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

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AA' rating to the following Cameron County, TX bonds:

--$15.2 million revenue and tax refunding bonds, series 2016 (State Highway 550 Project).

Proceeds of the bonds will refund outstanding debt for interest cost savings. The bonds are scheduled to price during the week of Dec. 5.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an annual property tax levy limited to $0.80 per $100 assessed valuation (AV) for operations and maintenance and limited tax 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

The county's 'AA' Issuer Default Rating (IDR) reflects its low liability burden, strong financial position, and superior inherent budget flexibility highlighted by management's willingness to utilize its ample revenue raising capacity.

Economic Resource Base

Cameron County is the southernmost county in Texas, and its largest cities include Brownsville, Harlingen, and San Benito. The county's estimated 2016 population totals 425,000, a 5% increase over the 2010 census level. The area economy relies on international trade due to its proximity to Mexico. Wealth levels remain well below average although they are improving at rates that exceed state and national averages.

Revenue Framework: 'aaa' factor assessment

The county's general fund revenues are expected to continue a solid growth trajectory due to continued population growth and economic expansion. The president-elect's proposal to cancel the North American Free Trade Agreement (NAFTA) does create uncertainty for the county's revenue growth prospects and Fitch will assess the impact of any treaty changes over the coming months. The county's independent legal ability to raise property tax revenues provides ample flexibility.

Expenditure Framework: 'aa' factor assessment

The county's solid expenditure flexibility is derived from management's prudent budgeting practices and manageable carrying costs. Fitch expects growth-related spending demands to be matched by revenue gains, keeping their trajectories in line with one another.

Long-Term Liability Burden: 'aaa' factor assessment

The county's liability burden is modest and driven primarily by overlapping debt. The county consistently funds its pension at actuarially determined levels.

Operating Performance: 'aaa' factor assessment

The combination of the county's expenditure flexibility, revenue-raising authority, and its record of reserve funding should enable the maintenance of a high level of financial flexibility during cyclical downturns.

RATING SENSITIVITIES

Strong Financial Flexibility: The county's modest liability burden and ample financial flexibility are the key strengths in the 'AA' rating. Although not anticipated, the rating is sensitive to shifts in the relative strength and relationship of these key factors over time.

CREDIT PROFILE

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. However, the campaign proposal of President-Elect Trump to withdraw from the North American Free Trade Agreement (NAFTA) has created considerable uncertainty for the area's established economic structure. The full implementation of such a policy would be a credit negative for the county. But Fitch believes the proposed shift to trade protectionism will be met with significant corporate lobbying and demands from Congress to approve any treaty changes (For more information, see "Fitch: Trump Policies Would Be Negative for US Public Finances, dated Nov. 9, 2016).

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. 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 opened this fall. Prominent tourist attractions include South Padre Island (SPI) among others

SpaceX, a space transport services company, broke ground on a $40 million commercial-only launch facility near Brownsville. SpaceX's first launch from this location is scheduled in 2017. 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.

Revenue Framework

Property taxes comprise 68% of general fund revenues, followed by charges for services at 13%. Revenue diversity is evident in the form of international bridge toll revenues (8.5%) and fees from housing federal inmates (7.3%).

Historical revenue growth has exceeded the level of inflation and U.S. GDP growth, aided by modest but steady AV growth. Fitch expects the county's revenues to continue this trend given the expanding employment base and strong demographic trends. AV increased by 2.9% in fiscal 2016 and the certified AV for fiscal 2017 points to a 2% gain.

At $0.40 in fiscal 2016, ample taxing margin remains under the $0.80 per $100 AV cap for operations and limited tax debt service. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Public safety spending accounts for 68% of general fund spending.

The pace of spending growth absent policy actions is likely to be in line with revenue growth but pressured by an expanding population and the growing service delivery needs associated with elevated poverty. The high incidence of drug-related offenses in the vicinity of the U.S.-Mexico border also pressures the county's adjudication spending.

The county's fixed cost burden is moderate, with carrying costs for debt, pension, and other post-employment benefits (OPEB) equaling 13.7% of governmental spending. Expenditure flexibility is aided by the county's lack of collective bargaining agreements with any of its personnel.

Long-Term Liability Burden

The long-term liability burden, including overall debt and unfunded pension liabilities, is modest at about 8% of personal income. The 10-year principal amortization rate is modestly below average at 45%. Overall debt is comprised mostly of overlapping debt. Continued overlapping debt issuances is likely to be accompanied with steady gains in personal income, leading Fitch to expect the county's long-term liability burden to remain modest relative to the resource base. The county does not have any near-term debt plans.

County employees participate in an agent multiple-employer defined pension plan administered by the Texas County and District Retirement System. The county consistently funds its pension contributions at the actuarially determined level and the unfunded pension liability is modest at $36 million or 0.3% of personal income based on Fitch's adjustment to a 7% rate of return.

Operating Performance

Fitch expects the county to remain in compliance with its recently enhanced fund balance policy (25% of spending) which supports an 'aaa' financial resilience assessment considering the county's solid revenue and expenditure flexibility and low level of expected revenue volatility. The fiscal 2015 audit posted a $3.8 million (4.5% of spending) operating surplus, increasing the unrestricted fund balance to a high $24 million or 29% of spending. Management projects fiscal 2016 results will post a surplus totaling $872,000 or 1% of spending.

Improved and prudent budgeting allowed the county to increase its financial reserves in the wake of the last downturn, which was relatively modest for the county. Moderate increases in property taxes, international bridge tolls, and per diems for housing federal inmates allowed the county to avoid postponing or deferring liabilities, including actuarially-based pension payments. The fiscal 2017 budget is funded with a level O&M tax rate, provides a 2% salary hike for all employees, and is projected to generate a modest operating surplus (1.2 million or 1.4% of spending).

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 Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015488

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
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
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com