization of the system's tax-supported debt slowed with the 2012 GO authorization; about 36% is repaid in 10 years. Management plans to use a portion of its reserves (about $8 million) to pay off the remaining debt on one of HCCS' facilities in early fiscal 2016. A fresh look at existing long-term capital plans may result in HCCS incurring additional debt over the near to intermediate term for facility renewal and repair needs, although management indicates completing the GO bond program is currently its top priority.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The college's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state historically provided the bulk of the employer's annual pension contribution. TRS is funded at 80.5% as of its Aug. 31, 2014 valuation, though Fitch estimates the funded position to be lower at 72.5% when a more conservative 7% return assumption is used.

The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. The employer's contribution is currently shared at a slightly higher 50% with the state. Increases in pension funding requirements beyond fiscal 2015, while not presently anticipated, could create additional budget pressure, which Fitch will monitor. Carrying costs (debt service, pension, OPEB costs, net of state and self-support) were moderate at approximately 16% of total expenses in fiscal 2014 and are projected to remain manageable even with the gradual increase in annual debt service to reach MADS in fiscal 2021.