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Fitch Rates Harlingen, Texas's GO Bonds 'A+'.

AUSTIN, Texas -- Fitch assigns its 'A+' rating to Harlingen, TX's (the city) $2.75 million general obligation (GO) bonds, series 2006, which are scheduled to sell via negotiation to Estrada Hinojosa & Company, Inc. on May 1. In addition, Fitch affirms its 'A+' rating on the city's outstanding debt comprised of $13.2 million GO bonds and $3.6 million combination tax and revenue certificates of obligation. The bonds are direct obligations of the city, payable from a continuing ad valorem tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV). The Rating Outlook is Stable.

The 'A+' rating reflects the city's very stable financial performance, low debt burden, rapid debt amortization, and diverse and growing tax base. Although city general fund revenues are heavily weighted toward sales tax revenues, financial reserves have exhibited ongoing resiliency in the face of recent sluggish sales tax growth, aided by expenditure controls and growing taxable values. Contraction in the cross-border maquiladoras was substantial during the recession but employment levels are reportedly stabilizing with the recent return of some manufacturing activity.

Harlingen is located between McAllen and Brownsville at the strategic intersection of U.S. Highways 83 and 77 in Cameron County. The city's population is currently estimated at over 63,000, an 11% increase from the 2000 census. Given its 9 mile proximity to the Mexican border and access to the area's extensive transportation network, international trade and manufacturing is an important component of the city's economy, along with recreational and nature tourism that attract a large number of 'winter Texans' from the northern U.S. during the winter months. The city's wealth levels and unemployment rates compare favorably to other Mexican border municipalities, although they still lag moderately behind state and national averages. Sensitivity to the Mexican economy is comparable to those of other Mexican-border communities.

Including the current offering, the city's positive debt profile is characterized by a low direct debt burden of a little over $300 per capita and less than 1% of TAV. Principal pay out is very rapid at 72% in ten years. Overall debt burden is also low to moderate at under $1,000 per capita and less than 3% of TAV after adjusting for state support of local school district debt. City voters approved three bond propositions in September 2003, totaling nearly $22 million. After this issuance, the city will have over $11 million remaining GO authorization and will possibly use certificates of obligation for additional capital improvement projects. The city's obligations will be structured to maintain a flat debt service tax rate.

Although the tax base growth rate has slowed during the last two fiscal years, the City reports recent gains in construction permit values. Based on fiscal 2006's TAV of over $2 billion, taxable values per capita are above average for South Texas municipalities at nearly $34,000. The city's top ten tax payers comprise a moderate 9% of total assessed valuation, led by a hospital and an aviation aerospace manufacturer at over 1% each. At about 35% built-out, considerable land remains available for development. Despite the loss of Fruit of the Loom in December 2003, a major taxpayer, employer, and water customer, tax base growth has increased by a compound annual average of 7.5% since fiscal 1998. The city's airport, Valley International Airport, leads the area in market share for enplanements (53%) and is an important asset in the city's economic development efforts. Lockheed Martin, a rocket parts manufacturer, is located adjacent to both the airport and Texas State Technical Institute which has cooperative agreements with this and other manufacturers to provide start-up training programs.

While sales taxes, the city's largest revenue source has experienced sluggish growth in recent years, the city's general fund has demonstrated notable stability in maintaining reserves of over 20% of expenditures since fiscal 1999, close to its goal of 90 days operating expenditures or 25%. At 45% of general fund revenues in fiscal 2005, sales taxes are followed by property taxes (32%) as the next largest revenue source. Sales taxes remained flat in fiscal years 2001-2003 before growing again by 6% in fiscal year 2004. Sales tax revenue growth of over 3% in fiscal 2005 was attributable to a new shopping center, a new manufacturer with a large volume of retail sales, and an annexation with existing retail activity. Additionally, in an effort to further increase sales tax revenue, the city has contracted with a Dallas based consultant for economic incentives and redevelopment recommendations. Over the last 20 years, sales taxes declined in only two years, aided by the city's location and reliance on non-cross border shoppers who are less susceptible to Mexican peso devaluations.

The city's solid financial performance is expected to continue and perhaps improve given the new administration's recent efforts to ensure the full cost recovery of services provided by the city, improve internal control measures, and establish dedicated revenue sources for pay-as-you-go capital outlays. Annual transfers to the general fund from the sanitation fund have also been decreased in the fiscal 2005 budget, lowering its reliance on subsidies and allowing the sanitation fund to retain more of its own revenues for operational purposes.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Apr 27, 2006
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