Fitch Affirms Hidalgo County, TX's L-T Bonds & COs at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Hidalgo County, Texas (the county) ratings:

--$51 million outstanding certificates of obligation (COs) at 'AA-'; and

--$28.11 million outstanding limited tax bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The limited tax bonds and COs are payable from a continuing direct annual property tax levy, limited to $0.80 per $100 taxable assessed valuation (TAV). Additionally, the COs are payable from a limited pledge of the surplus net revenues of the county's park system.

KEY RATING DRIVERS

ADEQUATE GENERAL FUND CUSHION: Reserves remain adequate, but below recent peaks as the county has used fund balance to address growth pressures. An adequate financial cushion is a key credit factor given the county's growth pressures.

RESILIENT TAX BASE: AV held relatively steady throughout the recession with two years of declines followed by modest growth. Fitch expects continuation of modest TAV growth based on development currently underway. Although the tax base is expanding, market value per capita remains low at $44,000.

SUBPAR DEMOGRAPHICS: The local economy continues to grow and diversify from the traditionally border trading based economy, as demonstrated by the education sector making up six of the top ten employers; however, unemployment remains high at 8.1%. Income and wealth metrics continue to lag state and national averages.

MANAGEABLE DEBT PROFILE: The county's debt burden is elevated, reflecting sizable overlapping debt. Fitch expects the county's carrying costs (debt service contributions and pension and other post-employment benefit obligations) to remain manageable based on its currently low direct debt levels and current borrowing plans.

RATING SENSITIVITIES

SOUND FINANCIAL POSITION: The rating assumes the county will retain adequate reserves to both address growth pressures and maintain expected service levels.

CREDIT PROFILE

Hidalgo County is located in the southernmost region of Texas along the U.S.-Mexico border. After rapid growth throughout the last twenty years, the population reached an estimated 831,073 in 2015. McAllen (general obligation [GO] bonds rated 'AA+', Stable Outlook by Fitch), Mission, and Edinburg (GO bonds rated 'AA-'; Stable Outlook by Fitch) are the largest cities in the county.

SOUND RESERVES DESPITE GROWTH PRESSURE

Sound financial management has enabled the county to maintain sound reserves despite recent drawdowns. Conservative budgeting and careful cost control allowed the county to accommodate relatively stagnant property tax revenues during the recession. Property tax revenues have rebounded in the past two years and now contribute approximately 83% of general fund revenues.

The county completed fiscal 2014 with a $5 million net deficit after transfers due primarily to the increase in Sherriff staffing requirements. Fiscal 2014 results were favorable to the county's deficit budget due to savings attributed to the implementation of an across the board hiring freeze, mid-year budget adjustments and higher than anticipated tax collections. The unrestricted general fund balance at year-end was $37 million or a healthy 20% of spending and transfers out.

Public safety, representing 41% of spending contributed to a spike in fiscal 2015 expenditures as the county staffed up to address needs. The county achieved cost savings during the year through hiring freezes and reclassification of positions into lower salaried jobs. Unaudited figures indicate a $1.7 million increase in fund balance. The county reports a $9.8 million increase in revenues and a $2.8 million decrease in expenditures as compared to those of fiscal 2014. Cost control is particularly important as the county's tax rate of $0.59 per $100 of TAV ranks among the top quartile in the state but below the statutory $.80 cap.

The $189 million 2016 adopted budget includes a $4.7 million appropriation of fund balance. County officials believe that based on year to date projections revenues and expenditures will be balanced for the year without the use of fund balance.

GROWING TRADE-BASED BORDER ECONOMY

The county's central location at the intersection of Interstate 2 and Interstate 69C on the Mexico border has long supported a strong international trade sector, centered on the operation of maquiladoras or "twin plants" with counterparts in Reynosa, Mexico. In 2012 the U.S. Department of Homeland Security approved a regional center for immigrant investors in McAllen, providing international investors the opportunity to expand the border economy while living in the county.

Tourism remains strong. Recent growth in "ecotourism" has attracted new travelers to the area, particularly for birding, as a result of the county's prime location along transcontinental migratory flight paths. The University of Texas medical school, scheduled to open in 2016, will contribute to an expanding health care sector. This project, coupled with a local mall expansion, is expected to create new jobs, adding further diversity and skilled employment to the county's trade-centered economy.

The county's economic development in these areas has led to rapid population growth in recent years, with population climbing nearly 10% between 2009 and 2014. Steady growth expected to continue in future years, as the McAllen Metropolitan Statistical Area (MSA) remains among the fastest growing regions in the nation due to its low cost of labor and economically beneficial proximity to the border.

Population growth helped spur strong gains in TAV during much of this period. The trend reversed with moderate contractions in 2011 and 2012, although TAV growth resumed in 2013 and increased a total of 3.2% between 2012 and 2014. Fitch anticipates this modest growth to continue during the intermediate term.

IMPROVING BUT STILL WEAK DEMOGRAPHIC PROFILE

Employment made solid gains throughout the recession, and income levels continue to climb at greater than twice the national rate. However, the county's demographics remain below average, with median household incomes 34% to 35% below those of the state and nation. Unemployment has decreased but remains above average at 8.1% as of January 2016, well above the state and nation (4.4% and 4.9%, respectively). Educational attainment is low with only 62.2% of Hidalgo County citizens being high school graduates, compared to the state and national averages of 81.6% and 86.3%, respectively.

MANAGEABLE DEBT AND OTHER LONG-TERM LIABILITIES

Debt levels are mixed, with high overall debt largely driven by overlapping school obligations which receive a substantial degree of state support (which is not accounted for in Fitch's debt burden calculation). Fiscal 2014 debt levels are moderate in relation to population at $2,915 per capita, but much higher as a percent of market value at 6.6%, reflecting the county's relatively low market value.

The 10-year principal pay out rate is a brisk 61.7%. Capital plans over the intermediate term include the construction of a new courthouse and improvements to roads, parks and the construction of community centers. The schedule of new debt issuance totaling $241 million will occur periodically over the next three years, which will result in increasing debt levels. However, Fitch believes that due to the pace of outstanding debt retirement and the staggering of new borrowings, the additional debt will not place material stress on the county.

The county participates in the Texas County and District Retirements System, which individually reports the funding levels of participating entities. As of 2014 the county had ratio of assets to liabilities of 75% based on the 7% investment rate of return estimate used by Fitch. Other post-employment benefits (OPEB) do not pressure county finances, as the county only provides an implicit subsidy to retirees. The county's carrying costs, including debt service, pension contributions, and OPEB pay- go costs, represented a manageable 11.4% of governmental spending in 2014.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 at the beginning of the second 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.

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=1001710

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001710

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+1-646-582-4857
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+1-646-582-4857
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com