Fitch Affirms City of Hidalgo, TX's COs at 'A-'; Outlook Stable

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

--$3.4 million outstanding increment revenue and limited tax certificates of obligation (CO) at 'A-';

The Rating Outlook is Stable.

SECURITY

The COs are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV), and are additionally payable from a pledge of gross revenues from the city's tax increment reinvestment zone (TIRZ) no 1.

KEY RATING DRIVERS

LIMITED TAX BASE: The tax base is modest and characterized by uneven growth over the recent past. Taxpayer concentration is moderate.

EXPOSURE TO REVENUE VOLATILITY: Two economically volatile revenue streams: sales taxes and international toll bridge revenues comprise the largest general fund revenue sources. Such exposure to economic swings is somewhat mitigated with sound reserves (although modest in absolute value) and a low tax rate, which has remained unchanged for 24 years.

SOUND FINANCIAL POSITION: Consistent financial performance and prudent cost management have allowed the city to build and maintain healthy general fund balances.

HIGH DEBT; SOUND PENSION: Overall debt is high due to sizable school district debt, unadjusted for state support. However, the impact of the city's debt service, pension and other post-employment benefit (OPEB) contributions on the budget is affordable and reflects a rapid amortization rate.

RATING SENSITIVITIES

The rating is sensitive to shifts in the city's fundamental credit characteristics, including the city's fiscal management and economic performance. Material growth in the local economy and resident wealth could lead to positive rating action. The stable rating reflects Fitch's expectation that such shifts are unlikely during the current review cycle.

CREDIT PROFILE

Hidalgo is located directly on the U.S. - Mexico border within Hidalgo County (ULTGO's rated 'AA-' with a Stable Outlook by Fitch) in southernmost part of Texas. Hidalgo's population has grown by 60% since 2000 due to the rapid growth of the South Texas border economy; though the estimated 2012 population remains modest at 11,711.

SOUTH TEXAS ECONOMY

The city economy has benefited greatly from two international toll bridges which link it to Reynosa, Mexico (population 600,000 plus), a major center for maquiladoras, or 'twin plant' manufacturers. Tourism and agribusiness are the city's other major economic sectors. Income levels remain 40% to 50% below those of the state and nation, although resident wealth has grown at greater than twice the national rate and the area's relatively low cost of living offsets some concern about wealth levels.

The county unemployment rate of 10.4% in December 2013 is improved from the year prior but remains stubbornly high in relation to state and U.S. averages. Annual growth in TAV has averaged 2.9% over the last five fiscal years (inclusive of fiscal 2014 projections), although TAV declined modestly in three of those. The city projects a gain of 6.4% in fiscal 2014 TAV which Fitch considers plausible based on residential and commercial development currently underway.

ECONOMICALLY SENSITIVE REVENUES

The city's general fund is largely dependent on bridge revenues (41%) and sales taxes (16%), with property taxes accounting for only about 10% of unaudited fiscal 2013 general fund revenues. Although the City of McAllen owns both bridges, interlocal agreements allocate 36% of surplus net bridge revenues to Hidalgo from the McAllen International Toll Bridge and 33% from the Anzalduas Bridge. This has allowed the city to levy modest property tax rates, providing the city ample taxing margin that could be tapped in future budget cycles to offset projected shortfalls in other revenue streams.

Sales tax revenues exhibited some volatility over the past five years, with an average annual decline of 1.8%. The drop was due largely to underperformance in fiscal 2012, with receipts declining by a notable 15% from the prior year. Sales tax revenues remained flat in fiscal 2013 on an unaudited basis. Fitch believes this volatility reflects the economic sensitivity to commercial and investment activity from international trade and migration of Mexican nationals. These losses have been partially offset by bridge revenue growth in recent years, which outperformed budget by 13.5% according to unaudited fiscal 2013 results.

SOUND FINANCES, DESPITE CHALLENGES

The city's strong unreserved/unrestricted fund balances have totaled approximately 50% of spending since fiscal 2008, well above its current fund balance policy level of three months. Officials have communicated the intent to build reserves to a level equivalent to one year of spending, which Fitch views as an unusually large cushion. Maintenance of strong reserves is an important credit factor to help the city manage potentially large fluctuations in bridge and sales tax revenues.

Fiscal 2013 unrestricted reserves of $4.6 million represent a strong 58.3% of spending, despite a $690,000 general fund expenditure for capital and nonrecurring items. To mitigate revenue softness, officials reduced operating expenditures through a hiring freeze, and supply and contract savings.

The fiscal 2014 budget is flat and does not include any appropriation of fund balance. Officials expect to complete fiscal 2014 favorably to budget based on improving revenues and continued cost management.

HIGH DEBT BUT AFFORDABLE CARRYING COSTS; WELL-FUNDED PENSION

The city's overall debt is high at $4,581 per capita and 10.6% of market value. The overall debt reflects growth pressures of the county and surrounding school districts due to rapid regional growth. Overlapping school obligations receive a high degree of state support, which is not reflected in Fitch's overall debt metric.

The city's debt plans are modest, and the city does not anticipate any new borrowing within the next two years. Texas A&M University has been working with the city to create an updated capital improvement plan, for adoption in the next fiscal year.

The city participates in the Texas Municipal Retirement System (TMRS), an agent multi-employer defined benefit pension plan with a sound funded ratio of 89% as of Dec. 31, 2012 based on the investment assumption of 7%. The city regularly funds its actuarial required contribution (ARC).

Fiscal 2012 carrying costs, which include both debt service and the pension ARC, are an affordable 14.9% of governmental spending which Fitch anticipates to remain stable based on the city's rapid 10-year debt amortization rate of 76.7% and the lack of issuance plans. The city does not provide other post-employment benefits.

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

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Amy R. Laskey
Managing Director
+1-212-908-1568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Amy R. Laskey
Managing Director
+1-212-908-1568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com