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

NEW YORK--()--Fitch Ratings has affirmed the following Hidalgo County, Texas (the county) ratings:

--$106.8 million outstanding certificates of obligation (CO) at 'AA-';

--$67 million outstanding limited tax bonds at 'AA-'.

The Rating Outlook is revised to Stable from 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

OUTLOOK REVISED TO STABLE: The revision of the Outlook to Stable from Positive reflects the weaker recent financial performance coupled with the current and forecast budget pressure as evidenced by budgeted use of reserves and reliance on mid-year budget adjustments.

SOUND FINANCIAL MANAGEMENT: The consistent maintenance of reserves at healthy levels in recent years reflects the county's prudent financial management despite modest tax base volatility, limited revenue flexibility, and population growth pressures.

RESILIENT TAX BASE: The tax base has held relatively steady throughout the recession with slight declines followed by modest growth. New construction and economic development have largely offset property devaluation, and modest tax base appreciation is expected going forward.

STABLE LOCAL ECONOMY: Education, health services and government sector employment continue to diversify the traditionally international trade-based and agricultural economy; however, unemployment remains elevated and job growth appears to have slowed from prior years.

MANAGEABLE DEBT PROFILE: Overall debt levels are mixed reflective of high overlapping issuance and the county's low wealth levels. The county is conservative in the issuance of new debt, and carrying costs are expected to remain manageable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management and stable economic performance.

CREDIT PROFILE

Hidalgo County is located in the southernmost region of Texas along the Mexico border. After rapid growth the last 20 years, the population reached about 815,996 in 2013. 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.

SOUND FINANCIAL MANAGEMENT DESPITE PRESSURES

The county has added to reserves in five of the past six consecutive years as a result of sound financial management. Conservative budgeting and careful cost control have allowed the county to accommodate flattening property tax revenues, which approximate a high 81% of general fund revenues. Savings have been achieved in employee benefit expenditures and through the deletion of vacant positions. Costs control is particularly important as Fitch considers the county's revenue flexibility to be limited, given that its longstanding general fund tax rate ranks among the top quartile in the state.

2013 (unaudited) closed with a slight addition to fund balance (1.2% of spending), despite a budgeted use of $17 million in reserves. Officials report that the county realized savings through the implementation of an across-the-board hiring freeze, and mid-year budget adjustments.

For 2014 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 2003). The budget appropriates $11.7 million of fund balance, though officials expect a more modest $5 million use of reserves, assuming no midyear adjustments are made by the commission. Given the county's history of outperforming its budgets and making corrective midyear adjustments, Fitch considers it likely that the county will close 2014 with a more modest use of fund balance than currently projected.

Planned expenditure reductions in fiscal 2015 include the budget neutralization of trash collection, which is currently free to residents, through privatization or the implementation of collection fees. Currently, the county spends about $5 million per year on trash collection.

GROWING TRADE-BASED BORDER ECONOMY

The county's central location at the intersection of Interstate 2 and Interstate 69C on the Mexico border has long supported a strong international trade sector, centered on the operation of maquiladoras, or 'twin plants', with counterparts in Reynosa, Mexico. In 2012, the U.S. Department of Homeland Security approved a regional center for immigrant investors in McAllen, providing international investors the opportunity to expand the border economy while living in the county.

Tourism remains strong with recent growth in 'ecotourism,' attracting new travelers to the area, particularly for birding, as a result of the county's prime location along transcontinental migratory flight paths. Healthcare has also seen growth, as the University of Texas recently committed to establishing a new university and medical school in the county, adding further diversity and highly skilled employment to the county's trade-centered economy.

The county's economic development in these areas has led to rapid population growth in recent years, with resident population rising over 36% between 2000 and 2010, and high growth expected to continue in future years, as the McAllen metropolitan statistical area (MSA) remains among the fastest growing regions in the nation due to its low cost of labor and economically beneficial proximity to the Mexico border.

Population helped spur strong growth in TAV for several years. This trend reversed with moderate contractions in 2011 and 2012, though the county expects a resumption of TAV growth of approximately 2% in 2013. Additional growth is expected going forward as construction resumes after the recession-induced slowdown.

IMPROVING WEAK DEMOGRAPHIC PROFILE

Employment made solid gains throughout the recession, and income levels continue to rise at greater than twice the national rate. However, the county's demographics remain below average, with wealth levels 40% to 50% below those of the state and nation. Unemployment remains stubbornly high at 10.4% as of December 2013 and educational attainment is well below national averages.

MANAGEABLE DEBT AND OTHER LONG-TERM LIABILITIES

Debt levels are mixed, with overall debt 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, at $2,793 per capita, but much higher as a percent of market value, at 6.4%, reflecting the county's weak demographic profile. The 10 year principal pay out rate is a rapid 72%. 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 and changes in the prison population.

The county participates in the Texas County and District Retirements System, which individually represents the funding of participating entities. As of 2011, the county had an estimated funded ratio of 75% based on the 7% investment rate of return used by Fitch. Other post-employment benefits (OPEB) do not pressure county finances, as the county only provides an implicit subsidy to retirees. The county's carrying costs, including debt service, pension contributions, and OPEB pay-as-you go costs, represent a manageable 12% of governmental spending in 2012. Carrying costs are not expected to pressure county finances, as Fitch considers the rapid amortization of county debt to mitigate the impact of planned future borrowing on carrying costs.

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

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.

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

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827350

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1-212-908-0770
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gabriela Gutierrez, +1-512-215-3731
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1-212-908-0770
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gabriela Gutierrez, +1-512-215-3731
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com