AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following obligations of McAllen, Texas (the city):
--$24.5 million combination tax and revenue certificates of obligation (COs), taxable series 2016.
The COs are scheduled for sale January 11 via negotiation. Proceeds will be used to finance various public improvements within the Tres Lagos Public Improvement District (PID).
In addition, Fitch has affirmed the ratings on the following outstanding general obligation (GO) bonds and COs:
--$56.8 million GO bonds at 'AA+';
--$20 million COs at 'AA+'.
The Rating Outlook is Stable.
SECURITY
All obligations are payable from an ad valorem tax levied upon all taxable property within the city. The tax rate is limited to $1.50 per $100 of taxable assessed valuation (TAV).
The series 2016 COs are additionally payable from a pledge of special assessments levied on property within the Tres Lagos PID by the city.
The series 2014 COs are additionally payable from a limited pledge of the city's hotel occupancy tax revenues.
The series 2011 COs are additionally payable from a limited, nominal pledge of net revenues of the city's airport system.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: Sound management practices have sustained the city's strong financial profile and proactive approach to funding operations, economic development, and capital needs. Operating reserves and liquidity provide a good fiscal cushion against unforeseen budget and economic stress.
DIVERSE INTERNATIONAL ECONOMY: The city is a major commercial and industrial hub in the Rio Grande Valley along the U.S.-Mexico border. Commercial trade with Mexico, healthcare, government, and retail comprise a well-diversified economic base that complements the traditional agriculture and tourism sectors.
IMPROVING BUT BELOW-AVERAGE DEMOGRAPHICS: Growth in per capita income has outpaced the U.S. but overall wealth indices remain below average. These concerns are somewhat tempered by the region's low cost of living.
SALES TAX CONCENTRATION: General operations are highly dependent upon economically sensitive sales tax revenue, particularly considering the large amount of retail generated by international shoppers. Fitch believes that this risk is mitigated somewhat by the city's high fund balance and relatively low property tax rate.
AFFORDABLE LONG-TERM LIABILITY BURDEN: Outstanding debt levels are moderate and carrying costs for debt service and retiree benefits are very low relative to the budget. The principal amortization rate is moderate and the city's debt issuance plans are modest.
RATING SENSITIVITIES
PRESSURED FINANCES: A sustained reversal of recent operating gains, accompanied by corresponding declines in the city's sound reserves, would be a negative credit consideration and could lead to downward pressure on the rating.
CREDIT PROFILE
McAllen is located in south Texas, seven miles north of the Mexican border and the city of Reynosa, Tamaulipas. The city is part of the rapidly growing metropolitan statistical area that includes Edinburg and Mission, as well as populous neighbors to the south of the border. The estimated population of 141,230 reflects 1.4% average annual growth since 2010.
TRADE WITH MEXICO; ECONOMIC DIVERSIFICATION
The city benefits from trade with Mexico, especially through the maquiladora program where manufacturing and assembly occurs in plants located in Reynosa and warehouse and distribution is handled in the city's foreign trade zone. The McAllen Economic Development Corporation has aggressively recruited new companies to the city under this program. However, Fitch believes there is also downside risk associated with the city's trade dependence on Mexico, including exposure to shifts in political and economic conditions.
Strong retail and healthcare sectors in McAllen serve both the growing south Texas region and Mexican residents. An estimated 35% of the city's retail purchases are attributed to shoppers from Mexico. Cross-border traffic is facilitated by two international bridges. Additionally, the city's healthcare sector is robust and has become a destination for Mexican residents who previously traveled to Houston for services and treatment. Government, tourism, and agriculture (centered on citrus crops) sectors round out the local and regional employment base.
The city's employment picture is positive, reflecting annual job growth in all but one year since 2004. The September 2015 unemployment rate was 4.9%, down from 5.4% one year prior and slightly above the state (4.5%) and U.S. (4.8%) rates for the month.
Median household income is above average for the Rio Grande Valley region, but remains below state and national norms. Tax base growth has been positive but the per-capita market value ($65,800) is below average for the rating category. These wealth levels correspond with the below-average local cost of living.
Tax base growth has been steady since the recession, as reflected in 2.3% compound annual growth in TAV over the last five fiscal years (2011 - 2016). Prospects for continued growth are positive and reflect ongoing and planned development in the hotel, retail, medical, and residential sectors.
