Fitch Affirms Hidalgo County, Texas' L-T Bonds and COs at 'AA-'; Outlook Positive

AUSTIN--()--Fitch Ratings affirms the following action on Hidalgo County TX's bonds:

--$102.7 million outstanding certificates of obligation (COs) at 'AA-';

--Approximately $71.6 million outstanding limited tax bonds at 'AA-'.

The Rating Outlook is Positive.

SECURITY

The limited tax bonds and COs are secured by a continuing direct annual property tax levy, limited to $0.80 per $100 taxable assessed valuation (TAV). Additionally, the COs are payable from a limited pledge of the surplus net revenues of the county's park system.

KEY RATING DRIVERS

MAINTENANCE OF POSITIVE OUTLOOK: Hidalgo County's financial position has improved notably benefiting from solid tax base and economic growth through the recession. This factor combined with expectations for continued operating stability support Fitch's Positive Outlook on the county.

SOUND FINANCIAL MANAGEMENT: Steady growth of reserves over the past five years reflects the county's prudent cost management and the benefit of tax base appreciation. Performance is generally favorable to budget.

RESILIENT TAX BASE: The tax base held relatively steady throughout the recession as new construction offset property devaluations. There was only one year of modest contraction followed by flat to modest growth. There is no significant taxpayer concentration.

STABLE LOCAL ECONOMY: The traditional agricultural and international trade based economy is increasingly diversified with education, health services and government sector employment. However unemployment remains elevated and job growth appears to have slowed from prior years.

MANAGEABLE DEBT PROFILE: The overall debt levels on a per capita basis are moderate, but weaker as a percent of market value reflective of the county's low wealth levels. The county is conservative in the issuance of new debt, and fixed costs associated with debt service and pension contributions are manageable.

RATING SENSITIVITIES

PRESERVATION OF STRONG FINANCIAL PROFILE: Continued trend of strong financial performance as demonstrated with structurally balanced operations and balanced budgets could lead to positive rating action.

CREDIT PROFILE

Hidalgo County, located in the southernmost region of Texas bordering Mexico, has a population of about 806,500. McAllen (general obligation [GO] bonds rated 'AA+' with a Stable Outlook by Fitch), Mission, and Edinburg (GO bonds rated 'AA-' with a Stable Outlook by Fitch) are the largest cities in the county.

GROWING SOUTH TEXAS ECONOMY

The leading sectors of commerce are tourism, agribusiness, and trade with Mexico. In particular, the tourism and trade sectors have led to rapid population growth, rising approximately 48% from 1990-2000 and another 36% through 2010. Manufacturing plants are a significant factor on both sides of the U.S.-Mexico border, with a major presence of maquiladoras, or 'twin plant' manufacturers, in Reynosa, Mexico.

Employment has expanded at a very solid 2.8% compound annual growth rate (CAGR) from 2003 - 2012, which impressively continued almost unabated during the recession. More recent employment data suggest some softening however, and unemployment remains above state and U.S. averages at 11% as of February 2013. Income levels have risen sharply since 2007 (3.2% CAGR) but remain 40% to 50% below those of the state and U.S.

Annual growth in taxable assessed valuation (TAV) averaged a solid 9% from 2007 - 2010, but contracted modestly in 2011 and has been relatively flat since then due to a recession-induced building slowdown and volatility in oil & gas values. The county projects next year's growth to be 1% - 3% based on information received from the county appraiser's office, which Fitch considers reasonable considering the reported amount of new construction activity. Taxpayer concentration is very modest.

SOUND FINANCIAL PROFILE AMIDST GROWTH PRESSURES

The county's financial reserves have grown steadily as a result of solid financial performance over the past five years. From 2007-2011 the general fund has recorded an aggregate surplus of $32.1 million, increasing the unreserved or unrestricted fund balance from $21.6 million or 16% of spending to $40.7 million or 25%. The county's last operating deficit of $9.2 million in 2008 resulted from expenses related to Hurricane Dolly, most of which were reimbursed by the federal government in 2009 and 2010.

More recently officials have carefully managed expenses to accommodate flattening property tax revenues, which approximate a high 80% of general fund revenues. The county posted better than previously anticipated results for 2011 with a healthy $5 million net operating surplus in the general fund due primarily to conservative budgeting and receipt of law suit settlement proceeds and other unexpected revenues. The unaudited 2012 financial statements reflect another increase to unrestricted fund balance.

For fiscal 2013 the commission adopted a budget that maintains the overall ad valorem tax rate at $0.59 per $100 of TAV (the last tax increase was enacted in fiscal 2003). The budget appropriates $17 million of fund balance, up from $8.5 million in fiscal 2012. The increased reliance on reserves is due in part to the first cost of living adjustment in the last three years. Officials report that the county expects to reduce this drawdown to a more modest $3 million by the end of the year. Given the history of outperforming its budgets, Fitch considers this expectation reasonable but cautions that structurally imbalanced operations could negate the prospects of positive rating action.

MANAGEABLE DEBT

Overall debt is largely driven by overlapping school obligations, which receive a high degree of state support (which is not accounted for in Fitch's debt burden calculation). Debt levels are moderate in relation to population ($2,850 per capita) but much higher as a percent of market value (7.1%). The 10-year principal pay out rate is favorable at 79%.

Capital plans over the next several years include the potential for a new courthouse and expansion of jail facilities at a cost of approximately $165 million. The schedule of new debt issuance will depend on the timing of tax base appreciation, as the county does not plan to increase the debt service tax rate at this time. Furthermore the aggressive pay down of outstanding obligations (79% within 10 years) should mitigate the impact of any new debt on the county's debt ratios.

The county participates in the Texas County and District Retirements System, which has an adequate funding rate of 83% (75% based on a more conservative investment rate assumption of 7% utilized by Fitch). The county's fixed costs, including debt service and pension contributions, represent a manageable 11% of fiscal 2011 governmental spending.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, and LoanPerformance, Inc.

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

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789737

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Contacts

Fitch Ratings
Primary Analyst:
Gabriela Gutierrez, +1-512-215-3731
Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Gabriela Gutierrez, +1-512-215-3731
Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com