Fitch Rates Edinburg, Texas’ COs and Sales Tax Bnds ‘AA-‘; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings assigns ‘AA-‘ ratings to the following bonds for which the city of Edinburg, Texas (the city) is the obligor:
–$6.4 million combination tax and revenue certificates of obligation (COs), series 2015A;
–$3.6 million combination tax and revenue COs, series 2015B;
–$12.9 million Edinburg Economic Development Corporation (EDC) sales tax revenue refunding bonds, taxable series 2015 (Santana Manufacturing Project Refinancing).
The COs and sales tax bonds are expected to price during the week of March 9. CO proceeds will be used for various public improvements. EDC sale tax bond proceeds will be used to refund outstanding parity debt.
In addition, Fitch affirms its ‘AA-‘ rating on the city’s outstanding $34.9 million limited tax bonds and assigns its ‘AA-‘ rating to the following EDC’s outstanding sales tax revenue bonds:
–$2.1 million Edinburg EDC sales tax revenue bonds (Ebony Hills Golf Course Project), series 2013A;
–$4.6 million Edinburg EDC sales tax revenue bonds (Emergency Shelter/Recreational Facilities Project), series 2013B.
The Rating Outlook for all securities is Stable.
The COs are payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a subordinate lien on surplus revenues from the city’s waterworks and sewer system. The sales tax revenue bonds are payable from a senior lien on the Edinburg’s Economic Development Corporation’s (EDC) 1/2% sales tax levied on all transactions within the city.
KEY RATING DRIVERS
SOUND FINANCES: The city has maintained a sound financial position. Ending balances have been strong, and have increased in recent years.
MODEST TAX BASE GROWTH: Recessionary TAV losses were minimal but tax base gains have been modest in recent years. Certain large projects underway will not increase taxable values because of their public purpose but Fitch expects that substantial private investments will follow.
SALES TAX LIEN CLOSED: Coverage of the EDC’s sales tax revenue bonds is ample and the lien is closed with this offering. Sales tax revenue growth has been strong and the solid coverage margins allow for substantial revenue volatility.
SALES TAX BOND RATING CAPPED: Per Fitch criteria, the sales tax revenue bond rating is capped at the level of the city’s general credit quality, which is reflected in the CO rating.
STABLE ECONOMY DESPITE BELOW-AVERAGE WEALTH AND INCOME INDICATORS: The city’s wealth and income indicators are below average but growing rapidly due to the ongoing diversification of the employment base. Unemployment continues to trend downward and the city is poised to benefit from several major economic development projects that are currently in process.
MIXED DEBT PROFILE: Overall debt levels are high relative to market value and will rise further with debt issuance for a multi-use arena. Debt amortization of general obligation debt is rapid and future debt plans are manageable. Overall debt service, pension, and other post-employment benefit (OPEB) costs are manageable but will rise moderately with debt issued to construct a minor league basketball arena.
SHIFT IN FUNDAMENTALS: The rating is sensitive to material changes in fundamental credit characteristics, including the city’s strong financial management practices. The city’s history of reserve adequacy and sound financial management practices indicates expected rating stability.
Edinburg, with an estimated 2015 population of about 85,600, is the county seat of Hidalgo County. The city is 20 miles from the Texas-Mexico border in the Rio Grande Valley.
SOUND FINANCES MAINTAIN STRONG RESERVE BALANCES
The city has historically maintained strong financial reserves, with general fund ending balances typically exceeding the city’s 25% fund balance policy. General fund revenues are led by property taxes (40% of total) and sales taxes (30%). Since fiscal 2010, the city has transferred a modest $1.5 million (3% of spending) from the solid waste fund into the general fund as a means of bolstering revenue and limiting the need for increased property taxes. Management indicates that these annual transfers are planned for the foreseeable future.
The fiscal 2013 audit posted a modest $843,000 (2% of spending) net surplus, increasing the unrestricted fund balance to $14.6 million or a strong 34.6% of spending. Unaudited fiscal 2014 results point to an 11% surge in sales tax revenues. However, this revenue gain was offset by a 10% increase in public safety, the city’s largest expenditure, attributed to the addition of 12 police officers, six firefighters, and the purchase of a tanker truck. Aided by the transfer of $1 million (2.2% of spending) in accumulated balances from the city’s health insurance fund, the unrestricted fund balance grew by a modest $408,000 (0.9% of spending), totaling $15 million or 32.4% of spending. The fiscal 2014 audit would have posted a net deficit of $592,000 (1.3% of spending) without the one-time transfer from the health insurance fund.
