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Fitch Rates McAllen, TX’s Ltd Tax GOs and COs ‘AA+’; Outlook Stable

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Fitch Rates McAllen, TX’s Ltd Tax GOs and COs ‘AA+’; Outlook Stable

AUSTIN, Texas–(BUSINESS WIRE)–Fitch Ratings takes the following rating action on the city of McAllen, Texas’ (the city) limited tax bonds:

–$45 million limited tax general obligation (LTGO) bonds, series 2014 rated ‘AA+’;
— $11.2 million combination tax and revenue certificates of obligation (COs), series 2014 rated ‘AA+’.

The bonds will be sold via competition on Feb. 24. Proceeds will be used to fund the construction of a performing arts facility, park and street improvements, and pay issuance costs.

Fitch also affirms its ‘AA+’ rating on outstanding limited tax COs, series 2010 and 2011.

The Rating Outlook is Stable.


All bonds are secured by an ad valorem tax levied upon all taxable property within the city. The tax rate is limited to $2.50 per $100 assessed valuation limitation.

The series 2014 COs are additionally secured by a limited pledge of the city’s hotel occupancy tax.

The series 2010 COs are additionally secured by a limited, de minims pledge of net revenues of the city’s water and sewer system.

The series 2011 COs are additionally secured by a limited, nominal pledge of net revenues of the city’s airport system.


WELL-MANAGED FINANCES, VERY STRONG RESERVES: Sound management practices have sustained the city’s strong financial profile and proactive approach to funding operations, economic development and capital needs. Operating reserves and liquidity provide a good fiscal cushion against unforeseen budget and economic stress.

DIVERSE INTERNATIONAL ECONOMY: The city is a premier commercial and industrial hub in the Rio Grande Valley along the U.S.-Mexico border. Commercial trade with Mexico, healthcare, government, and retail provide a well-diversified economic base that complements the traditional agriculture and tourism sectors.

IMPROVING BUT BELOW-AVERAGE DEMOGRAPHICS: Per capita income has increased at a rate faster than the state and nation but overall wealth indices and educational attainment measures remain below average. These concerns are somewhat tempered by the region’s low cost-of-living.

CONCENTRATION IN SALES TAX: Relatively high dependence upon economically sensitive sales tax revenues for operations is a risk, particularly when considering the large amount of retail activity generated by shoppers from Mexico. Fitch believes the city’s high fund balance and relatively low property tax rate mitigate this risk to a degree.

AFFORDABLE LONG-TERM LIABILITY BURDEN: Outstanding debt levels are moderate and carrying costs for debt service and retiree benefits are very low relative to the budget. Amortization is average and the city plans to continue utilizing its pay-as-you-go approach to capital improvements.


The rating is sensitive to shifts in the fundamental credit characteristics of the city, including its strong financial management practices and economic diversification and growth. The high rating and Stable Outlook reflect Fitch’s expectation that such shifts are unlikely.


McAllen is located in south Texas seven miles north of the Mexican border and the city of Reynosa, Tamaulipas. The city is part of the 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 of 136,507 reflects 2% average annual growth since 2000.


The city benefits 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 U.S. in the city’s foreign trade zone. The McAllen Economic Development Corporation has aggressively recruited new companies to the city under this program. However, Fitch believes there is also downside risk associated with the city’s trade dependence with Mexico, including exposure to shifts in political and economic conditions.

Strong retail and healthcare sectors in the city serve both the growing south Texas region and Mexican residents. An estimated 35% of the city’s retail purchases are attributed to shoppers from Mexico. Cross-border traffic is facilitated by two international bridges. Additionally, the city’s healthcare sector is robust and has become a destination for Mexican residents who previously traveled to Houston for services and treatment. Government, tourism and agriculture employment (centered on citrus crops) round out the local and regional economy.

The city’s employment picture is positive. Annual job growth has occurred in all but one year since 2004. The November 2013 unemployment rate stood at 6.4%, a decrease from 6.7% for the same month in 2012. The unemployment rate is above the state average (5.8%) but below the national average (6.6%).

City wealth levels are above average for the region but remain well below state and national norms. Tax base growth has been good but the per-capita market value ($63,000) is below average for the rating category. Per capita income and median household income equal only 72% and 74% of national levels, respectively. These income levels correspond with the local below-average cost of living.

Taxable value has returned to growth following a slowdown during the recession, during which taxable assessed valuation (TAV) marginally declined. TAV has increased by a 1.1% annual compounded average in the last five fiscal years (2009-2014). Prospects for continued growth are positive given the business investment occurring in the area and stability in real estate values.


The city maintains a good level of financial flexibility that is supported by its sizable reserves, low tax rate and sound policies adopted by the city council. The city has prudently maintained a high level of general fund reserves and continued to make transfers out for capital projects and some early debt retirement; these transfers have averaged 5.3% of total general fund spending since fiscal 2008.

The general fund concluded fiscal 2012 with a modest operating surplus after transfers of $2.9 million (2.9% of spending). The surplus reflects lower total spending levels due to reduced transfers out that year, as well as good performance by sales and property tax revenues. These primary general fund revenues increased by 7% and 3%, respectively. Unreserved fund balance stood at $45.8 million which represents a significant cushion equal to 45% of spending.

Fiscal 2013 preliminary unaudited results indicate a small $1.9 million deficit after transfers (2.1% of spending). Operating results before considering a $6.9 million transfer (6.4% of spending) to the capital investment fund were again positive. Unrestricted fund balance is anticipated to settle at $41.5 million or a robust 39% of spending. The city remains in compliance with its prudent fund balance policy that sets a floor for fund balance at 140 days (38%) of spending.

Management adopted a surplus fiscal 2014 budget that increases spending by 5.5%, supported by reasonable assumptions for sales tax and property tax revenue gains. Appropriations include 0.5% pay raises for fire department personnel, as dictated by a collective bargaining agreement in place, 3% pay raises for all other staff, and additional positions. There was no change in tax rates. The city expects to maintain its sizable fiscal cushion at year-end.


Operating revenues are led by sales tax collections which represented a substantial 43% of general fund revenues in fiscal 2012. Sales tax performance has been notably strong due to annual growth in retail sales, but this revenue stream was not immune to recessionary forces and declined by 7% and 2% in fiscal years 2009 and 2010. Receipts flattened in fiscal 2011 before increasing by 5% in both fiscal 2012 and fiscal 2013 (unaudited); cash-basis receipts through December show year-to-date fiscal 2014 revenues tracking very closely with last year’s trend but running slightly below budget, which may reduce the budgeted general fund surplus.

Fitch views the high degree of reliance on economically sensitive sales taxes to be a risk, particularly when considering that 35% of retail purchases are sources from Mexico, exposing this revenue stream to political dynamics between the U.S. and Mexico and currency value fluctuations. The substantial reserves and other budget flexibility, such as the relatively low property tax rate and ability to curtail pay-as-you-go capital funding, somewhat offset these concerns.


Overall debt levels are moderate at $2,768 per capita and 4.4% of market value. These ratios include the overlapping debt of several school districts and do not consider the state debt service aid provided to these generally low property-wealth districts. Amortization slows to 56% with this issuance. Future debt needs are relatively limited given the city’s ongoing pay-as-you-go capital investments from general fund resources, a hotel occupancy tax, and economic development sales tax.

Voters approved this GO authority in November 2013 and the city expects a roughly 4.5-cent tax rate increase (10%) will be necessary to service the debt. Audited fiscal 2012 debt service consumed a very low 2.7% of governmental spending. Total debt service with this issuance would increase debt service to a still low 5.6% of spending (using current spending levels).


All city employees with the exception of fire personnel participate in a joint contributory, hybrid defined benefit pension plan through the state-wide Texas Municipal Retirement System (TMRS). The city pension’s already high funded position was further increased with TMRS’ actuarial methodology changes in 2011. The city’s TMRS pension liability was 100% funded as of Dec. 31, 2012, using a 7% discount rate. Fire department personnel pension benefits are administered through a single-employer defined benefit plan that was funded at a weaker estimated 64% as of Sept. 30, 2010 (using a more conservative 7% discount rate). The city recently agreed to increase its contribution rate to this plan to 13% of payroll from 12.5% effective this year (fiscal 2014).

Other post-employment benefit (OPEB) liabilities for retiree healthcare are modest; the unfunded liability equaled 0.1% of fiscal 2012 full market value. The city has set aside funds towards the unfunded liability, which reside in a retiree healthcare fund which is not an irrevocable trust. Total carrying costs for debt service, pension ARC, and OPEB pay-go are projected to remain quite affordable with this debt issuance at about 10% of spending.

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