Fitch Rates Del Rio, TX's Limited Tax Obligations 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Del Rio, TX (the city) obligations:
--$14.4 million combination tax and revenue certificates of obligation (COs), series 2015A.
The bonds are scheduled to sell via negotiation on November 9. The proceeds will be used to finance various public improvements.
In addition, Fitch affirms the 'AA-' rating on $48.8 million of outstanding limited tax general obligation bonds (GOs) and COs.
The Rating Outlook is Stable.
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.
FINANCIAL FLEXIBILITY: Preservation of the city's sound fiscal cushion is important to the current rating, 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.
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 32 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 approximately one-third of the city's 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.
Decreased oil production in the surrounding region produced a modest decline in both employment and labor force during the 12 months ended August 2015. However, the net effect on the city's unemployment rate was a decrease to 6.0% from 6.1%. This exceeds the state and national rates of 4.4% and 5.2%, respectively. 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 sales taxes (30% of general fund revenues), property taxes (26%), 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 of all revenue sources 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 fiscal 2014 surplus of $784,000 after transfers and capital outlays (3% of spending). Consistent with management projections, the results outperformed the balanced budget, benefiting from cost savings due to open positions and renegotiations of expired contracts.
The general fund closed the year with an unrestricted fund balance of $10.6 million, or a solid 45% of spending. This is well in excess of the city's formal fund balance policy to maintain a reserve of 25% of expenditures. Unaudited general fund results for fiscal 2015 point to a modest drawdown of approximately $450,000 (1.7% of budgeted spending) for cash financing of several one-time expenditures. Sales tax collections grew by 3.3% over fiscal 2014.
The proposed budget for fiscal 2016 is essentially balanced, conservatively assuming no sales tax growth over unaudited fiscal 2015 revenue. 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 above average at 5.1% of full market value. Debt per capita is moderate at $2,256. These calculations consider the substantial debt service self-support received from the city's enterprise systems. Debt amortization is rapid with 70% of principal retiring in 10 years.
Del Rio's seven-year capital improvement plan (CIP) is extensive and calls for total spending of about $130 million, some of which will be cash-funded. This amount compares with $51 million of tax- and enterprise-supported debt maturing in the same period; $67 million will fund enterprise system infrastructure and $63 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 since its initial year of participation in 2005, but remains at a level Fitch views as weak. As of the Dec. 31, 2014 actuarial valuation, the city's plan is 64% funded when adjusted for 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 2.5% of governmental fund spending in fiscal 2014. 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 15.7% of governmental fund spending in fiscal 2014.