Fitch Rates Cameron County, TX Rev & Tax Bonds 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA-' rating to the following Cameron County, TX's bonds:

--$4.5 million revenue and tax bonds, series 2015 (State Highway 550 Project).

The bonds are scheduled for a negotiated sale during the week of April 6. Bond proceeds will be used to complete the construction of the state highway (SH) 550 project.

Fitch also affirms its 'AA-' rating on the county's outstanding debt comprised of:

--$131 million limited tax bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the county's annual property tax levy, limited to $0.80 per $100 of taxable assessed valuation (TAV) for operations and maintenance (O&M) and debt service. The bonds are additionally payable from Cameron County Regional Mobility Authority (CCRMA) toll revenues and vehicle registration fees as well as certain Texas Department of Transportation payments.

KEY RATING DRIVERS

STABILIZED FINANCIAL PERFORMANCE: Improved cost controls and revenue enhancements have stabilized Cameron County's financial position following weakening driven by declines in certain non-property tax revenues and growing public safety expenditures.

WILLINGNESS TO RAISE REVENUE: Management has shown a willingness to take advantage of its substantial taxing flexibility by increasing its O&M levy in recent years to help balance financial operations and add to reserves.

MIXED DEBT PROFILE: The elevated overall debt level relative to market value is balanced against moderate debt on a per capita basis, average principal amortization, limited debt plans, and low carrying costs.

SERVICE AREA LINK TO INTERNATIONAL TRADE: The service area relies on international trade activity due to its proximity to Mexico and an extensive and expanding transportation network. Numerous completed or planned major mobility projects should strengthen the county's multi-modal transportation network, aiding trade activity, local commerce, and tourism.

LOW WEALTH LEVELS; ELEVATED UNEMPLOYMENT: The county's wealth levels remain well below average although are improving at rates that exceed state and national averages. Employment and labor force continue to grow but the unemployment rate remains well above the state and national averages.

RATING SENSITIVITIES

RETURN TO STRUCTURAL IMBALANCE: Failure to maintain structural balance and adequate financial reserves could lead to negative rating action.

CREDIT PROFILE

Cameron County is the southernmost county in Texas, and its largest cities include Brownsville, Harlingen, and San Benito.

STABILIZED FINANCIAL PERFORMANCE

The county's revenue base is supported 60% by property taxes. The county also benefits from toll bridge activity and fees from housing federal inmates. The county's aggressive budgeting of these volatile revenues, in part, led to structural imbalances prior to fiscal 2011. While Fitch believes the county is taking a more conservative approach, Fitch views cautiously the budgeted increases in related revenues.

The county has posted two years of positive financial results since restoring structural balance in fiscal 2011. The fiscal 2013 audit yielded a large $4.4 million general fund surplus, equal to 6% of spending, aided by a 20% increase in charges for services due to greater than budgeted average daily population (ADP) of inmates from the U.S. Marshall's Office (USMO). As a result, the unrestricted fund balance increased to a solid $15.9 million or 21.7% of spending, in excess of the county's 16% fund balance goal.

Unaudited fiscal 2014 results are also positive with a projected operating surplus of $4.8 million or 6% of spending. If audited results remain unchanged, the unrestricted fund balance will total a healthy $20.7 million or 26% of spending. Positive fiscal 2014 operations were aided by vacancy savings and a large 42% increase in the approved per diem rate (now $51) for housing inmates from the USMO that was imposed in the last quarter of fiscal 2013. Such revenues accounted for a modest 8.6% of general fund revenues. The ADP of USMO inmates totaled 350, about 21% of the jail's total capacity. Including the county's own inmates, the total average daily population remains modestly below the full capacity of the facility. Fiscal 2014 revenues also benefited from an 8% hike in the international toll bridge rate for autos, increasing the toll bridge transfer to $7.3 million or 9.3% of general fund revenues.

