Fitch Rates Houston, TX $65MM POBs 'AA-'; Outlook Revised to Stable.

AUSTIN, Texas -- Fitch assigns an 'AA-' rating to the $65 million taxable pension obligation bonds, series 2007A of Houston, Texas. Additionally, Fitch affirms the 'AA-' rating on the city's $1.9 billion in general obligation bonds, $81.3 million in certificates of obligation and $2.3 million in

Proceeds will fund a portion of the annual contribution to the pension systems for municipal employees and classified police officers of the city. The bonds are scheduled for a negotiated sale through a group led by Goldman, Sachs & Co. on or about Feb. 6.

The revision in Outlook to Stable from Negative results from voter passage of Proposition G in November 2006, which eases revenue restrictions approved by voters two years earlier. With Proposition G the city now will exclude enterprise fund revenues from the previously approved charter revenue limitations. Proposition 1 was a city council initiative and targets only ad valorem tax revenue and water and sewer system rates. Proposition 2, which was a citizen initiative, is much broader, covering combined revenues of essentially all city operations and has the potential to more severely restrict revenue growth.

Propositions 1 and 2 are conflicting, and litigation is ongoing to resolve the inconsistencies. A district court ruled in January, 2006 that the city must implement both Proposition 1 and Proposition 2, despite a city attorney opinion that only Proposition 1 is legally binding since it received the larger number of votes in the 2004 election. The city has appealed the court's final ruling. Houston continues to budget in compliance with both measures.

Fitch believes the approval by voters of Proposition G removes the most onerous component of Proposition 2 by excluding enterprise system revenues from the revenue limitations; this component had the potential for reductions in basic services if enterprise system revenues increased significantly. In addition, the approval in November 2006 of another ballot measure-Proposition H-adds $90 million in public safety spending for fiscal 2007 and boosts the base revenue amount for subsequent years, thereby reducing the impact of another restrictive component of Proposition 2. A voter has filed suit challenging both Proposition G and Proposition H, claiming that both measures violate state law. The city disputes this, and both measures presently are in effect.