TEXT-Fitch cuts Milam County, Texas COs to 'BBB'

Aug 6 - Fitch Ratings downgrades the following Milam County, Texas (the
county) bonds:

--$6.6 million outstanding certificates of obligation (COs), series 2004 to
'BBB' from 'BBB+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY
The bonds are direct obligations of the county payable from an ad valorem tax
within the statutory $0.80 per $100 of assessed value limit on all taxable
property within the county.

KEY RATING DRIVERS

WEAK FINANCIALS DRIVE DOWNGRADE: The downgrade to 'BBB' from 'BBB+' reflects
Fitch's expectation of marginal financial performance over the near term given
the county's ongoing experience of failing to achieve its financial targets
largely from overbudgeting annual revenues. Management expects to maintain
modest, positive reserves by fiscal 2012 year-end. Fitch believes these results
may be achievable with the recent positive revenue trends evidenced and
historically tight spending, but remains skeptical given the property tax
revenue gap that management faces.

TAXPAYER RESOLUTION LEADS TO STABLE OUTLOOK: The Outlook revision to Stable from
Negative reflects the improved stability in the county's narrow tax base with
the recent settlement by its leading taxpayer. The resulting reduction in
taxable assessed valuation (TAV) was not as sizeable as originally anticipated.

SIGNIFICANTLY CONCENTRATED TAX BASE: Two large power plants owned by Luminant
make up the county's largest taxpayer at a slightly reduced but still high 39%
in fiscal 2012. Luminant is a unit of Energy Future Holdings (EFH) Corporation.
Fitch's recent downgrade of EFH to an Issuer Default Rating of 'CC' from 'CCC'
provides added uncertainty to the county's credit profile.

MINERAL GAINS PROVIDE PARTIAL OFFSET TO TAV LOSS: Recent discovery of mineral
deposits in the county and subsequent activity that has led to some productive
oil/gas drilling have contributed to modest growth and diversification of the
county's tax base.

CASH-BASIS ACCOUNTING: The county relies upon cash-basis financial reporting
that began in fiscal 2008, which makes it difficult to ascertain its true
financial condition. Before the transition, the county had reported a modest
negative general fund balance under generally accepted accounting principles
(GAAP) accounting.

LIMITED ECONOMY: The area economy is largely rural, characterized by elevated
unemployment and below-average demographics.

MODEST DEBT LEVELS, MINIMAL CAPITAL NEEDS: Overall debt levels are modest. The
county's direct debt levels are low and principal amortizes rapidly. Management
does not anticipate any capital needs over the near term that would require
additional debt financing.

WHAT COULD TRIGGER A RATING CHANGE

CHANGES TO FINANCIAL POSITION: A trend of positive financial performance in line
with projections would be viewed favorably. Conversely, further instability in
the county's property tax revenues from its largest taxpayer and/or a trend of
continued operating deficits and negative fund balances could negatively affect
this rating.

CREDIT PROFILE

POOR FINANCIAL MANAGEMENT PRODUCES WEAK PERFORMANCE
The county switched from GAAP to cash-based financial reporting in fiscal 2008
after reporting two prior years of negative general fund balances. The cash
position improved in fiscals 2008 and 2009, but weakened again in fiscal 2010. A
steeper than anticipated $1.7 million draw on cash reserves was realized in the
fiscal 2010 audit as revenues fell well short of budgeted expectations.
Management substantially over-estimated income from fees and fines in fiscal
2010 with actual general fund revenues falling by nearly $1.6 million or 16%
below the prior year. The year-end fiscal 2010 general fund cash balance dropped
to a reduced but sufficient $2.1 million or 21% of spending. However, Fitch
notes this cash available was likely bolstered by property tax receipts received
for the upcoming fiscal year. The county maintains additional liquidity from
about $3 million in cash, deposited in the road and bridge fund and held outside
of the general fund.

For fiscal 2011, management expects unaudited fiscal 2011 year-end results will
preserve a minimal $400,000 operating reserve on a cash basis or a low 4% of
spending, which is in line with prior expectations at Fitch's last review. A
mid-year correction of across the board spending reductions and better than
budgeted sales tax collections reportedly addressed much of the previously
projected $500,000 cash shortfall at year-end and supports management's year-end
estimates.

UPSWING IN SALES TAX REVENUES BOLSTERS 2012 OPERATING REVENUES
Solid monthly gains in sales tax revenue have been realized on a year-over-year
basis beginning in the latter part of 2011 and have continued through fiscal
2012 due largely to recent mineral activity. Year-to-date sales tax performance
as of July 2012 has remained very strong at a high 30% or additional $170,000
year-over-year gain.

