Fitch Rates Harlingen, TX's GO Refunding Bonds 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a 'AA+' ratings to the following Harlingen, Texas (the city) obligations:
--$23.5 million general obligation (GO) refunding bonds, series 2016.
The GOs are expected to price via negotiation the week of May 30. Proceeds will be used to refund outstanding obligations for savings.
In addition, Fitch has upgraded the city's $50.9 million in outstanding limited tax obligations (pre-refunding), consisting of GOs and certificates of obligation (COs), and the city's Long-Term Issuer Default Rating (IDR) to 'AA+' from 'AA-.'
The Rating Outlook is Stable.
The GOs and COs are payable from a direct annual ad valorem tax, limited to $2.50 per $100 assessed valuation, levied against all taxable property within the city. The COs are further payable from a limited pledge of surplus revenues of the city's Butler golf course (not to exceed $1,000).
KEY RATING DRIVERS
Analytical Conclusion: The rating upgrade to 'AA+' reflects the city's above average revenue growth prospects, strong gap-closing capacity, and moderate fixed costs. Fitch expects that long-term liabilities will continue to be a moderate burden on resources due to the modest debt issuance plans.
Economic Resource Base
The city of Harlingen has an estimated population of roughly 66,000. It is located in south Texas near the U.S.-Mexico border, encompassing almost 40.3 square miles in Cameron County. The area economy has long been linked to the agriculture, tourism, trade, and manufacturing sectors. The local economy continues to diversify, aided by the city's economic development incentive programs and a transportation network that includes the city-owned and operated Valley International Airport.
Revenue Framework: 'aaa' factor assessment
Historical revenue growth has been strong, exceeding the pace of national economic expansion, 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
The pace of spending is expected to be generally in line with revenue growth. Carrying costs are affordable and are not expected to shift materially due to modest borrowing needs.
Long-Term Liability Burden: 'aa' factor assessment
Debt levels are moderate and are expected to remain a reasonable burden on resources given limited future borrowing plans.
Operating Performance: 'aaa' factor assessment
Revenue and spending flexibility provides exceptional gap-closing ability through a typical economic cycle. A normal downturn is not expected to impair the city's overall financial flexibility.
Expenditure Pressure: The city is sensitive to spending pressure that could result from population growth in excess of recent trends, although the expectation is for management to maintain operational stability.
The city has positioned itself as a regional healthcare hub in recent years. The Regional Academic Health Center, a branch of the University of Texas-San Antonio Health Science Center, has brought a nationally recognized institute of health science education and research to the Rio Grande Valley. Other health care facilities have opened recently, and health care is now one of the largest employment sectors in the area, along with higher education and local government. Income levels are low, and poverty levels are double that of the state and nation.
The revenue base is dominated by sales taxes at about 40% of total general fund revenues and property taxes at one-third.
Over the last decade, the city's general fund revenues have grown at a rate in excess of both U.S. economic performance and CPI, driven by steady, incremental increases in both sales and property tax collections with minimal recessionary contraction. Economic initiatives underway by city management bode well for historical growth rates to continue.
Statutory limitations on sales tax rates do not allow for any rate increases. The city has ample room to raise property tax revenue as the current tax rate of $0.5888 per $100 taxable assessed value (TAV) is well under the limit of $2.50 per $100, and it has remained flat since fiscal 2010.
The city's largest spending area is public safety which makes up about half of general fund spending. Spending growth in that area has trended in line with general fund expenditure growth.
Average spending growth is generally on par with the growth of revenues, a trend that Fitch expects to continue.
The city's carrying costs for debt service, pension and other postemployment benefits equal 14% of governmental expenditures. The city participates in collective bargaining with the Professional Fire Fighters Association and the Police Officers' and Law Enforcement Association. Management reports positive relations with both associations and contract negotiations are about to begin later this month to renew agreements that expire at the end of the fiscal year (September 30th). No significant changes are anticipated.
Long-Term Liability Burden
The city's long-term liability burden is estimated by Fitch as a moderate 11% of personal income and is expected to increase only marginally given current issuance plans. Officials anticipate issuing approximately $14 million in COs to fund construction of a 44,000 square foot convention center within calendar year 2016. The city will own the center, which will be managed by a private concern.
The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan. Additionally, the city is the administrator of the Firemen's Relief and Retirement Fund, a single-employer defined benefit pension plan.
Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension asset (NPA) of $1.1 million, with fiduciary assets covering 101% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date. The city reports a fiscal 2015 Firemen's NPL of $12.9 million, with fiduciary assets covering 62.3% of total pension liabilities at a 7% return assumption (adjusted by Fitch as a substitute for the plan rate of 8%). The Firemen's valuation date is Dec. 31, 2013. The NPL represents a low 1.25% of personal income.
The city 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 downturns while preserving a high level of fundamental financial flexibility. General fund reserves are well above the city's reserve policy, a level that withstands the moderate economic downturn stress evaluated using the Fitch Analytical Sensitivity Tool (FAST).
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, inclusive of sales tax revenues that are budgeted at about 2% growth per year. The city has a formal reserve policy of 90 days of spending.
The city's fiscal 2015 unrestricted reserves remained sound at $15.9 million or 35.6% of spending. A fiscal 2015 net deficit of $1.24 million (2.8% of spending) resulted from budgeted nonrecurring expenditures. The city projects break even fiscal 2016 results, with sales tax revenue modestly exceeding the budget and some one-time spending.