The fiscal 2015 budget is balanced and limits appropriation growth to 5% over the previous year's budget. Charges for services are budgeted to increase by 15% due primarily to anticipated moderate growth in USMO inmates. Most pay hikes were limited to a modest $500 plus a one-time compensation allowance of $1,000.

SERVICE AREA LINK TO INTERNATIONAL TRADE

The county's population continues to grow rapidly. Estimated 2015 population of 436,584 represents a notable 7.5% increase over the 2010 census level. Trade, manufacturing, and tourism are all major components of the local economy.

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 Matamoros, Mexico. The Port of Brownsville is an important link with Mexico and affords the only entry point on the border accessible by the four modes of transportation. Prominent tourist attractions include South Padre Island (SPI) among others.

Income levels remain significantly below those of the state and U.S. Unemployment remains elevated largely due to labor force growth (averaging 1.8% per year since 2005) outpacing employment increases (1.6%). The county's annual unemployment rate declined from 10.2% in 2013 to 8.5% in 2014, but remained well above the state's 5.2% and the nation's 6.2% averages.

TAX BASE REMAINS SLUGGISH

Previously solid TAV growth flattened in recent years as a result of the reduced building activity during the economic slowdown, although the county has not experienced any declines in TAV. After declining notably in recent years, home building permit activity is stirring again although TAV grew only modestly in fiscal 2015 by 0.8%. Future plans by the Cameron County Regional Mobility Authority (CCRMA) for a second causeway bridge to SPI would likely lead to increased development on the northern end of SPI.

The recent conversion of a local highway into IH 69 was designed to facilitate international commercial traffic. The University of Texas recently consolidated two existing campuses into The University of Texas Rio Grande Valley and authorized it to build south Texas' first medical school which will open in 2016.

SpaceX, a space transport services company, recently broke ground on a $40 million commercial-only launch facility near Brownsville. SpaceX's first launch from this location is scheduled in 2016. A 10-year tax abatement agreement with the county requires SpaceX to employ at least 300 by 2024. Additional employment gains are expected from the relocation of suppliers to the area. Up to 12 launches will be scheduled annually and are projected by the county to further boost tourism.

HIGH DEBT BUT MODEST CARRYING COSTS

The county's debt profile is mixed. The overall debt burden relative to market value is elevated at 5.7% due in part to the presence of 10 overlapping school districts and the general growth pressures of the region. Offsetting debt factors include moderate overall debt on a per capita basis at $2,336, average principal pay out of 4% in 10 years, and limited debt plans. Fitch also notes the county's modest debt service tax rate of $0.05 per $100 TAV.

The current offering will finance the completion of a $75 million toll road project undertaken by the CCRMA. The CCRMA was created in 2004 and is required to have six of its seven board members appointed by the commissioners' court. The 10 mile toll road will connect Interstate Highway 69 and the Port of Brownsville.

The tax and revenue bonds are payable from the county's limited tax levy but are also payable from revenues of the CCRMA via an interlocal agreement. The agreement pledges toll revenues, vehicle registration fees, and payments from the Texas Department of Transportation via a pass-through agreement. Although Fitch stress tests suggest property tax support won't be needed to meet annual debt service, Fitch notes that the full amount of maximum annual debt service (MADS) could be serviced with a modest 2.1 cent or 5% increase in the county's current 39.7 cent limited tax levy.

The county provides retirement benefits through the Texas County and District Retirement System, a statewide agent multiple employer defined benefit pension plan. As of Dec. 31, 2012, the published funded ratio totaled a strong 88%. The Fitch-adjusted funded ratio, based on a 7% rate of return, is estimated at a still solid 80%. Fitch notes that the county typically exceeds its annual required contribution. Total carrying costs, including debt service, pension ARC, and other post-employment benefit (OPEB) pay-go, were modest at 6.6% of governmental spending in fiscal 2013.

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 IHS Global Insight.

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=981805

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1 512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1 512-215-3741
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1 512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1 512-215-3741
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com