2008-09-04 23:59:02 -

- Fitch Ratings assigns an 'AA-' rating to Pasadena, Texas' (the city) approximately $21.6 million general obligation (GO) bonds, series 2008. Additionally, Fitch affirms the 'AA-' rating on the city's outstanding $118 million GO bonds and $17 million certificates of obligation. The Rating Outlook is Stable.

Scheduled to sell competitively on Sept. 8th, the bonds are direct obligations of the city, payable from an ad valorem tax levied against all taxable property in the city. The state constitution and city charter limit ad valorem taxes for general and debt service purposes to $2.50 per $100 of assessed valuation. Bond proceeds will be used to finance construction and renovation of city facilities, parks, street and drainage improvements, and to pay

costs of issuance.

The 'AA-' rating reflects the city's solid tax base within the Houston area economy, sound management practices that are characterized by long-term capital improvement planning and five-year budget forecasting, a moderate direct debt burden with above-average amortization, and adequate reserves. Although reserve levels declined in three of the last five years, fiscal 2007 results remained comparable to the prior year, ending with a healthy surplus. Preliminary fiscal 2008 results include another operating surplus and increase in reserves. Also considered in the rating is the city's large but manageable capital plan as well as susceptibility to economic fluctuations as a result of industry concentration in nondurable manufacturing, although this is offset by a long history of stable petroleum and chemical operations in the city. Given that ongoing capital pressures and operating expenditure growth may continue to strain fund balances, the continuance of solid reserves will be integral to maintaining credit quality going forward.

Located in southeastern Texas along the Houston Ship Channel (Port of Houston Authority GO bonds rated 'AA+' by Fitch), the mature city of Pasadena encompasses approximately 60 square miles. It is the largest suburban city in the Houston metropolitan statistical area. Building on a base of petroleum, chemical, and allied industry employment, the area economy continues to expand and diversify with a growing retail presence in the southern portion of the city. Although industry concentration is in petrochemicals, there is a stable mix within the sector. Pasadena benefits from its proximity to the Port of Houston and the Houston area economy. Although the taxable assessed value (TAV) growth rate has been somewhat sporadic in the past few years, TAV has increased an average of almost 6% annually over the past five fiscal years. Income figures remain below those of the state and nation. The city's unemployment rate of 5.8% in June 2008 exceeds the metro and state averages of 4.7% and 4.8%, respectively.

After posting several years of general fund operating deficits, the city's financial position has stabilized and reserve levels remain strong. Most recently, fiscal 2007 results further added to reserves, bringing the unreserved general fund balance to almost $17 million or 23% of spending. Moreover, city officials expect to end the year with a $2 million surplus, resulting in an increased fund balance reserve of about $19 million, or an estimated close to 25% of spending. This reserve level is well above the city's formal unreserved fund balance policy of maintaining at least two months of operating expenditures. Funds in excess of two months may be used for capital projects. As per the adopted fiscal 2009 budget, city officials anticipate maintaining adequate reserves in line with this operating policy, despite a planned drawdown of roughly $2.3 million in fiscal 2009.

Pasadena has maintained a long-term capital improvement plan (CIP) since fiscal 2002. The city's CIP is updated annually during the budgeting process. The current fiscal 2008-2012 CIP calls for a total of $283.7 million in projects, of which, almost half are for streets, traffic and drainage projects. The plan includes issuance of this sale, which is the last portion of the 2002 bond election. The CIP also sets the starting point for consideration of future bond elections to fund projects that do not yet have another funding source. City officials reportedly do not anticipate another tax-supported debt issuance within the next 12-24 months. Direct debt levels are moderate. Including approximately $260 million in overlapping debt, overall debt ratios rise to high levels, but remain manageable. Amortization is above average with 64% principal retirement in 10 years.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, Austin
Rebecca Moses, +1-512-215-3739
Gabriela Quiroga, +1-512-215-3731
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)