Fitch Rates Hidalgo County, Texas' COs 'A+'; Upgrades Outstanding

AUSTIN, Texas-(Business Wire)-January 6, 2009 - Fitch Ratings assigns an 'A+' rating to Hidalgo County, TX's $24.4 million certificates of obligation (COs), series 2009, scheduled to price the week of Jan. 12 via negotiation. Additionally, Fitch upgrades the county's outstanding debt constituting $78.7 million limited tax bonds, $30.7 million COs, and $9.2 million tax notes to 'A+' from 'A'. The Rating Outlook is Stable.

The COs are payable from a property tax levy, limited to $0.80 per $100 taxable assessed valuation (TAV), on all taxable property within the county. Additionally, the COs are payable from surplus net revenues from the county's park system.

The upgrade to 'A+' reflects the county's improved financial position, positive debt profile, solid tax base growth, and strategic border location and access to the Gulf Coast transportation network that benefits its growing international trade activity. Other credit factors include the county's low but rapidly growing wealth levels and historically above average unemployment levels. Amid steady tax base growth, the county has maintained level tax rates to help address the growing service demands of its rapidly growing population. After posting record low unemployment rates in 2007, recent increases in this indicator and a stalled housing market point to softening economic conditions. The county's future financial management should benefit from development of its first strategic plan which will incorporate multi-year financial forecasting. Additionally, a proposed change to the city's fund balance policy would further enhance its flexibility in meeting unexpected challenges. Finally, international trade activity has benefited the county's economy but also poses a source of uncertainty during the current economic downturn.

Hidalgo County, located in the southernmost region of Texas bordering Mexico, has a population of more than 775,000. McAllen (general obligation [GO] bonds rated 'AA' by Fitch), Mission, and Edinburg (GO bonds rated 'A+' by Fitch) are the largest cities in the county. The leading sectors of commerce are tourism, agribusiness, and trade with Mexico. In particular, the tourism and trade sectors have led to rapid population growth, rising approximately 48% from 1990-2000 and another estimated 36% through 2008.

Manufacturing plants are a significant factor on both sides of the U.S.-Mexico border, with a major presence of maquiladoras, or 'twin plant' manufacturers, in Reynosa, Mexico. Income levels remain significantly below those of the state and U.S., although the area's relatively low cost of living offsets some concern about wealth levels. Unemployment remains above average but declined to a record low level, totaling 6.6% in 2007, although an increase to 7.7% in October 2008 suggests that the county is entering a period of slower economic growth.

Annual growth in TAV has averaged a strong 9.7% over the last five fiscal years. While home building permits have declined notably, commercial building activity remains stable as big box retailers continue to follow the recent surge in home building. Although oil and gas mineral values comprise only 8% of total TAV, five of the top 10 tax payers are oil and gas producers.

The current offering includes $20 million in drainage improvements and is part of a larger $228 million drainage improvement project of the Hidalgo County Drainage District 1 (the district). Once the district secures voter approval for a bond authorization, the district will reimburse the county for its current offering. Under the scenario where the county continues to support the debt service on the 2009 COs, no debt service tax rate impact is anticipated under reasonable TAV growth assumptions.

Direct debt burden is low at about $235 per capita and less than 1% of TAV. Overall debt is moderate at $1,318 per capita and 4.1% of TAV, adjusting for substantial state support for school district debt. The 10-year principal pay out rate is favorable at 60%. The county's near term debt plans include about $15 million for a 400-bed expansion of the county jail. Longer term capital needs include a $35 million county courthouse replacement.

The county's financial reserves have grown steadily, posting general fund operating surpluses in four of the last five years. In 2007, the county posted a large $10 million operating surplus, increasing its unreserved fund balance to $21.6 million or 16% of spending, well above the county's fund balance policy of 7%-10%. After adopting a balanced budget for 2008, unaudited results point to a $9.6 million drawdown due mostly to Hurricane Dolly related expenditures. On July 23, 2008, Hurricane Dolly made landfall in the adjacent county as a category two hurricane. Debris removal, totaling $7.5 million, was the largest expenditure to the county, most of which is expected to be reimbursed by the federal government. Also, the county cash-funded $5 million in high-priority drainage improvements which will be subsequently reimbursed with proceeds from the current offering.

The 2009 budget is balanced despite a notable 9% increase in appropriations that will fund cost of living adjustments for county staff plus a large 11.5% pay hike for law enforcement personnel. The budget includes two new albeit modest contingency funds. In addition, an enhanced fund balance policy will soon be presented to the commissioner's court that will increase the minimum reserve from 7%-10% of spending to 10%-15%. Finally, the county will complete its first strategic plan this spring 2009 that will add multi-year financial forecasting to management's toolkit.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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