AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Edinburg, Texas' (the city) general obligation (GO) bonds and certificates of obligation (COs):
--$15.6 million in outstanding general obligation (GO) refunding bonds affirmed at 'AA-';
--$29.4 million in outstanding combination tax and revenue certificates of obligation (COs) affirmed at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a subordinate lien on surplus revenues from the city's waterworks and sewer system.
SENSITIVITY/RATING DRIVERS
SOUND FINANCES: The city has maintained a sound financial position. Ending balances have been strong, with some fluctuations, and have increased in recent years.
STABLE ECONOMY DESPITE BELOW AVERAGE WEALTH AND INCOME INDICATORS: The city's wealth and income indicators are below average. However, unemployment remains below county and national levels even as the city has experienced continued strong population growth. The city is poised to benefit from several economic development projects currently in process, which could lead to strengthening of the city's credit.
MIXED DEBT PROFILE: Direct debt levels are low, but increase considerably when overlapping debt is included. Debt amortization is rapid and capital needs are manageable, with no additional near-term GO or CO debt issuance expected. Combined debt service, pension, and other post-employment (OPEB) costs are also manageable.
CREDIT PROFILE
Edinburg, with an estimated 2011 population of about 79,000, is the county seat of Hidalgo County. The city is 20 miles from the Texas-Mexico border in the Rio Grande Valley.
SOUND FINANCES FEATURE MAINTENANCE OF STRONG RESERVE BALANCES
The city has historically maintained strong financial reserves, with general fund ending balances at greater than 30% of spending. General fund reserve levels remain solid but declined in fiscal 2010 to $9.1 million or 23% of spending (unreserved), which was below the city's policy of maintaining no less than 25% of expenditures in fund balance. The unrestricted balance increased to $12.9 million or about 35% of spending in fiscal 2011 and is projected remain above 30% for fiscal 2012, using a mix of recurring and some non-recurring transfers from other funds.
Since fiscal 2010, the city has transferred about $1.5 million annually from the solid waste fund into the general fund as a means of bolstering revenue and limiting the need for increased property taxes. In fiscal 2012, the city relied on additional transfers totaling $1.6 million from other funds, primarily for capital projects. The fiscal year 2013 budget does not include these additional transfers, though $1.5 million is again transferred from the solid waste fund.
The fiscal 2013 budget is balanced, with the use of the solid waste fund transfers, and year-to-date performance is positive relative to the budget. After strong estimated fiscal 2012 revenue growth (7.7% or 4.9% excluding interfund transfers), which includes sales (3.5% increase) and property tax (1.7%) collection increases, the city is conservatively budgeting for a decline in fiscal 2013 of about 5.6%, or 2% excluding transfers. Sales tax collections, however, are stronger than budgeted and the city projects that they will exceed budgeted amounts by about $1.2 million. Expenditure growth was 12.5% in fiscal 2012 due largely to one-time capital spending, but also to increased public safety expenditures. Expenditures are budgeted to decline in fiscal 2013 by about 4% reflecting much lower levels of one-time capital spending.
ECONOMIC STABILITY DESPITE BELOW AVERAGE WEALTH AND INCOME
Because of its position near the Mexican border along a major transportation route, Edinburg serves as a distribution center, benefiting from the trade generated by cross-border manufacturing activity as well as the agricultural production in the region. Retail trade, government, education and health services are all major components of the area economy.
The city's economy has remained stable as strong population growth has offset weak wealth and income indicators. The October 2012 unemployment rate was 7.3%, down from 8.4% a year prior. While higher than the state's unemployment rate (6.2%), it is below the county (10.1%) and national (7.5%) rates. Employment levels have seen consistent annual increases through 2011. Median household income is 77% and 74% of state and national levels, respectively. The city's poverty rate is about 28% as compared to 17% for the state and 14% for the nation. Further economic expansion is expected in the near term related to the multi-phase construction of a denim manufacturing facility, expansions at a recently completed Federal Express distribution center, and reported additional new business development and expansions of established businesses.
Edinburg's tax base is fairly diverse, with moderate top 10 taxpayer concentration at about 10%. Following strong prior year growth, taxable assessed value (TAV) declined in fiscal 2011 (-1.7%), due largely to commercial inventory reductions and remained essentially flat in fiscal 2012 (+.03%). TAV increased in fiscal 2013 (2.9%) due to stable commercial values and increased property values.
DEBT PROFILE IS MIXED
Overall debt levels are a moderate $2,290 per capita or 5.1% of market value due largely to local school district debt. Principal amortization of the city's tax-supported debt is rapid with 68% repaid in ten years. City officials report no immediate plans to issue additional tax-supported debt.
The city provides pension as well as disability and death benefits through the Texas Municipal Retirement System (TMRS). Funding of the pension annual required contribution (at about 80% in fiscal year 2011) is being increased and is expected to reach 100% in two years. The phase-in was permitted due to retirement system restructuring in 2007. The funded level as of Dec. 31, 2010 was 70.5%, assuming a 7% investment return. In addition, the city provides OPEB benefits to retirees up to age 65 in the form of group health insurance coverage. Combined debt service, pension, and OPEB costs are also manageable at about 20% of 2011 expenditures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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