Fitch Rates Del Rio, TX's GO Bonds and COs 'A'.

AUSTIN, Texas -- Del Rio, TX's $6.8 million unlimited tax general obligation bonds, series 2005, and $6 million combination tax and revenue certificates of obligation (COs), series 2005, are both rated 'A' by Fitch Ratings. The bonds and COs are scheduled for a negotiated sale on August 8 via a syndicate led by A. G. Edwards & Sons. In addition, Fitch affirms the 'A' rating on the city's outstanding $38.3 million combination tax and revenue COs, $1.9 million in international toll bridge system and tax and subordinate revenue refunding bonds, and $15.4 million in outstanding combination tax and revenue refunding bonds. The Rating Outlook is Stable.

The bonds and COs are secured by a pledge of ad valorem taxes levied annually within the limits prescribed by law against all taxable property. In addition, the COs are secured and payable from a limited pledge (not to exceed $1,000) of surplus net waterworks and sewer system revenues (after the payment of revenue bonds). The state constitution and city charter limit ad valorem taxes for general and debt service purposes to $2.50 per $100 of assessed valuation. The state attorney general's administrative policy prohibits debt service requirements exceeding $1.50 calculated at a 90% property tax collection rate.

The 'A' rating is based on the continued strengthening of the city's financial position, diverse revenue stream, and its moderate effective debt profile. The rating also incorporates the city's limited but growing tax base, moderate overall tax rate, as well as its measured capital improvement plan (CIP). The CIP is expected to be entirely debt financed; however, the vast majority of the CIP is expected to be fully self-supporting from enterprise systems, primarily the water and sewer fund. Bridge transfers and sales taxes represent the city's largest sources of operating revenues, which creates some vulnerability to economic cycles; however, maintenance of sizable reserves helps mitigate this concern.

Financial performance is solid, evidenced by the maintenance of significant reserves and ample liquidity levels. For fiscal 2004, the general fund balance stood at $8.2 million, representing about 53% of expenditures and transfers out. In addition, most of the general fund reserve is undesignated, adding to financial flexibility. Liquidity position is also strong, with fiscal 2004 cash and cash equivalents accounting for six months of operating expenses and transfers out. The fiscal 2005 budget calls for about an $800,000 drawdown associated with the purchase of capital equipment; officials anticipate a more modest drawdown due to conservative budgeting practices.

The current financial management team has been successful in restoring the city's fiscal integrity. After essentially depleting financial reserves in fiscal 1998, a then new management implemented various measures to restore the general fund balance to more appropriate levels. These measures included a combination of improved expenditure controls and tighter financial monitoring, as well as increasing bridge tolls, which enabled larger general fund transfers.

Financial operations have been aided by general stability in the city's major operating revenues. Sales taxes, which account for 26% of operating revenues (including transfers in), recorded favorable growth, averaging over 4.6% annually over the past five years. Bridge transfers represented 22% of general fund operating revenues in fiscal 2004, down from 25% from the prior year, and have been essentially flat at approximately $3.5 million. Property tax receipts account for about 19% of revenues and continue to grow, reflecting steady gains in assessed valuation, which has averaged nearly 7% annually over the last five years. Preliminary taxable value information points to a 6.5% gain for the coming year.

While the city has issued a sizable amount of debt, effective debt ratios are relatively modest, benefiting from substantial self-support from enterprise systems. Overlapping debt ratios are moderate, especially after adjusting for significant state support for debt for area's school district. Payout is above average.

Del Rio's recent multi-year CIP is substantial, totaling about $46 million from 2006-2009. The city currently plans to finance the CIP primarily with debt, while pursuing grants and other sources. The tax impact is expected to be minimal, since most of the CIP is expected to be self-supporting from non-property tax revenues. The next borrowing planned is in 2006.

Located along the Texas-Mexico border, Del Rio is approximately 150 miles west of San Antonio, TX. Population growth has been modest, increasing 12% since 1990 to about 35,000 in 2004. Ciudad Acuna, on the Mexican side of the Rio Grande River, had an estimated population of 150,000. The city's economy is based on maquiladora (twin-plant) manufacturing, government-sector employment, and tourism. Aided by the city's official port of entry, about 40 such plants are located in Acuna. There is some employment concentration with Laughlin Air Force Base, located five miles east of the city. Laughlin serves as the largest pilot training installation in the world and is expected to benefit from additional jobs as a result of the recent base alignment and closure list. Lake Amistad, a 127-mile-long reservoir on the Rio Grande River, serves as a major tourist attraction. Similar to other Texas-Mexico border communities, per capita incomes are low in comparison to the statewide average, but higher than other border communities. City unemployment is materially lower than historical highs but remains above the state and nation; most recently available monthly rates point to 6.9%.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.