Fiscal 2015 appropriations represent a large 7.3% increase over fiscal 2014 budget levels. Compared to unaudited fiscal 2014 actual, the budget increase is more modest at 1.1% due to the hike in spending enabled by fiscal 2014’s sales tax surge. The budget funds 27 new positions (a 5.5% increase over fiscal 2014 actual levels), a 3% pay hike for non-civil service employees, and a 2% pay hike for police department civil service employees. Pay-go capital outlays of $1.6 million (3.4% of spending) are also funded.
The budget assumes moderate sales tax revenue growth of 3.7% from actual but unaudited fiscal 2014 revenues but also includes a $2.3 million (4.9% of spending) transfer into the general fund from the capital projects fund. The transfer returns funds for projects initially funded by the general fund that have since been cancelled or that will be funded with bond proceeds. Sales tax revenue for the first three months of the fiscal year is on track with budgeted projections.
EDC DEBT SERVICE COVERAGE IS AMPLE
Voters approved a permanent ?% sales tax in 1990 for use by the city’s EDC for the promotion of economic development, entertainment, and other activities. The current sales tax bond offering will refund two EDC loans that are on parity with outstanding sales tax revenue bonds. The refunding bonds will restructure an upcoming balloon payment and will include a cash-funded standard debt service reserve fund (DSRF). The senior lien will be closed except for refunding. Coverage of maximum annual debt service (MADS) is ample at 3.1x based on actual fiscal 2014 revenues, enabling debt service to weather considerable revenue volatility. The EDC’s ?% sales tax revenues have grown by a large compound average growth rate (CAGR) of 7% over the last 10 years.
ECONOMIC STABILITY DESPITE BELOW-AVERAGE WEALTH AND INCOME
Because of its position near the Mexican border along a major transportation route, Edinburg serves as a distribution center, benefiting from the trade generated by cross-border manufacturing activity as well as the agricultural production in the region. Retail trade, government, education and health services are all major components of the area economy.
The city’s economy has remained stable despite strong population growth and weak wealth and income indicators. The average 2014 unemployment rate was 6.2%, down from 7.4% a year prior. While on par with the nation’s unemployment rate, it is above the state’s rate (5.2%). Employment levels saw consistent annual increases throughout 2014. Per capita money income is low at 66% and 61% of state and national levels, respectively, but is growing at a rapid 2.6% CAGR. The city’s poverty rate is high at about 26% as compared to 18% for the state and 15% for the nation but has declined modestly from 2010 levels.
Edinburg’s tax base is fairly diverse with a mix of power plants, healthcare, retail, and manufacturing among its top 10 taxpayers which account for less than 9% of total taxable assessed valuation (TAV). Recessionary TAV losses were limited to a modest 1.7% decline in fiscal 2011. TAV increased in fiscal 2015 by almost 5% due to stable commercial growth and the annexation of 2,200 acres after posting modest 2% – 3% gains in recent years.
Further economic expansion is expected in the near term related to $150 million in projects underway at the newly designated University of Texas – Rio Grande Valley, including the region’s first medical school, and a $200 million expansion of the local hospital. Planned projects include a $650 million power plant and an upscale retail, entertainment, and hotel complex.
MIXED DEBT PROFILE
Overall debt levels relative to market values are high and will rise further to 6.7% with the concurrent issuance of $38 million of debt issued by the Edinburg Local Government Finance Corporation (LGFC) for a new entertainment center. Principal amortization of the city’s general obligation debt is rapid with 76% repaid in 10 years. The aggregate debt pay- out rate, including EDC sales tax and LGFC debt, is about average with 47% repaid in 10 years. The 2014-2018 CIP is large at $215 million but will be funded mostly by federal, state, and utility system funds. Less than 5% will be funded with tax-supported debt, including the current offering, and no tax rate impact is anticipated based on modest TAV growth, which Fitch considers reasonable.
The city provides pension as well as disability and death benefits through the Texas Municipal Retirement System (TMRS). Full funding of the pension required contribution was phased in and reached 100% in fiscal 2014. The phase-in was permitted due to retirement system restructuring in 2007. The funded level as of Dec. 31, 2012 was 74%. In addition, the city provides OPEB benefits to retirees up to age 65 in the form of group health insurance coverage. Overall debt service, pension, and OPEB costs are manageable at 18% of 2013 expenditures.
Additional information is available at ‘www.fitchratings.com‘.
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, and National Association of Realtors.
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
U.S. Local Government Tax-Supported Rating Criteria
Jose Acosta, +1-512-215-3726
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX, 78701
Shane Sellstrom, +1-512-215-3726
Amy Laskey, +1-212-908-0568
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York