Fitch Rates Del Rio, Texas' Tax and Revenue COs 'A'; Affirms Outstanding.

AUSTIN, Texas -- Fitch Ratings assigns a rating of 'A' to Del Rio, Texas' approximately $8.7 million combination tax and revenue certificates of obligation (COs), series 2006. Fitch also affirms the 'A' rating on the city's outstanding $44.3 million combination tax and revenue COs, $15.4 million combination tax and revenue refunding bonds, $6.8 million unlimited tax general obligation refunding bonds, and $1.9 million in international toll bridge system and tax and subordinate revenue refunding bonds. The Rating Outlook is Stable.

The certificates are scheduled for a negotiated sale on September 12, 2006 via a syndicate led by Southwest Securities. Certificates are secured by a pledge of ad valorem taxes levied annually within the limits prescribed by law against all taxable property and further 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 city's rating of 'A' is based on its sound financial management, improved financial position, diverse revenue stream, and 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, a large part is expected to be fully self-supporting from enterprise systems, primarily the bridge and the water and sewer funds. 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.

The current financial management team has successfully restored the city's financial position from depleted reserve levels recorded in fiscal 1998. In order to restore the general fund balance to more appropriate levels, the then new management team implemented improved expenditure controls and tighter financial monitoring, as well as increasing bridge tolls, which enabled larger general fund transfers. As a result, significant reserve levels and ample liquidity levels were achieved even enabling the city to fund some capital outlays with available reserves. In fiscal 2005, the general fund balance stood at nearly $8 million, representing about 44% of expenditures and transfers out despite a sizeable $1.1 million in planned capital outlays. Although management has designated a significant portion of the total fund balance, it is conservatively primarily reserved for street drainage and bridge reserves. Liquidity position remains strong, with fiscal 2005 cash and cash equivalents accounting for five months of operating expenses and transfers out. One month short of ending fiscal 2006, management anticipates a modest $600,000 drawdown associated with the purchase of capital equipment. The fiscal 2007 proposed budget is balanced.

Financial operations benefit from the general stability in the city's major operating revenues. Sales taxes, which account for 25% of operating revenues (including transfers in), continues to post favorable growth, averaging about 4% annually over the past five years. Property tax receipts account for about 20% of revenues and gains reflect steady increases in assessed valuation, which has averaged nearly 7% annually over the last five years. Preliminary taxable value information for fiscal 2007 points to an 8.4% increase. Bridge transfers represent 20% of general fund operating revenues in fiscal 2005 (down from 25% in fiscal 2003) and collections have been essentially flat at approximately $3.5 million. However, the city has recently increased vehicle crossing tolls by 25% to support a large part of this issuance.

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 rate is above average at 72% debt retirement in 10 years.

Del Rio's recent multi-year CIP is substantial, totaling about $44 million from 2007-2011. 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 2007.

Located along the Texas-Mexico border, Del Rio is approximately 150 miles west of San Antonio, TX. Population growth has been modest, increasing 6% since 2000 to about 36,000 in 2005. 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 56 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. The city's most recent monthly unemployment rate was 6.4%.

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