Fitch Affirms Brownsville, TX GOs and COs at ‘AA-‘; Outlook Stable
September 29, 2015 | By Business Wire News
NEW YORK
Fitch Ratings has affirmed the following City of Brownsville, Texas (the city) securities:
–$122.1 million city limited tax bonds and COs at ‘AA-‘;
–$12.1 million Brownsville Community Improvement Corporation (BCIC) sales tax bonds at ‘AA-‘.
The Rating Outlook is Stable
SECURITY
The GOs and COs are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from surplus revenues of the city’s municipal landfill. The BCIC sales tax revenue bonds are secured by a 1/4% sales tax and additionally by a cash-funded reserve fund in an amount equal to the average annual debt service of all parity obligations.
KEY RATING DRIVERS
SOUND ECONOMY; GROWTH PROSPECTS: The city continues to realize solid tax base and economic growth, benefitting from its advantageous location and extensive transportation network in the lower Rio Grande Valley. The city’s low cost of living, reflected in affordable housing, also supports economic growth; income and wealth levels remain below average.
STRONG FINANCES: Positive credit factors include conservative budgeting and maintenance of solid general fund balances. Sound reserves help to mitigate the city’s exposure to inherently volatile sales tax revenues.
MANAGEABLE DEBT BURDEN: The city’s overall debt is moderate per capita but above average in relation to market valuation. Long-term obligations do not pressure the budget and intermediate term capital needs are moderate. The city’s pension obligations are well-funded.
SOLID COVERAGE: Debt service coverage on the BCIC sales tax bonds remains sound. Legal provisions are adequate.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics including the city’s sound fiscal practices and strong financial flexibility which help to mitigate sales tax exposure.
CREDIT PROFILE
Brownsville is located on the north bank of the Rio Grande with a 2014 population of 181,860, representing an almost 30% increase from the 2000 census. Three international bridges adjoin the city with Matamoros, Mexico.
ADVANTAGEOUS LOCATION; MULTI-MODAL TRANSPORTATION NETWORK
Brownsville serves as the seat of Cameron County, the only port of entry from Mexico with highway, air, rail and shipping transportation modes. Directly linked to the Gulf of Mexico through a 17-mile channel, the Port of Brownsville is home to more than 230 companies performing offshore oil rig construction, ship repair and construction, rail car rehabilitation, waste oil recovery, steel and petroleum transportation services.
The maquiladora (twin-plant manufacturing) industry, employing more than 50,000 in over 100 companies, has turned Brownsville into a regional trade and distribution center for much of the valley over the past 25 years. Additionally, Brownsville continues to attract manufacturing, healthcare, professional and technology service operations that provide diversity to its traditional trade and tourism base. Unemployment has improved over the past several years but remains higher than the state and national averages at 7.1% as of March 2015, characteristic of border economies.
The tax base is diverse and without taxpayer concentration, although market value per capita remains well below average. TAV remained stable throughout the recession and more recently has increased, including growth in fiscal years 2015 (2.3%) and 2016 (2.4%). Similar growth is projected in the near term based on development underway.
A prominent aerospace company, Space Exploration Technologies (SpaceX), is building the first commercial space vehicle launch facility near Brownsville. The $100 million capital investment is expected to expand the tourism and commercial sector when launches begin (expected to open in late 2016 or early 2017). Although not directly within the city’s boundaries, SpaceX is anticipated to bring new aeronautical and engineering firms to the area, improving the city’s tax base and employment prospects.
SOUND FINANCIAL POSITION
The city benefits from diverse revenues sources. In fiscal 2014, property taxes provided 27% of the city’s operating revenues, followed by sales tax revenues (26%) and charges for services (25%).
The city regularly exceeds its fund balance policy of maintaining unrestricted general fund reserves equal to 15% of spending, which Fitch considers prudent given above-average sales tax exposure. As of July 2015 (fiscal year ending Sept. 30), the city reports the general fund has a $4.1 million surplus after transfers. By fiscal year-end, the city expects the actual surplus for 2015 to be smaller. Although fiscal 2016 is budgeted for a $709 thousand deficit, the city consistently performs better than budgeted.
HEALTHY SALES TAX COVERAGE
Maximum annual debt service (MADS) coverage on the BCIC bonds remains strong at 2.7x based on fiscal 2014 audited pledged revenues of $4.4 million. Pledged revenues have grown a solid 32% over the past 10 years, despite a recessionary dip in fiscal 2009 and 2010. The city projects modest growth going forward. Management reports BCIC sales tax revenues through the first 11 months of fiscal 2015 are up 5% year-over-year.
Other credit factors include a lack of additional leveraging plans, and an average 1.4x additional bonds test (ABT). The rating further reflects the strong linkage that sales tax performance shares with the city’s overall revenue base.
MANAGEABLE DEBT
As of fiscal 2015, Brownsville’s overall debt is moderate per capita ($2,077) but above average per market value (6.1%), without adjusting for state support of overlapping local school district debt. Annual carrying costs (sum of debt service, pension, and other post-employment benefits) are moderate at 20.4% of 2014 total governmental spending. Debt amortization is rapid with 78% repaid within 10 years.
The city plans to issue additional debt over the next four years for additional capital (totaling approximately $54.9 million) and issued combination tax and revenue certificates of obligation for capital projects.
Brownsville’s pension plan is provided through the Texas Municipal Retirement System (TMRS), with a fiscal year 2013 funded position of 84%, based on the TMRS investment rate assumption of 7%. The city provides other post-employment benefits (OPEB) to retirees in the form of health care benefits and supplemental death benefits.
Additional information is available at ‘www.fitchratings.com‘.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991521
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991521
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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