Fitch Ratings assigns an 'AA+' rating to the following McAllen, Texas' limited tax obligations:
--$30 million combination tax and revenue certificates of obligation (COs), series 2010;
--$3.5 million outstanding tax notes, series 2006.
The COs are expected to sell via negotiation on May 6, 2010.
The Rating Outlook is Stable.
RATING RATIONALE:
--The city's sound financial management practices and policies have enabled it to maintain solid fund balance reserves, while investing heavily in pay-as-you-go capital improvements.
--Dependence upon economically sensitive sales tax revenues, particularly from the retail sector, including the activity generated by shoppers from Mexico, is substantially mitigated by strong fund balances and a relatively low property tax rate.
--Direct tax supported debt is minimal and future borrowing needs are modest as the city has historically relied on capital reserves for maintenance and acquisition of capital assets.
--Commercial trade with Mexico and health care are sectors both locally and within the region that have grown to diversify the historically agricultural and tourism-based economy.
KEY RATING DRIVER:
--Given the challenges of the current economic environment, continued adherence to conservative practices and policies is essential for the city to maintain its historically strong financial profile consistent with the current strong credit quality.
SECURITY:
The COs are secured by an ad valorem tax levied upon all taxable property within the city, subject to a $2.50 per $100 assessed valuation limitation and are further secured by a limited pledge of surplus revenue of the city's waterworks and sewer system.
CREDIT SUMMARY:
McAllen, with an estimated population of 130,000, is located in Hidalgo County, approximately 230 miles south of San Antonio, and seven miles north of the Mexican border and the city of Reynosa, Tamaulipas. McAllen is part of a rapidly growing metropolitan statistical area that includes Edinburg and Mission, Texas, as well as populous neighbors to the south of the border; the estimated population for Reynosa is 530,000.
The city has benefited from trade with Mexico, especially the maquiladora program where manufacturing and assembly occurs in plants located in Reynosa and warehouse and distribution is handled in the United States. The McAllen Economic Development Corporation has brought 262 companies and nearly 19,000 jobs to the city since 1988, benefiting Reynosa as well, with the placement of 345 companies and 83,000 jobs in the neighboring city. In addition to commercial trade, retail and health care companies in the city serve both the growing south Texas region, as well as Mexican residents. An estimated 40% of retail sales in the city are attributed to shoppers from Mexico.
Additionally, the growing health care sector of the local economy is becoming a destination for Mexican residents that previously traveled to Houston for services and treatment. The government, tourism, and agriculture components round out the local economy. The region, or Rio Grande Valley, has long been recognized as a citrus crop producer. However, the agriculture sector has dipped in prominence as trade has emerged with the introduction of the North American Free Trade Agreement. Also, the region is the winter home to many tourists, or winter Texans, that travel to enjoy the relative warmth and attractions of south Texas.
Historically, unemployment in the region has registered in the double digits, in part due to the traditional agriculture labor force environment. However, over the last decade, unemployment rates have declined to 7.8% as recorded for February 2010, compared with 10.6% in 1999. Although recent data reflects a slow down in the economy (unemployment rate rose from 6.4% in February 2009), the city has fared relatively well through the national economic recession. Despite a year-over-year increase in the unemployment rate, McAllen actually posted job gains of 2.8% from February 2009 to 2010, compared with 2.1% losses nationally. Wealth levels remain below average, with the median household income for 2008 at 78% and 73% of state and national levels, respectively. However, these income levels correspond with the local below-average cost of living.
The city's finances are a significant credit strength, with sizeable reserves and sound policies adopted by the city commission. Reflective of its financial flexibility is the city's ability to maintain solid financial reserves while transferring a total $58 million to the capital improvement fund over the last five fiscal years. Fiscal 2009 ended with a modest deficit of $2 million in the general fund, which was attributed to capital outlays. The unreserved, undesignated general fund balance was $44.2 million, or 41.6% of expenditures, well in excess of the 140 days of expenditures, or 38% minimum fund balance required by policy. For fiscal 2010, despite revenue shortfalls, the city anticipates maintaining level general fund reserves.
General fund revenues are led by sales tax collections which represented a substantial 45% of all general fund revenues for fiscal 2009. Having experienced annual growth in retail sales since 1995, fiscal 2009 sales tax receipts declined by 7% from the prior year. The inherent volatility of this source, further exacerbated by the city's concentration in retail, the dynamics of cross-border shoppers, potential currency fluctuations, and immigration issues, is considered a risk. The substantial reserves and other revenue flexibility, such as the relatively low property tax rate and pay-as-you-go capital funding, somewhat offset these concerns.
Direct tax-supported debt is minimal with only $3.5 million in tax notes outstanding prior to this sale. Amortization is very rapid and the current issuance is structured to fully mature in ten years. The city typically calls bonds early and has current plans to call these bonds in five years. Future needs are relatively limited given the city's ongoing pay-as-you-go capital investments. The city has called a bond election on May 8, 2010 for $35 million in park projects; the bonds will be sold within the next 12 months if approved by voters. Tax base valuation has grown at a healthy rate, averaging 7.8% annually for the past five years, but growth has recently slowed and is anticipated to be only 1% in fiscal 2011.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
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