OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Del Rio, TX (the city) obligations:

--\$9.265 million general obligation refunding bonds, series 2015.

The bonds are scheduled to sell via negotiation on March 11. The proceeds will be used to refund a portion of the city's outstanding debt for interest cost savings.

In addition, Fitch affirms the 'AA-' rating on \$54.43 million of outstanding limited tax general obligation bonds (GOs) and COs.

The Rating Outlook is Stable.

SECURITY

The GOs and COs are payable from an annual property tax limited to \$2.50 per \$100 of taxable assessed valuation (TAV), levied on all taxable property within the city. The COs are additionally payable from a limited pledge of surplus net revenues of the city's waterworks and sewer system.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The city maintains strong operating reserves relative to the budget through the use of prudent fiscal stewardship and conservative budgeting practices. Modest draws on fund balance have supported capital outlays. The city's strong reserves are an important credit factor as operations are somewhat exposed to economically sensitive sales tax and toll bridge revenues.

ECONOMY ANCHORED BY MILITARY AND BORDER TRADE: 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.

BELOW-AVERAGE SOCIOECONOMIC PROFILE: Growth in median household income has outpaced the state and U.S. but overall wealth indices and educational attainment remain below average.

MIXED DEBT PROFILE: Overall debt is moderately high and may increase further given the city's capital plans. However, amortization is rapid and tax-supported debt carrying costs are affordable.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: Preservation of the city's sound fiscal cushion is necessary to offset some exposure to economically sensitive revenues and a somewhat limited economy.

DEBT ISSUANCE: Debt issuance without accompanying TAV growth or self-support from enterprise systems to ease the impact on debt affordability metrics would be viewed negatively.

FEDERAL MILITARY/AGENCY SPENDING: The rating is sensitive to changes in federal funding that would substantially affect military/agency employment and the city's economy.

CREDIT PROFILE

Del Rio has an estimated population of approximately 36,500 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 River, has an estimated population of 110,000, bringing the total area population to nearly 150,000.

STABLE ECONOMY ANCHORED BY BORDER TRADE AND FEDERAL EMPLOYMENT

The city benefits from trade with Mexico, especially through the maquiladora program in which raw goods are shipped to Mexico for manufacturing and assembly and the finished goods are imported into Del Rio for warehousing and distribution. Forty-eight maquiladora plants are located in Acuna, and 31 are in Del Rio, as the city is an official port of entry. The economy is also heavily based on government-sector employment and tourism, given the city's proximity to Mexico and the large, popular Lake Amistad. The city's vulnerability to political and economic shifts in Mexico, given the importance of cross-border trade, is an economic risk factor inherent in the rating.

Federal employees comprise over 30% of the city's 2013 non-farm employment due to the presence of nearby Laughlin AFB and federal border security agencies. Although the base received additional troops and families as a result of the base realignment and closure process (BRAC), federal budget cuts in recent years have affected civilian employees at the base via reduced hours.

Employment gains of 4.3% for the 12-month period ending December 2014 outpaced 2.7% labor force expansion and produced a decline in the unemployment rate from 5.9% to 4.5%, which exceeds the state (4.1%) but is favorable to nationwide unemployment (5.4%). Wealth metrics are below state and national norms but similar to other Texas-Mexico border communities.

ECONOMICALLY SENSITIVE REVENUES; FINANCIAL FLEXIBILITY MAINTAINED

Financial operations include a mix of major operating revenues, which consist of sales taxes (29%), property taxes (25%), and transfers of toll revenues (21%) from the city's international toll bridge. The city receives 67% of the revenues derived from bridge crossings and has the ability to adjust toll rates. The toll revenues have demonstrated the most volatility from year to year, but the city has sole authority to establish tolls for traffic departing the U.S. and the closest alternative entry point is 50 miles away.

Operating results before considering capital expenditures have been mostly positive, supported by prudent fiscal management and conservative budgeting practices. The general fund recorded a strong fiscal 2013 surplus of \$1.1 million after transfers and capital outlays (5% of spending). The results include a \$1.4 million capital outlay equal to 6.3% of spending, and the surplus is attributable to payroll savings from open positions on the city's police force.

The general fund closed the year with an unrestricted fund balance of \$9.8 million, or a solid 45% of spending. This is well in excess of the city's formal fund balance policy to maintain 25% of expenditures. Liquidity was also sound, with general fund cash and investments equal to nearly five months of operating expenditures.

Unaudited general fund results for fiscal 2014 point to another surplus of approximately \$600,000 (2.7% of budgeted spending), favorable to the balanced budget. Management attributes this performance to cost savings from open positions and renegotiations of expired contracts.

BALANCED RESULTS EXPECTED IN 2015

The proposed budget for fiscal 2015 is essentially balanced, with 2.5% sales tax growth and a toll rate increase supporting a number of one-time departmental expenditures. Fitch considers the projected sales tax growth to be reasonable, given strong year-to-date collections that are 5% higher than the same period in fiscal 2014. Fitch believes the city's strong financial track record and sound fiscal cushion will help it absorb potential declines in economically sensitive revenues and make budget adjustments if necessary.

ABOVE-AVERAGE DEBT BURDEN; LARGE CAPITAL PLANS

The city has issued debt steadily over the past several years, and its overall debt burden, inclusive of debt from an overlapping school district, is high at 5.4% of full market value. Debt per capita is moderate at \$2,298. These calculations consider the substantial debt service self-support received from the city's enterprise systems. Debt amortization is rapid with 73% of principal retired in 10 years.

Del Rio's five-year capital improvement plan (CIP) is extensive and calls for total spending of about \$52 million, compared with \$71 million of tax- and enterprise-supported debt currently outstanding. \$24 million will fund enterprise system infrastructure and \$28 million will fund general government improvements. Fitch expects the tax rate impact and debt service burden to be mitigated somewhat by self-supporting debt issued for enterprise systems, as the city plans to increase service rates over the next several years to accommodate additional debt service.

PENSION FUNDING GRADUALLY IMPROVING

The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer pension plan. The funded position for the city portion of the plan has improved steadily since its initial year of participation in 2005, but remains at a level Fitch views as weak. As of the Dec. 31, 2012 actuarial valuation, the city's plan is 65% funded using a 7% investment return. Fitch expects that the city's practice of consistently funding its annual required contribution (ARC) will continue to improve the pension plan's funded position over the next several years. The city's unfunded liability equals a modest 0.5% of full market value and the ARC consumed a low 2.6% of governmental fund spending in fiscal 2013. The city funds its retiree healthcare benefits on a pay-as-you-go basis, provided through age 65 or until the retiree is eligible for Medicare. Combined carrying costs for debt service, pension ARC, and OPEB paygo were a moderate 15.6% of governmental fund spending in fiscal 2013.