AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the following obligations of Del Rio, TX:
--$12.7 million combination tax and revenue certificates of obligation (COs), series 2017.
In addition, Fitch has upgraded the city's Issuer Default Rating (IDR) and the rating on $57.5 million in outstanding limited tax general obligation bonds and COs to 'AA' from 'AA-'.
The Rating Outlook is Stable.
The COs are scheduled to sell Dec. 12 via negotiation. Proceeds will be used to finance various public improvements.
SECURITY
The GOs and COs are payable from an ad valorem tax levied against all taxable property within the city, limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally payable from a pledge of surplus net revenues of the city's waterworks and sewer system.
KEY RATING DRIVERS
The upgrade of the city's IDR and GO ratings to 'AA' reflects the application of Fitch's revised criteria for U.S. state and local governments, which were released in April 2016 and provide a more focused consideration of the economic profile. The rating reflects the combination of strong revenue and expenditure flexibility and healthy operating performance that positions Del Rio well to withstand economic cycles. Revenue growth prospects are solid and the city's long-term liability burden is low.
Economic Resource Base
Del Rio has a historically flat population of about 36,000 and is located along the Texas-Mexico border, approximately 150 miles west of San Antonio. Ciudad Acuna, on the Mexican side of the Rio Grande, has an estimated population of 110,000, bringing the total metropolitan area population to nearly 150,000. Employment is concentrated in the federal government with Laughlin Air Force Base (Laughlin AFB) and border security agencies. The city is also inherently linked to the Mexican economy and is vulnerable to international economic and political shifts, given its reliance on border trade activity.
Revenue Framework: 'aa' factor assessment
Historical revenue growth exceeds the pace of inflation, and growth prospects appear positive. Independent revenue-raising capacity is high as the city's property tax rate remains well below state limits.
Expenditure Framework: 'aa' factor assessment
Fitch expects the pace of spending to align generally with solid revenue growth given the city's flat population. Carrying costs are affordable, contributing to a solid measure of expenditure flexibility.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch expects the city's liability burden to remain a low burden on resources, as moderate borrowing plans are offset by direct debt amortization.
Operating Performance: 'aaa' factor assessment
Revenue and spending flexibility provides exceptional gap-closing ability through economic cycles. A moderate downturn is not expected to impair the city's overall financial flexibility.
RATING SENSITIVITIES
Liability Burden: Debt issuance without accompanying growth in the resource base or self-support from enterprise systems to ease the impact on debt affordability metrics would be a negative rating consideration.
Federal Policy: The rating is sensitive to material changes in federal policy that negatively affect trade with Mexico or unexpected reductions in federal funding that would substantially affect military/agency employment and the city's revenue growth prospects.
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 Ciudad Acuna. 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 city. 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).
Federal employees comprise approximately one-third of the city's non-farm employment due to the presence of nearby Laughlin AFB and federal border security agencies. Federal budget cuts in recent years have affected civilian employees at the base via reduced hours, but city officials report pending initiatives that may add to base employment.
The city's TAV experienced strong compounded annual growth of more than 4% over the past 10 years with no declines. Although the tax base has no concentration of mineral values, decreased oil production in the surrounding region produced a modest increase in the city's unemployment rate, which is historically above state and national averages. Growth in median household income has outpaced the state and U.S. but overall wealth indices and educational attainment remain below average.
Revenue Framework
General fund revenues and transfers in include a diverse mix of sales taxes (27% in fiscal 2015), property taxes (21%) and transfers of toll revenues (19%) from the city's international toll bridge. The city receives 67% of revenues derived from bridge crossings. Toll revenues have demonstrated the most volatility from year to year, but Del Rio has sole authority to establish tolls for traffic departing the U.S. and the closest alternative crossing is 50 miles away.
Historical revenue growth has exceeded the level of inflation but remained slower than U.S. GDP growth, aided by steady TAV expansion and only one year of modest sales tax decline. City management is pursuing economic initiatives for federal jobs, which bodes well for historical growth rates to continue, although the status of trade with Mexico under the Trump administration is a significant uncertainty.
The sales tax rate can only be increased with voter approval for special purposes. However, the city has ample room to raise property tax revenue as the current rate of $0.68 per $100 of TAV is well below the limit of $2.50. If a proposed tax rate results in an 8% year-over-year levy increase or more (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. The city also has independent legal ability to adjust bridge toll rates.
Expenditure Framework
The city's largest spending area is public safety, which makes up about 60% of general fund spending. Spending growth in that area has generally trended in line with other expenditures.
Average spending growth is generally on par with the growth in revenues, a trend that Fitch expects to continue.
The city's carrying costs for debt service, pension, and other postemployment benefits equal 14% of fiscal 2015 governmental spending. The city participates in collective bargaining with the Del Rio Police Association, for which contract negotiations are currently underway. Management retains a reasonable degree of control over labor costs.
Long-Term Liability Burden
The city's long-term liability burden is estimated by Fitch at about 8% of personal income and is expected to remain a low burden on resources based on current issuance plans. This offering will fund various public improvements, and about 35% of debt service will be self-supporting through bridge, utility, and refuse rate increases. Overall tax-supported debt is $82 million with this issuance. The city's four-year capital plan includes issuance of $61 million ($16 million of which will be tax-supported), offset by $30 million amortizing over the same period.
The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan. Under GASB 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $7.1 million, which is less than 1% of personal income. Fiduciary net assets cover 70% of plan liabilities at the plan's 7% investment return assumption, and this figure has improved in recent years with consistent funding of actuarially determined contributions.
Operating Performance
Exercising the strong budget controls that provide its superior inherent budget flexibility, Del Rio has maintained robust reserve levels and continued to do so during the most recent economic recession, which was relatively mild in the region. The city is expected to manage through economic cycles while reserving a high level of fundamental financial flexibility. General fund reserves are well above the city's reserve policy.
Historically, the city has practiced conservative budgeting and has implemented cost savings initiatives when necessary. Fitch believes that the city will continue these financial practices while maintaining compliance with its formal reserve policy of 25% of spending.
Del Rio's fiscal 2015 unrestricted reserves were a high $13.5 million or 50% of spending and transfers out. Year-to-date sales tax and bridge toll receipts are up in fiscal 2016, positioning the city to outperform its balanced budget. The fiscal 2017 budget is essentially balanced, with an increase in the bridge fund transfer to offset the repurposing of 1/8 of 1% sales tax for economic development. TAV for fiscal 2017 is up 3.2% over the prior year.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis, InvestorTools, and the Municipal Advisory Council of Texas.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015961
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https://www.fitchratings.com/regulatory
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