The fiscal 2012 $10.3 million general operating budget was adopted as balanced
with the budgeted use of reserves. Mid-year, management judiciously enhanced its
operating revenues through negotiated, ongoing use of its excess jail capacity
with a neighboring county, which is expected to provide additional net revenue
for the county. On a year-to-date basis, management expects to minimally
maintain reserve levels comparable to unaudited fiscal 2011 year-end.

Preserving and building reserves is one of management's stated goals. However,
management must still grapple with the final settlement loss of approximately
$800,000 in budgeted property taxes attributable to Luminant's reduced TAV
settlement that began in fiscal 2012. Positive, year-end cash reserves depend
largely on continued growth in economically sensitive sales taxes, revenues from
a new prison housing contract, and tighter than budgeted spending in an
environment of reduced financial flexibility.

For fiscal 2013, the proposed $11.2 million general fund budget is balanced.
Projected revenues include a sizeable gain in sales taxes and shared revenues
(from a full year of the prison housing contract) and use of $1 million in
reserves. Year-over-year spending grew nearly 9% due largely to modest pay
increases, growth in jail costs, and establishment of a roughly $570,000
reserve.

Fitch notes some positive steps have been taken by the county's relatively new
management to address the county's economic and fiscal challenges. However,
Fitch believes past county actions such as the historical failure to maintain
sufficient levels of reserves, unrealistic revenue budgeting practices that
include the use of reserves to balance operational spending, and the conversion
from GAAP to cash-basis accounting reflect weak management practices. Fitch
views negatively the county's decision to switch from modified accrual to
cash-basis accounting as it obscures its true financial condition, especially as
the county's finances were already tenuous at the time of the change. Most
recently, however, management reports it is likely the county will change back
to modified accrual financial reporting by fiscal 2013.

SETTLEMENT MODERATELY REDUCES TAV; OFFSET IN PART BY MINERAL VALUE GAINS
General fund revenues are derived primarily from property taxes, which comprise
about two thirds of the revenue base. The county benefited in recent years from
very healthy TAV increases that averaged about 8% annually over fiscal years
2007-2012 and reached approximately $1.7 billion in fiscal 2012. Much of the
growth was attributable to the construction and completion of a large power
generating plant in 2009 owned by Luminant. However, the expansion resulted in
an increasingly concentrated tax base. Luminant and its subsidiaries constitute
the county's largest taxpayer at about 44% of TAV in fiscal 2011 and accounted
for almost 30% of county general fund revenues in fiscal 2010.

A lawsuit filed by Luminant against the county appraisal district for a decrease
in the Unit 5/Sandow power plant's assessed valuation roughly a year ago was
recently settled, successfully reducing the facility's TAV by $138 million
beginning in tax year 2011 (fiscal 2012). This TAV reduction was not as sizeable
as initially assumed; a relatively moderate 5% decline rather than the initial
3% gain will be recorded for fiscal 2012 after adjusting for this settlement.
Per values from the county appraisal district, minerals contributed about $66
million to fiscal 2012 TAV results and modest expansion (up to nearly $92
million) will allow some offset to the TAV loss. Overall, preliminary TAV
remains relatively flat at $1.6 billion in fiscal 2013. County management does
not anticipate any retroactive tax protest from Luminant nor repayment of prior
years' taxes. Luminant is current with its tax payments to the county through
fiscal 2012.

LIMITED LOCAL ECONOMY
The county is located in central Texas, about 60 miles northeast of Austin.
Local income and wealth levels are below state and national averages. Rural and
sparsely populated, the county's 25,000 residents are spread over 1,022 square
miles. Population growth has been relatively stagnant since 2000. The local
economy is based on agriculture, power generation, and mining. County employment
declined by over 1,500 or 13% between 2007 and 2010 spurred mainly by the
closing of Alcoa's aluminum smelting plant in 2009, previously the county's
largest employer.
Unemployment rates topped 10% in 2009 and have remained at or above those levels
through 2011. At 7.5% in April 2012, year-to-date unemployment levels remain
elevated but have declined from prior highs due to a 3% loss of labor force in
that time period. At this level, county unemployment shadows the nation's rate
of 7.7% while remaining above the 6.5% rate for the state.

MODERATE OVERALL DEBT BURDEN
Direct debt of the county consists of one series of outstanding COs issued in
2004 with final maturity in 2024. The county's fixed cost burden, which includes
debt service and annual pension cost, was a moderately high 12% of spending in
fiscal 2010. Principal amortization is rapid with nearly 90% of principal
retired within the next 10 years. Overall debt levels are moderate at 2.2% of
market value and $3,125 on a per capita basis with the majority of overlapping
debt consisting of outstanding bonds of school districts located within the
county. The county has no current plans to issue additional bonds, although it
may seek to refund the series 2004 COs in the near term for debt service
savings.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 15, 2011.

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria