OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following Edinburg, Texas (the city) general obligation (GO) bonds:

--$16 million GO refunding bonds, series 2016.

The GO bonds are expected to price during the week of March 21. Bond proceeds will be used to refund outstanding debt for interest cost savings.

The Rating Outlook is Stable.

Fitch also affirms the 'AA-' rating on the city's outstanding $41 million limited-tax bonds (pre-refunding).

SECURITY
The bonds are, payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

SOUND FINANCES: The city has maintained a sound financial position. Ending balances have been strong and have increased in recent years.

MODEST TAX BASE GROWTH: Recessionary TAV losses were minimal and moderate tax base gains have been recorded in recent years. Certain large projects underway will not increase taxable values because of their public purpose, but Fitch expects that substantial private investments will follow.

STABLE ECONOMY, BELOW-AVERAGE WEALTH: The city's wealth and income indicators are below average but growing rapidly due to the ongoing diversification of the employment base. Unemployment continues to trend downward, and the city is poised to benefit from several major economic development projects that are currently in process.

MIXED DEBT PROFILE: Overall debt levels are high relative to market value, but principal amortization of general obligation debt is rapid and future debt plans are manageable. Overall debt service, pension, and other post-employment benefit (OPEB) costs are manageable.

RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to material changes in fundamental credit characteristics, including the city's strong financial management practices. The city's history of reserve adequacy and sound financial management practices indicates expected rating stability.

CREDIT PROFILE

Edinburg, with an estimated 2015 population of about 88,750, is the county seat of Hidalgo County. The city is 20 miles from the Texas-Mexico border in the Rio Grande Valley.

SOUND FINANCES MAINTAIN STRONG RESERVE BALANCES

The city has historically maintained strong financial reserves, with general fund ending balances typically exceeding the city's 25% fund balance policy. General fund revenues are led by property taxes (40% of total) and sales taxes (30%). Since fiscal 2010, the city has transferred a modest $1.5 million (3% of spending) from the solid waste fund into the general fund as a means of bolstering revenue and limiting the need for increased property taxes. Management indicates that these annual transfers are planned for the foreseeable future.

Audited fiscal 2014 results include an 11% surge in sales tax revenues. However, this revenue gain was offset by a 10% increase in public safety, the city's largest expenditure, attributed to the addition of 12 police officers, six firefighters, and the purchase of a tanker truck. Aided by the transfer of $1 million (2.2% of spending) in accumulated balances from the city's health insurance fund, the audit posted balanced results although the unrestricted fund balance grew modestly to $15.1 million or a strong 32.6% of spending. The fiscal 2014 audit would have posted a net deficit of $592,000 (1.3% of spending) without the one-time transfer from the health insurance fund.

Unaudited fiscal 2015 results point to a net general fund operating surplus of $977,000 (2.1% of spending). Positive results were aided by a 7.3% gain in sales taxes, an amount nearly double the budgeted gain of 3.7%.

The fiscal 2016 budget is balanced with a level tax rate and assumes moderate sales tax revenue growth of 4%. The budget includes an additional $1.4 million (3% of spending) transfer into the general fund from the solid waste fund in order to fund pay-go outlays under a level tax rate. Management indicates that this will not be a permanent adjustment. Sales tax revenue for the first three months of the fiscal year is up by 4.9% for the same period the year prior, leading management to expect balanced or better results.

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 despite strong population growth and weak wealth and income indicators. The December 2015 unemployment rate was 4.7%, about level from a year prior although it remains above the state (4.2%) but nearly on par with the national (4.8%) average for the period. Employment levels saw consistent annual increases throughout 2014. Per capita money income is low at 66% and 61% of state and national levels, respectively, but is growing at a rapid 2.6% CAGR. The city's poverty rate is high at about 28% as compared to 17% for the state and 16% for the nation but has declined modestly from 2010 levels.

Edinburg's tax base is fairly diverse with a mix of power plants, healthcare, retail, and manufacturing among its top 10 taxpayers which account for less than 9% of total taxable assessed valuation (TAV). Recessionary TAV losses were limited to a modest 1.7% decline in fiscal 2011. The annexation of 2,000 acres accounted for about one-half of the almost 5% TAV gain in fiscal 2015. Growing residential and commercial development plus reappraisal gains fueled an almost 8% TAV hike in fiscal 2016. A March 2015 annexation, totaling $84 million in AV, will contribute to a 2% tax base gain in fiscal 2017. TAV per capita remains low at $48,000 despite the recent gains.

Further economic expansion is expected in the near term related to $150 million in projects underway at the newly designated University of Texas - Rio Grande Valley, including the region's first medical school, and a recent $200 million expansion of the local hospital. Planned projects include an upscale retail, entertainment, and hotel complex adjacent to the $60 million multi-purpose arena currently under construction. The arena will be the home of the local basketball team of the National Basketball Association Development League.

MIXED DEBT PROFILE

Overall debt levels relative to market values are high at 6.2%, but principal amortization of the city's general obligation debt is rapid with 77% repaid in 10 years. The aggregate debt pay- out rate, including economic development corporation sales tax and local government finance corporation debt, is average with 50% repaid in 10 years. The 2015-2020 CIP is large at $193 million but will be funded mostly by federal, state, and utility system funds. Less than $8 million of tax-supported debt is planned through 2018, and no tax rate impact is anticipated based on modest TAV growth, which Fitch considers reasonably likely to occur.

The city also plans to enter into an inter-local agreement with Hidalgo County (limited tax bonds rated 'AA-' by Fitch) to fund $30 million (20% of project cost) of a new $150 million county courthouse to be built in Edinburg. The city has agreed to provide $1.5 million of annual debt service funding, starting in fiscal 2018, for tax-supported debt to be issued by Hidalgo County in 2016 or 2017. The debt service will be funded with excess revenues from the Edinburg Economic Development Corporation sales tax and other sources. Fitch considers the additional carrying costs to be manageable but will review the final terms of the agreement.

The city provides pension as well as disability and death benefits through the Texas Municipal Retirement System (TMRS). Full funding of the pension required contribution was phased in and reached 94% in fiscal 2014. The phase-in was permitted due to retirement system restructuring in 2007. The funded level as of Dec. 31, 2014 was 71%. In addition, the city provides OPEB benefits to retirees up to age 65 in the form of group health insurance coverage. Overall debt service, pension, and OPEB costs are manageable at 15.1% of fiscal 2014 expenditures.