NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following San Benito, Texas' (the city) limited tax obligations at 'A+':
--$6.6 million limited tax general obligation bonds (LTGOs), series 2011 and 2012;
--$19.5 million of combination tax and limited pledge revenue certificates of obligation (COs).
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured from a limited subordinate lien pledge of the net revenues of the city's waterworks and sewer system.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: The key credit strength is the city's sound financial performance marked by stable reserves and conservative budgeting of economically sensitive revenue streams.
MODEST, DIVERSIFIED TAX BASE: The city's assessed valuation continues to increase modestly. Diversity in the area economy, together with a stable housing market and additional development, support projections for continued consistency in the tax base.
WEAK SOCIECONOMIC INDICATORS: The city's low income levels, high poverty rate, and above-average unemployment rate are subpar compared to state and national averages.
MIXED DEBT PROFILE: Overall debt levels are high due primarily to overlapping debt. Amortization of direct tax-supported debt is rapid which should accommodate additional debt as needed in the near term.
RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in the city's credit fundamentals, including the sound fiscal profile which is a key mitigant to the weaker socioeconomic metrics and high overall debt levels. The Stable Outlook reflects Fitch's view that such shifts are unlikely.
CREDIT PROFILE
SMALL RIO GRANDE VALLEY COMMUNITY
The city is located in Cameron County at the southern tip of Texas in the Lower Rio Grande Valley. It is situated between the cities of Harlingen and Brownsville. The population has remained fairly flat since 2000 and is estimated at 25,000 for 2013. The city's economy is based on agriculture, retail/service industries, manufacturing, and tourism.
Wealth and income levels in the city are substantially below state and national levels. Per capita money income is less than 50% of the state and national averages, and the city's per capita market value is a low $29,000. Unemployment remains elevated at 8.4% in August 2014 compared to the state (5.5%) and nation (6.3%), with year-over-year improvement from 9.4% due to growth in the employment base.
STABLE TAX BASE
The tax base has grown modestly post-recession and did not mark a single year of contraction. TAV grew at 2.2% in fiscal 2014 to almost $600 million, and certified values for fiscal 2015 show another year of growth at 1.6%. The city reports several residential developments underway, along with increased demand for housing by border patrol and federal law enforcement personnel in the area. The city's location near the U.S. border with Mexico and the Los Indios Bridge crossing provides additional economic opportunities in international trade, warehousing, and associated services.
STEADY FINANCIAL PROFILE
The city's financial results show evidence of conservative budgeting of somewhat volatile revenue sources and positive year-end operating results. Fiscal 2013 ended with $3 million in unrestricted reserves, or 30% of spending, after a moderate $500,000 addition to reserves. Management expects fiscal 2014 to end with break-even results, marking over a 10-year trend of positive or break-even general fund operating results.
Non-ad-valorem taxes, which make up over one-third of operating revenues, have recovered post-recession and show 15% cumulative growth from fiscals 2010-2014. Fitch views the city's practice of conservatively budgeting the inherently volatile non-ad valorem taxes, which include sales taxes, vehicle inventory taxes, and franchise fees, as prudent.
The fiscal 2015 budget is balanced and shows an incremental increase in spending of 2% from the prior year's projected results. Sales and other non-property taxes are budgeted flat, in line with historical practice, and no new positions will be added. The tax rate will also remain the same at $0.728 per $100 TAV, well below the statutory cap of $2.50 per $100 TAV.
AFFORDABLE DEBT BURDEN
The city's debt burden is average on a per capita basis ($3,000) but very high as a percent of market value (MV) (10.2). Debt levels are driven primarily by San Benito Consolidated Independent School District (rated 'A' by Fitch, Outlook Stable), and the differential between the two burden measures reflects low MV per capita of about $29,000. Approximately 72% of the city's direct debt is repaid by net enterprise and special revenues, thus excluded from the burden calculation. Debt service supported by taxes consumed a manageable 11% of fiscal 2013 governmental expenditures even with rapid amortization of 79% retired in 10 years.
Water and sewer utility operations remain healthy and net system revenues provided 2.0x coverage of fiscal 2013 tax-backed debt service. The last of a series of rate increases occurred in fiscal 2015 in line with recommendations from an external rate study. The rate increases are supporting recent plant improvement costs and debt service.
The city's capital needs include improvements to water distribution lines, road repairs, and public safety equipment. There are no plans to issue debt in the current fiscal year; however, a near-term issuance of COs to address the aforementioned needs is plausible. The city is in the process of creating a Capital Improvement Plan (CIP) to better address medium- and long-term capital projects, showing progress toward long-term financial planning, which Fitch views as a credit positive.
MANAGEABLE OTHER LONG-TERM LIABILITIES
The city contributes to two pension systems: the Texas Municipal Retirement System (TMRS) and a Firemen's Pension Fund. Fitch considers the city's funded position strong for TMRS at 89% as of Dec. 31, 2012, and weak though improved for the much smaller Firemen's system at only 59.5% funded as of Dec. 31, 2011, assuming a 7% rate of return. The city makes 100% of the annual required contributions for both plans. Carrying costs for debt service pension were a low 10.4% of governmental fund spending in fiscal 2013 and are expected to remain manageable going forward. The city does not offer 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, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
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 ￢ﾀﾓ Effective Aug. 15, 2011 to Aug. 14, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=901274
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