Fitch Rates Mercedes, Texas' $6.5MM COs 'A-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns its 'A-' rating to the $6.5 million combination tax and limited pledge revenue certificates of obligation (COs), series 2007 of Mercedes, Texas. In addition, Fitch affirms the 'A-' rating of the city's outstanding $14 million COs and $2.7 million general obligation bonds. The Rating Outlook is Stable.
The COs will be sold to Southwest Securities, Inc. via negotiation on or about Nov. 5. The COs constitute a direct and general obligation of the city, payable from an ad valorem tax levied against all taxable property within the city and within limits prescribed by law and are further secured by a limited pledge of the net revenues of the city's combined utility system (not to exceed $1,000). Proceeds will be used to fund various capital improvements.
The 'A-' rating reflects Mercedes' growing tax base and economy, as well as its solid general fund reserve levels. The rating also reflects the city's high debt load, low wealth levels, and high but improving area unemployment rate. Improved financial margins have been sustained over the past several years. Taxable assessed values (TAV) jumped 49% in fiscal 2008 due to completion of the first phase of a large outlet shopping mall. Similarly, sales taxes more than tripled through October 2007, compared with the same period last year, evidence of the new mall's success in attracting regional customers from the area and northern Mexico. Given the city's growing reliance on the revenue generated from the economically sensitive sales tax, maintenance of solid reserve levels is essential for the current rating category. The prospects for continued growth are favorable given the planned expansion of the outlet mall and additional retail concerns currently under construction.
Deliberate efforts to rebuild reserves to more suitable levels from minimal amounts in 1997, coupled with economic gains, have boosted the general fund balance to impressive levels. For the close of fiscal 2006, the undesignated general fund balance was $3.3 million, representing a solid 66% of expenditures. The city's tax base and sales tax was boosted in fiscal 2007with the completion of phase one of the Chelsea Premium Outlets. Unaudited results for fiscal 2007 indicate another $1.2 million will be added to the general fund reserves. The fiscal 2008 budget is balanced despite a tax rate decrease of $0.02 per $100 TAV.
The city's overall debt per capita is high even after consideration of substantial non-property tax support. A large portion of the city's general obligation 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. Payout is above average but is expected to slow with the issuance of additional debt. City officials accelerated the capital plan for general city projects as a result of the huge increase in TAV. The city plans to issue an additional $7.5 million combination tax and subordinate lien revenue COs within the next twelve months for expansion of the wastewater system. These are expected to be privately placed with the Texas Water Development Board under the Clean Water State Revolving Fund loan program.
Mercedes is located in the Rio Grande Valley, about 5 miles north of the Mexican border. Its limited economy centers on agriculture, manufacturing, and trade. Commensurate with most border communities, unemployment levels historically have been high. But unemployment within Hidalgo County, which had seen double-digit levels as recently as 2002, has steadily declined, dropping to a reasonable 6.1% for August 2007. 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 recently recruited new businesses in the retail and hospitality sectors providing additional jobs within the city.
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