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Fitch Rates Harlingen, TX's COs 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating on the following Harlingen, Texas certificates of obligations (COs):

--$2.3 million combination tax and revenue COs, series 2012

The certificates will be sold via competitive bid on Oct. 3, 2012. Proceeds will be used for various infrastructure improvements.

In addition Fitch affirms its 'AA-' rating to the following general obligation bonds (GOs) and COs:

--$2.9 million combination tax and revenue COs, series 2010

--$1.7 million GO refunding bonds, series 2010

--$9.5 million GO bonds, series 2007

--$19.4 million combination tax and revenue COs, series 2007

--$2.6 million GO bonds, series 2006

--$3.8 million GO refunding and improvement bonds, series 2005

The Rating Outlook is Stable.

SECURITY

The bonds and certificates are secured by a limited ad valorem tax levied against all taxable property in the city; the certificates are secured further by a limited pledge of surplus revenues of the city's Butler golf course.

KEY RATING DRIVERS

HEALTHY RESERVES MAINTAINED: The city has a relatively stable financial history. Strong financial flexibility is evident in the maintenance of high reserve levels.

DEPENDENCE ON SALES TAXES: The city relies heavily on sales tax revenues for operations, but Fitch notes its high reserve levels tempers risk to volatility in sales tax performance.

MODERATE DEBT LEVELS: The city's overall debt burden is moderate with limited near term borrowing plans; principal amortization is average.

ECONOMIC GROWTH: Harlingen is located in south Texas near the U.S.- Mexico border. Tax base and economic growth have remained positive despite the recession, but the region continues to suffer persistently high unemployment and low wealth levels. Proximity to Mexico and an extensive and expanding transportation network support strong international trade activity.

CREDIT PROFILE

STABLE FINANCIAL OPERATIONS WITH STRONG RESERVE LEVELS

The city's financial reserves have remained strong despite three years of modest draw downs (fiscal years 2008 - 2010) that were primarily attributable to pay-go capital outlays. For fiscal 2011 the city reported a modest increase to fund balance of roughly $330,000 and ended the year with $10.9 million in unrestricted fund balance (committed, assigned and unassigned per GASB 54), or 30.1% of spending. The city has reported reserve levels exceeding 30% of spending annually since fiscal 2006. For fiscal 2012, management reports that revenues are ahead of budget and anticipates closing the year with another modest increase to fund balance. The fiscal 2013 adopted budget is balanced without the use of reserves.

The general fund receives over 40% of its revenues from a 1.5% sales and use tax. Despite the volatile nature of sales tax revenues, this revenue source has grown at an average annual rate of 2.5% in the last ten years. Fiscal 2010 was the first time in a 17-year period that sales tax revenues declined (down 6.8%), but they immediately rebounded with 3% growth in fiscal 2011 and 8.5% growth in fiscal 2012. The city attributes some of this growth to a new retailer, Bass Pro Shops, which opened in November 2011. In addition to the 1.5% sales and use tax for the general fund, the city collects a 0.5% sales tax for economic development programs.

Property taxes account for approximately one-third of total general fund revenues. The tax base is well diversified and has grown at a compound annual growth rate of 3.4% since fiscal 2007 to $2.7 billion in fiscal 2012. The top 10 taxpayers represent a moderate 6.8% of the total. City officials expect 4% growth in the tax base over the next several years, due to the Bass Pro Shops addition to the tax base and additional commercial development underway.

MANAGEABLE DEBT LEVELS WITH LIMITED DEBT ISSUANCE PLANS

Key debt ratios are moderate. The city's overall debt burden, after adjusting local school district debt for state debt service assistance, is $1,916 per capita and 4% of fiscal 2013 market value and debt carrying charges of approximately $4.1 million are equal to 10% of spending. Principal amortization is about average.

The city has no GO debt authorization currently and has no plans to approach voters for additional authorization in the near term. This is the first borrowing of a total of $6 million planned for infrastructure needs in the tax increment financing reinvestment zone. Officials report that the city's capital improvement plan is being updated for other future needs.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), a statewide agent multiple employer plan. The city's funding position is a healthy 99.5% as of Dec. 2010 with an aggregate unfunded actuarial accrued liability (UAAL) associated with the plan at a low $406,000, equal to a modest 0.05% of market value.

Funded on a pay-go basis, other post-employment benefits (OPEB) liabilities are higher but still manageable. The UAAL as of Sept. 2011 totaled $12.8 million, equal to 0.4% of full market value. On a combined basis, the city's contributions to TMRS ($2.5 million in fiscal 2011) and OPEB (less than $80,000) approximate 7% of general fund spending.

DIVERSIFIED ECONOMY

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.

The city is slowly positioning 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. The South Texas Veterans Administration Health Care Center at Harlingen was recently completed, and a $40 million surgical and ambulatory facility to supplement the center is now open, employing over 200 medical professionals.

The Bass Pro Shops completed construction of its retail store on a 110-acre site and opened in November 2011, spurring additional retail development and attracting more shoppers to the area.

Higher education is also a major economic component. Texas State Technical College Harlingen is a two-year institution whose new Articulation and Career Center, which opened in August 2011, offers degrees to area students from other universities in the state and the U.S. Fitch views these developments favorably, as they should promote stability and attract higher quality jobs to the region.

At 9.7% in July 2012, unemployment levels have improved from the prior year but remain higher than the state (7.5%) and the U.S. (8.6%) averages. Wealth levels are well below average compared to the state, but are in line with those of other border communities.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Fitch Ratings
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com
or
Primary Analyst:
Gabriela Gutierrez, +1-512-215-3731
Director
Fitch, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-512-3733
Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director

Source: Fitch Ratings