STRONG FINANCIAL MANAGEMENT
McAllen maintains a high level of financial flexibility that is supported by its sizable reserves, low tax rate, and sound policies adopted by the city council. The city has prudently maintained its sound general fund reserves and continues to make transfers out for capital projects and some early debt retirement; these transfers have averaged nearly 5% of total general fund spending since fiscal 2008.
The general fund concluded fiscal 2014 with essentially balanced results, outperforming a deficit budget. Operating results were positive before considering a $1.2 million transfer (1.1% of spending) to the capital improvements fund. Unrestricted fund balance at year-end was $41.2 million, which represented a significant 39% of spending.
Fiscal 2015 preliminary unaudited results point to a solid general fund surplus of $5.2 million (5% of spending) after transfers. Management attributes the positive operations to tax and bridge revenues that outperformed conservative assumptions, as well as unexpended funds for public works. Unrestricted fund balance is projected to settle at $46.8 million (44% of spending). The city remains in compliance with its prudent fund balance policy that sets a floor for fund balance at 140 days (39%) of spending.
The city adopted a surplus budget for fiscal 2016 that assumes a modest increase in spending over the previous year. Officials anticipate increased toll revenues from a bridge expansion planned to open in February 2016. Management expects to maintain its sizable fiscal cushion at year-end.
RESERVES MITIGATE SALES TAX DEPENDENCE
Operating revenues are led by sales tax collections, which represented a substantial 48% of general fund revenues in fiscal 2014. Sales tax performance has been notably strong due to annual growth in retail sales, but this revenue stream is not immune to recessionary forces and declined by 7% and 2% in fiscals 2009 and 2010, respectively. Fitch considers management's projection of 3% revenue growth in fiscal 2016 to be somewhat optimistic when compared with recent collections, which increased by 2.7% in fiscal 2015.
The high degree of reliance on economically sensitive sales taxes is a credit risk, particularly when considering that 35% of retail purchases are by international shoppers. This trend exposes the sales tax revenue stream to political dynamics between the U.S. and Mexico and currency fluctuations. These concerns are offset somewhat by the city's substantial reserves, relatively low property tax rate, and ability to curb capital spending, all of which provide budget flexibility.
AFFORDABLE DEBT BURDEN
The city's overall debt level is moderate at $2,461 per capita and 3.9% of market value. These ratios include the overlapping debt of several school districts, many of which receive significant state aid due to their low property wealth. The rate of amortization is average with 58% of principal retiring in 10 years.
Proceeds from this offering will finance infrastructure in the Tres Lagos development, a 2,571-acre master-planned community slated to break ground in 2016. Officials project no tax rate increase for this offering, as the city intends to meet debt service using a combination of tax increment revenues and PID property assessments. Fitch's rating is based solely on the limited ad valorem tax pledge, and the city retains ample taxing margin under its statutory maximum rate.
Near-term debt plans are limited to about $10 million each for drainage improvements (COs) and a university campus (contract revenue bonds). Management anticipates that these borrowings will not require a tax rate increase, as debt service will be funded with a combination of drainage fees, tax increment revenues, and sales tax receipts. Debt service consumed a very low 2.4% of governmental fund spending in fiscal 2014.
WELL-FUNDED LEGACY BENEFITS
All city employees with the exception of fire personnel participate in a joint contributory, hybrid defined benefit pension plan through the state-wide Texas Municipal Retirement System (TMRS). The city maintained a high funded position of 95% as of Dec. 31, 2014, using a 7% discount rate. Fire department personnel pension benefits are administered through a single-employer defined benefit plan that was funded at a weaker estimated 60% as of Sept. 30, 2012 (using a 7% discount rate). The unfunded liability of the fire pension was $19.4 million, or 0.2% of the city's fiscal 2014 market value. The city recently increased its contribution rate to this plan to 13% from 12.5% of pay effective in fiscal 2014.
Other postemployment benefit (OPEB) liabilities for retiree healthcare are modest; the unfunded liability equaled less than 0.1% of fiscal 2014 full market value. The city has set aside funds toward the unfunded liability, which reside in a retiree healthcare fund (not an irrevocable trust). Total carrying costs for debt service, pension ARC, and OPEB pay-go were quite affordable at less than 7% of fiscal 2014 governmental spending.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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, Municipal Advisory Council of Texas, and National Association of Realtors.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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