AUSTIN, Texas–(BUSINESS WIRE–
Fitch Ratings takes the following rating action on Mercedes, Texas as
part of its continuous surveillance effort:
–$3.4 million limited tax refunding bonds, series 2010 affirmed at ‘A+’;
–$10.9 million combination tax and limited pledge revenue certificates
of obligations, series 2004A, 2004B, 2006, 2006A, and 2007 affirmed at
‘A+’.
The Rating Outlook is Stable.
SECURITY
Outstanding GO bonds and COs are both secured by a property tax limited
to $2.50 per $100 of taxable value. The outstanding COs are further
secured by a limited pledge of net revenues of the water and wastewater
utility system.
KEY RATING DRIVERS
SOLID FINANCIAL RESERVES: The city continues to record solid fund
balance reserve levels despite budgetary pressures related to the
economic slowdown. The unreserved general fund balance has ranged from
44% to 73% over the last five audited fiscal years.
SALES TAX DEPENDENCE: Sales taxes comprise over 50% of general fund
revenues. This revenue source rapidly increased with the completion of a
140 store outlet mall that attracts shoppers from both sides of the
border. Credit concerns regarding the city’s dependence on such
economically sensitive revenue source are somewhat tempered by the
city’s solid fund balance reserve levels.
HIGH DEBT BURDEN: The city’s overall debt levels are very high at 13% of
taxable assessed valuation (TAV, reflective of the city’s limited tax
base. Overall debt per capita is more moderate, at nearly $4,600. Future
tax supported borrowing plans are limited and amortization is above
average with nearly 60% or principal maturing within 10 years.
WEAK ECONOMIC INDICATORS: The county’s socioeconomic indicators remain
well below-average but have improved somewhat over the last five years,
aided by growth in the retail, international trade, healthcare, and
higher education sectors.
LIMITED TAX BASE: The city’s tax base remains limited despite
substantial TAV growth resulting from the recent completion of the
outlet mall. The top 10 taxpayers comprise a concentrated 21% of the
total TAV with the outlet mall alone accounting for 13%. Prospects for
growth are positive, given the area’s rapid population growth and
ongoing road infrastructure improvements.
CREDIT PROFILE
Mercedes is located in the Rio Grande Valley, about five miles north of
the Mexican border. Although the region is among the fastest growing in
the country, Mercedes’ own population had, until recently, experienced
only modest growth. However, the 2010 census count of 15,570 is up 14%
since the 2000 census. Commensurate with most border communities,
unemployment levels historically have been somewhat high, as evidenced
by the September 2011 rate of 12.3%, up from 11.6% a year ago and well
above the rates of the state (8.4% and nation (8.8%. Wealth levels,
also typical of the region, are very low, with county personal per
capita income at about 50% of the state and national average.
The city, through its economic development efforts, has recruited new
businesses to the area, providing additional jobs. In particular, the
city was able to attract a large outlet mall, with phases 1, 2, and a
portion of 3 already completed. The city estimates that between 1,200
and 1,300 full and part-time jobs have been created by the new mall. The
city’s relatively small tax base recorded sizable gains averaging 24%
annually from 2006 to 2009, reflecting the new mall project and
attendant development as well as housing construction. The tax base has
been essentially flat (less than 1% decline over the last two fiscal
years, and Fitch believes it will remain relatively flat over the next
few years. However, prospects for long-term growth are favorable given
the city’s location within the growing McAllen-Edinburg-Mission MSA and
ongoing regional road infrastructure investment. While there is some tax
base concentration due to the presence of the outlet mall (representing
13.3% of taxable value, the remaining top 10 taxpayers represent a good
industry mix.
The city has maintained sizable general fund balance reserves over the
last five fiscal years. At the close of fiscal 2010, the undesignated
general fund balance was approximately $5.7 million, representing a
solid 49.8% of expenditures and transfers out, well above the city’s
informal policy of maintaining four months of operations in reserve.
Financial performance was enhanced by economic expansion, boosting
collections of both property and sales taxes, the major sources of
operating support.
Sales taxes represent the largest share of operating support (over 50%
of general fund expenditures and continue to record strong annual
gains, albeit at a more moderated pace. In addition, given the
importance of the outlet mall and sales taxes to city operations,
management has taken precautionary measures by obtaining an insurance
policy guaranteeing one-year sales taxes in the event of business
interruption at the mall.
While general fund expenditure growth has also been strong, much of the
increase in the past was related to improving compensation and benefits
for employees, with only a small number of new positions added. For
fiscal 2011, officials anticipate a $700,000 drawdown on reserves for
planned capital outlays that will bring fund balance reserves to still
solid levels exceeding about 45% of fiscal 2010 spending.
Overall debt per capita is high even after consideration of substantial
non-property tax support primarily due to the relatively small size of
the city’s tax base as well as large issuances by the local school
district. A large portion of the city’s GO debt is funded from a
combination of enterprise system revenues, sales taxes from the city’s
economic development corporation, and under a special agreement with the
U.S. Department of Housing and Urban Development, Community Development
Block Grant Funds. Principal payout is above average. The city was
successful in obtaining sufficient funding, including $6 million in
stimulus funds, for the expansion of its wastewater treatment plant.
Additional borrowing may be required due to infrastructure improvements
associated with continued economic expansion.
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 informed by information from
Credit Scope and Texas Municipal Advisory Council.
Applicable Criteria and Related Research:
–’Tax Supported Rating Criteria’, dated Aug. 15, 2011 ;
–’U.S. Local Government Tax Supported Rating Criteria’, dated Aug. 15,
2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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Fitch RatingsPrimary AnalystGabriela Gutierrez, +1-512-215-3731DirectorFitch, Inc111 N. Congress Avenue, Suite 2010Austin, Texas 78701orSecondary AnalystRebecca Moses, +1-512-215-3739DirectororCommittee ChairpersonChristopher Hessenthaler, +1-212-908-0773Senior DirectororMedia Relations:Sandro Scenga, +1-212-908-0278Email: sandro.scenga@fitchratings.
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