AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the following City of Brownsville, Texas (the city) securities:
--$12.275 million combination tax and revenue certificates of obligation, series 2012A;
--$1.2 million combination tax and revenue certificates of obligation (COs), taxable series 2012B.
The bonds are scheduled for a negotiated sale the week of Dec. 10. CO proceeds will be used to fund municipal transportation, facility and park projects.
In addition, Fitch affirms the following ratings:
--$149.8 million city limited tax bonds and certificates of obligation (COs) at 'AA-';
--$16.6 million Brownsville Community Improvement Corporation (BCIC) sales tax bonds at 'AA-'.
The Rating Outlook is Stable.
The GOs and COs are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV). The series 2012A COs are additionally payable from surplus revenues of the city's municipal landfill. The series 2012B COs are additionally payable from the city's surplus airport revenues. The BCIC sales tax revenue bonds are secured by a 1/4% sales tax and additionally by a cash-funded reserve fund in an amount equal to the average annual debt service of all parity obligations.
KEY RATING DRIVERS
ECONOMIC GROWTH: Tax base and economic growth have remained positive throughout the recession, benefiting from strong international investment. Proximity to Mexico and an extensive and expanding transportation network support robust international trade activity. The city's low cost of living supports economic growth; income and wealth levels trail state and national averages.
SOUND FINANCIAL PROFILE: Positive credit factors include a tenured management team, conservative budgeting and maintenance of adequate general fund reserves. Unaudited fiscal 2012 financial statements reflect strengthening revenue trends, additional cost reductions and improved net margins.
MIXED DEBT METRICS: The city's overall debt level is low per capita, but moderately high in relation to market valuation. An above-average debt burden on the general fund reflects the city's very rapid debt amortization schedule. Mid-term capital needs are moderate.
ADEQUATE COVERAGE: Debt service coverage on the BCIC sales tax bonds remains sound, but inherent volatility is a credit risk given the sensitivity of sales tax collections to the general economic cyclicality.
Brownsville is located on the north bank of the Rio Grande with an estimated 2012 population of 178,500, representing an almost 30% increase from the 2000 census. Three international bridges adjoin the city with Matamoros, Mexico.
TRANSPORTATION NETWORK SUPPORTS TRADE AND TOURISM
The city serves as the county seat of Cameron County, the only port of entry from Mexico with highway, air, rail and shipping transportation modes. Brownsville serves as a trade and distribution center for maquiladora (twin-plant manufactured) assembled and other products, with more than 5.5 million tons of cargo passing through the city's deep-water port annually. Directly linked to the Gulf of Mexico through a 17-mile channel, the port is home to more than 230 companies performing offshore oil rig construction, ship repair and construction, rail car rehabilitation, waste oil recovery, steel and petroleum transportation services.
International, U.S., state and county investment combine to fund the city's expanding transportation infrastructure. Notable projects include the $35 million bi-national West Rail Relocation Project representing the first international rail bridge constructed between the U.S. and Mexico in over 100 years, with completion expected in March 2013. Serving as a major hub for national and international ground transportation, phase one of the $33 million Brownsville Multi-modal Terminal (BMT) project went into service during fiscal 2011, with project completion scheduled for fiscal 2012. Transportation improvements slated for the next several years include a $100 million Texas Department of Transportation funded upgrade to U.S. Highway 77 and expansion of the Brownsville South Padre Island International Airport supported by Federal Aviation Administration funding.
Tourism accounts for about 10% of the city's economic structure, although traffic from Mexico declined sharply with the advent of border violence. Fiscal 2011 and 2012 bridge traffic has stabilized, but remains at only half of the level realized during the recent fiscal 2006 peak.
A growing health care and education sector, including a branch of the University of Texas, contributes stability to the region. Typical for the border area, unemployment rates are high (10.5% as of September 2012), as is the incidence of poverty. Income levels are roughly 60% of state and national averages.
