Fitch Rates El Paso County, TX's GO Refunding Bonds at 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA' rating to the following El Paso County, Texas' bonds:

--$50.4 million limited tax general obligation refunding bonds (GOs), series 2016.

The bonds scheduled for negotiated sale the week of March 7th. Proceeds will be used to redeem portions of the district's outstanding debt for interest savings.

Fitch has also affirmed the 'AA' on the following outstanding obligations (pre-refunding):

--$32.9 million GO refunding bonds series 2007 and 2011;

--$137.2 million certificates of obligation (COs) series 2001, 2007, and 2012.

--$715,000 taxable COs, series 2007A.

The Rating Outlook is Stable.

SECURITY

The GOs and COs are payable from a direct annual ad valorem tax, limited to $0.80 per $100 assessed valuation, levied against all taxable property within the county. The COs are further payable from a limited, de minimus pledge ($1,000) of the surplus net revenues of the county's parking garage facility.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The county has a history of conservative budgeting, prudent cost management and maintenance of adequate reserves.

GROWING, DIVERSIFIED ECONOMY: The economy of El Paso County includes international trade, manufacturing and distribution, the U.S. Army's second largest installation (Fort Bliss), and the stabilizing presence of medical, education, and local government sectors. Growth will likely continue on a modest, steady trajectory.

MANAGEABLE DEBT: Overall debt per market value is high due to high overlapping school district debt, without regard to state support. However, Fitch expects the debt service burden on the county's budget to remain affordable based on its current level and the lack of issuance plans.

MIXED ECONOMIC METRICS: Income levels remain weak but continue to grow at a faster pace than the state and nation over the past five years. Unemployment rates have improved significantly, declining to levels consistent with national averages.

RATING SENSITIVITIES

SOUND FINANCIAL MANAGEMENT: The rating is sensitive to shifts in the county's financial stewardship and adequate reserve levels.

CREDIT PROFILE

El Paso County and Juarez, Mexico comprise the largest Mexican bi-national metroplex, with a combined population of more than 2.5 million. The county includes the City of El Paso (GO bonds rated 'AA' by Fitch), the sixth largest city in Texas.

DIVERSIFIED TAX BASE

The county's location midway between the U.S. coasts has made it a significant gateway between the U.S. and Mexico. The county currently has five ports of entry, increased by the recently opened Tornillo-Guadalupe International Port that is anticipated to further boost trade by easing downtown congestion and improving east-bound commercial traffic flows.

The 1,700 square mile Fort Bliss military post contributes significantly to the local economy with a total supported population of 170,500 through active duty personnel, family members, civilians, and retirees. An expanding medical sector also contributes to the region's employment base, with the $1 billion new military hospital and two other new health care facilities on the east and west sides of town. These additions supplement the recent expansion of the downtown Medical Center of the Americas, consisting of the El Paso County Hospital district, including the University Medical Center, the El Paso Children's Hospital, Texas Tech University Health Sciences Center and Paul L. Foster Medical School.

The county's 4.8% unemployment rate as of December 2015 has improved significantly and now trends only slightly higher than the state (4.2%) and is in line with the nation (4.8%). Fitch believes that investment in the county's trade, military, and medical sectors, combined with new downtown redevelopment and wide spread commercial and retail development bode well for near term gains in the county's population and resource base.

STRONG FINANCIAL PERFORMANCE

The county has maintained sound finances throughout economic cycles by implementing a variety of cost cutting measures, including a hiring freeze, across-the-board budget cuts, and labor concessions. More recently, revenue gains associated with an expanding local economy have allowed the county to soften austerity measures, although officials continue to carefully manage and monitor cost growth.

A slight surplus in fiscal 2014 allowed the county to maintain sound unrestricted reserves of $50.9 million, representing 22.1% of spending, and in excess of the county's target equal to between 10% and 15% of the general fund budget. Fiscal 2015 unaudited results point to a more robust surplus of $10 million due to additional property tax revenue from a 2 penny increase in the tax rate and increased valuations, 4% growth in sales tax revenues, and an underspending of the budget.

The 2016 budget was adopted as balanced and shows a 4% increase from the prior year, the smallest increase in the last 5 years. Management implemented several initiatives in order to quell spending growth in fiscal 2016, notably in the sheriff's office through a new collective bargaining contract, an increase in the federal daily prisoner rate, and more efficient processing of prisoners. Management reports no significant variances from the budget year-to-date and sales tax collections are trending favorably compared to this time last year.

AFFORDABLE DEBT; ADEQUATELY-FUNDED PENSION PLAN

Overall debt is moderate in relation to the county's population ($4,147 per capita), but high in relation to market value at 8.0%, reflecting weak AV per capita. Overall debt is dominated by debt issued by area municipalities and school districts. Direct debt service as a percentage of spending is very affordable at 6.5% of governmental spending and reflects a moderate amortization rate.

The county has no immediate new debt issuance plans. Notably, the county's maintenance and operations (M&O) tax rate of $0.397 per $100 of TAV includes one penny dedicated to the county's capital project fund, estimated to provide about $3.7 million annually.

The county's pension plan is provided through the Texas County and District Retirement System (TCDRS), with a funded position of 82.2% in fiscal 2014, or an adequate 74.0% based on a more conservative 7% investment rate assumptions. The county also provides other post-employment health care benefits (OPEB) to retirees, currently funded on a pay-as-you-go basis. The unfunded actuarial accrued liability (UAAL) for the county's OPEB has declined to $26.7 million in fiscal 2014 from $59.8 million due to a change in the plan for retirees over 65, and represents less than 1/10th of 1% of the county's market value.

The county's carrying cost burden on its budget, measured by the total of debt service payments, pension and retiree healthcare contributions, is an affordable 14.3% 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 the end of the first quarter of 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 applicable criteria specified below, this action was informed by information from Lumesis and the Municipal Advisory Council of Texas.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000015

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000015

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com