Fitch Rates Harlingen, TX's GOs 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a rating of 'AA-' to the following obligations of Harlingen, Texas (the city):
--$2.1 million refunding general obligation (GO) bonds, series 2016.
The GOs are expected to price via negotiation the week of April 18, pending market conditions. Proceeds will be used to refund outstanding obligations for savings.
Fitch currently rates the city's $37.4 million in outstanding limited tax obligations, consisting of GOs and certificates of obligation (COs), '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
STABLE FINANCIAL PROFILE: The city has a stable financial history marked by slow, steady growth in revenue streams and healthy reserves, which offset concern over the city's reliance on sales tax revenues.
ECONOMIC GROWTH: Tax base and economic growth remained positive during the recession, but the region continues to suffer relatively high unemployment and low wealth levels. Proximity to Mexico and an extensive and expanding transportation network support strong international trade activity.
MODERATE DEBT LEVELS: The city's overall debt burden and total carrying costs are moderate, and near-term borrowing plans are limited. Principal amortization is rapid.
MAINTENANCE OF SOLID RESERVES: Given the city of Harlingen's reliance on economically sensitive sales taxes, maintenance of solid reserve levels is key to the rating.
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. However, the local economy continues to diversify, aided by the city's economic development incentive programs and an extensive transportation network that includes the city-owned and operated Valley International Airport.
In recent years, the city has positioned itself as a regional healthcare hub. 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.
At 5.6% in Jan. 2016 unemployment levels have improved from the prior year but remain higher than state (4.3%) and the U.S. averages (5.2%). Wealth levels are well below average compared to the state but are in line with those of other border communities.
STABLE FINANCIAL OPERATIONS
The city's fiscal 2015 unrestricted reserves remain sound at $15.9 million, 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.
The general fund receives about 40% of its revenues from a 1.5% sales and use tax. This revenue source has shown modest, steady growth post-recession, marking only one year of minor contraction in fiscal 2010, the first in an almost 20-year period. Management budgets this revenue stream conservatively (about 2% growth per year), and projects growth modestly above the budget forecast in fiscal 2016.
Property taxes account for approximately one-third of general fund revenues. The tax base is well diversified and has grown at a compound annual growth rate of 2.3% since fiscal 2009 to $2.9 billion in fiscal 2016. The top 10 taxpayers represent a moderate 8.7% of the total.
MANAGEABLE LONG-TERM LIABILITIES
Fitch anticipates the city's debt, 5.3% of market value, will remain manageable based on issuance plans and a rapid principal amortization rate of 78% in 10 years. 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 liability (NPL) of $ 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 (plan rate of 8%). The Firemen's valuation date is Dec. 31, 2013. The NPL of both plans represent a low .5% of fiscal 2015 market value. Carrying costs including annual debt service, pension and other post-employment benefit contributions are manageable at 14% of fiscal 2015 governmental spending.