HEALTHY TAX BASE
Compound annual growth of about 5% between fiscal 2006 and 2013 encompasses rapid tax base expansion leading up to the recession, and the more moderate TAV growth which followed, largely mitigating the city's sales tax declines during fiscal 2009 and 2010. Management attributes recent TAV gains to the city's recovering housing market, reflecting new single family construction and rising values on existing homes. Residential properties contribute 58% to the city's fiscal 2013 tax base, followed by commercial and industrial sectors at 28% and 5% respectively.
Top 10 taxpayers comprise a small 4% of TAV, representing real estate, health care, retail and manufacturing interests. The city anticipates moderate near-term TAV growth, which Fitch notes is consistent with current development activity levels and regional trends.
SOUND FINANCIAL POSITION
Sales taxes provided 26% of the city's fiscal 2011 revenues, followed by charges for services (23%) and property tax revenues (22%). Total revenues grew by a meager 1.5% on average during the four years ending in fiscal 2011; the city maintained reserve adequacy through cost management, supplemented with modest economic assistance from the Brownsville Public Utility Board during fiscal 2010 and 2011. The city's policy is to maintain an unrestricted general fund balance equal to 15% of annual general fund expenditures plus transfers out. The policy also calls for fund balance deficiencies to be corrected according to a policy-specified time frame of between 1 and 5 years, depending on the magnitude of the fund balance shortfall.
A fiscal 2011 net operating deficit of $865,000 (1% of expenditures and transfers out) brought the city's unrestricted general fund balance to $15.5 million (16.3% of spending). Fiscal 2011 revenue gains resulting from a $1.4 million (4.6%) increase in sales tax receipts and $2.5 million in BPUB economic assistance were absorbed by higher expenditures consisting of $1.9 million of increased public safety personnel costs, and transfers out which included $2.9 million for the fire department operations at the airport. An unaudited fiscal 2012 net operating surplus of $3.9 million (4.3% of expenditures and transfers out) benefited from a $2.5 million (12%) increase in property tax revenues, additional sales tax improvement and cost reductions attributed in part to personnel vacancies, bringing the city's unrestricted general fund balance to a sound 21.1% of spending and transfers out. Officials anticipate break-even fiscal 2013 results which reflect personnel cost and medical plan savings.
Brownsville's overall debt is low on a per capita basis at $1,991 but above average at 5.5% of market value, after adjusting for state support of overlapping local school district debt. Annual debt service charges are moderately high at 15.3% of total fiscal 2011 general fund expenditures and transfers out, reflecting an aggressive repayment schedule in which 80.6% of outstanding principal is repaid within 10 years.
This issue funds municipal facilities and improvements, as well as transportation projects including the Westrail relocation project and a dual customs multi-purpose hangar at the Brownsville South Padre Island International Airport. The city's capital program approximates $30 million over the next four years.
Brownsville's pension plan is provided through the Texas Municipal Retirement System (TMRS), with a fiscal year 2011 funded position of 81.9%, based on the TMRS investment rate assumption of 7%. The city provides other post-employment benefits (OPEB) to retirees in the form of health care benefits and supplemental death benefits. The unfunded actuarial accrued liability (UAAL) for the city's OPEB is $28.3 million, representing 1/2 of 1% of total market value as of Sept. 30, 2010. Carrying costs, including debt service, pension and OPEB contributions are a high 29.1% of fiscal 2011 general fund expenditures and transfers out.
IMPROVING SALES TAX COVERAGE
Maximum annual debt service (MADS) coverage on the BCIC bonds remains strong. Fiscal 2011 sales tax receipts reflect a 4.6% annual increase following a 2-year cumulative decline of 9%. Coverage of MADS from fiscal 2011 audited pledged revenue totaled 2.5x, with the ability to sustain an almost 20% decline in revenues before falling below 2.0x.
Unaudited fiscal 2012 sales tax receipts have increased an additional 3.6%, with a 1.4% increase conservatively budgeted for fiscal 2013. Other credit factors include a lack of additional leveraging plans, and a somewhat below average 1.4x additional bonds test (ABT). The rating further reflects the strong linkage that sales tax performance shares with the city's overall financial health and general credit characteristics.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria