TEXT - Fitch affirms Pharr, Texas rating
Dec 20 - Fitch Ratings has affirmed its 'AA-' rating on the following Pharr, Texas (the city) bonds: --$1.690 million general obligation (GO) refunding bonds, series 2011. The Rating Outlook is Stable. SECURITY The GO bonds are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation. KEY RATING DRIVERS PRUDENT FINANCIAL MANAGEMENT: The city's management has demonstrated conservative stewardship and commitment to adhere to policies, practices which have contributed to the city's prompt restoration of its sound financial position. HEALTHY RESERVES: The city's financial reserves have exceeded its 25% fund balance policy in each of the last three audited fiscal years. ABOVE AVERAGE DEBT BURDEN: The debt profile of the city is characterized by limited debt plans, balanced against an above-average overall debt burden and the potential need to refinance a large balloon payment in 2017. WEAK BUT EXPANDING ECONOMY: The city's wealth levels are very low but their growth is outpacing state and national averages as the local economy transitions from its historical agricultural roots to retail, international trade and manufacturing. CREDIT PROFILE Located four miles east of McAllen in Hidalgo County, Pharr's historically agricultural-based economy has been diversifying into retail, shipping and distribution, and light manufacturing. Local international trade activity is aided by the presence of the city-owned Pharr International Bridge into Mexico. The bridge has stimulated development within several adjacent industrial parks; however, due to increased security concerns and competition from other bridges, total bridge crossings have trended downward like most other border municipalities. IMPROVED FINANCIAL PROFILE The city underwent an overhaul of its financial management in the wake of the fiscal 2007 audit in which a new auditor deemed several general fund receivables as non-current. As a result, the city was required to offset these receivables with fund balance reservations, leading to a negative $6.4 million unreserved fund balance, equal to a large 20% of spending. Under new financial management, the city eliminated the deficit position through transfers from associated funds and enterprise systems. Improved financial monitoring, cost controls, and financial management policies enabled the city to promptly restore its financial position. The city has reported net operating surpluses in each of the last four audited fiscal years. At the close of fiscal 2011, the city's unrestricted fund balance stood at $13.9 million, or 36.3% of spending, in excess of its 25% fund balance policy. This is despite the use of nearly $7 million for non-recurring capital investment in fiscal 2011. For fiscal 2012 unaudited results point to modest use of fund balance of about $1 million due to pay-go capital investment. The 2013 budget is balanced, based on conservative growth assumptions for sales tax receipts which are currently showing strong growth over 2012 numbers. MIXED DEBT PROFILE The overall debt burden is moderate on a per capita basis at just under $2,000, but high as a percent of market value at 6%. The city has recently entered into additional tax-supported obligations aggregating to roughly $26 million for the acquisition of land and infrastructure improvements. Amortization of debt is skewed by a large $12 million balloon payment due in five years. Amortization would be average without this payment. The city reports no near-term capital needs for general purposes that would require additional debt issuance but continues to seek grant funding for certain eligible projects. The city participates in the Texas Municipal Retirement System (TMRS) for its pension plan and has a solid fiscal year 2011 funded position of 89% based on TMRS's assumed 7% investment rate of return. The city provides additional other post-employment benefits (OPEB) consisting of supplemental death insurance (also administered by TMRS with nominal annual required contributions (ARC) which have not exceeded $3,000 in any of the last three years), and retiree health insurance benefits to employees hired prior to Jan. 1, 2009. As of fiscal 2011, the plan was funded on a pay-go basis but the city reports that effective fiscal 2012, a trust fund was established to fund the estimated $4.7 million actuarially accrued liability. The city intends to fund the full OPEB ARC going forward. The city's carrying costs, including debt service, pension and OPEB contributions are considered by Fitch to be moderate at about 17% of fiscal 2011 spending after adjusting for one time capital outlays. WEAK BUT GROWING ECONOMY The city's tax base is diverse and grew by a compound annual growth rate (CAGR) of 6% between fiscals 2007 and 2012 despite the economic slowdown and with only one year of very modest decline. Some of the increase in TAV was driven by commercial investment by big box retailers expanding operations along State highway 281, which is undergoing significant expansion and is projected to continue to attract material investment into the community. The city's unemployment rate has improved but remains high, at 9% in September 2012, relative to the state and national average of 6.3% and 7.6%, respectively. However, the economy continues to expand and the overall dependence on agriculture continues to decline. Typical of many U.S.-Mexico border municipalities, the city's wealth levels are very low, with median household incomes equal to about one-half of the U.S. average. Pharr's population is estimated at 72,500 in 2011. Overall, the annual growth rate of the McAllen-Edinburg-Mission MSA outpaced the annual state and national population growth rates from the 2000 to the 2010 census.