OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following bonds of McAllen, Texas (the city):

--\$14.965 million general obligation (GO) refunding bonds, series 2015.

The bonds will be sold competitively on January 26. Proceeds will be used to refund a portion of the city's outstanding debt for interest cost savings.

In addition, Fitch affirms its ratings on the following outstanding GO bonds and certificates of obligation (COs):

--\$42.38 million GO bonds at 'AA+';
--\$40.835 million COs at 'AA+'.

The Rating Outlook is Stable.

SECURITY
All bonds are payable from an ad valorem tax levied upon all taxable property within the city. The tax rate is limited to \$2.50 per \$100 assessed valuation.

The series 2014 COs are additionally payable from a limited pledge of the city's hotel occupancy tax.

The series 2010 COs are additionally payable from a limited, de minimis pledge of net revenues of the city's water and sewer system.

The series 2011 COs are additionally payable from a limited, nominal pledge of net revenues of the city's airport system.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: 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 major commercial and industrial hub in the Rio Grande Valley along the U.S.-Mexico border. Commercial trade with Mexico, healthcare, government, and retail comprise a well-diversified economic base that complements the traditional agriculture and tourism sectors.

IMPROVING BUT BELOW-AVERAGE DEMOGRAPHICS: Growth in per capita income has outpaced the state and U.S. but overall wealth indices and educational attainment remain below average. These concerns are somewhat tempered by the region's low cost of living.

SALES TAX CONCENTRATION: General operations are highly dependent upon economically sensitive sales tax revenue, particularly considering the large amount of retail generated by international shoppers. Fitch believes that this risk is mitigated somewhat by the city's high fund balance and relatively low property tax rate.

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. The debt amortization rate is average and the city plans to continue using its pay-as-you-go approach to capital improvements.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: 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.

CREDIT PROFILE
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, as well as populous neighbors to the south of the border. The estimated population of 136,639 reflects 2% average annual growth since 2000.

TRADE WITH MEXICO IMPORTANT; ECONOMIC DIVERSIFICATION CONTINUES
The city benefits from trade with Mexico, especially through the maquiladora program where manufacturing and assembly occurs in plants located in Reynosa and warehouse and distribution is handled 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 on Mexico, including exposure to shifts in political and economic conditions.

Strong retail and healthcare sectors in McAllen 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 (centered on citrus crops) sectors round out the local and regional employment base.

The city's employment picture is positive, reflecting annual job growth in all but one year since 2004. The October 2014 unemployment rate was 5.3%, down from 6.8% the previous year. This rate is above the state unemployment rate (4.8%) but just below the U.S. average (5.5%).

Wealth levels are above average for the Rio Grande Valley region, but remain below state and national norms. Tax base growth has been positive but the per-capita market value (\$64,000) is below average for the rating category. Per capita income and median household income equal only 74% and 78% of national averages, respectively. These income levels correspond with the below-average local cost of living.

Tax base growth has resumed following a slowdown during the recession, during which taxable assessed valuation (TAV) marginally declined. TAV has increased by 1.4% compound annual growth in the last five fiscal years (2010-2015). Prospects for continued growth are positive and reflect ongoing and planned development in the hotel, retail, restaurant, and single-family residential sectors.

STRONG FINANCIAL MANAGEMENT EVIDENT IN FINANCIAL PROFILE
McAllen maintains a high 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 its sound general fund reserves and continued to make transfers out for capital projects and some early debt retirement; these transfers have averaged nearly 5% of total general fund spending since fiscal 2008.

The general fund concluded fiscal 2013 with a small deficit of \$1.9 million after transfers (1.8% of spending). Operating results were positive before considering a \$6.9 million transfer (6.5% of spending) to the capital improvements fund. Unrestricted fund balance at year-end was \$41.8 million, which represented a significant cushion equal to 39% of spending.

Fiscal 2014 preliminary unaudited results point to essentially balanced results after transfers. Operating results before considering a \$1.2 million transfer (1.1% of spending) to the capital improvements fund were again positive. Unrestricted fund balance is projected to settle at \$41.3 million (39% of spending). The city remains in compliance with its prudent fund balance policy that sets a floor for fund balance at 140 days (39%) of spending.

The city adopted a surplus budget for fiscal 2015 that assumes a modest increase in spending over the previous year, supported by reasonable assumptions for sales tax and property tax revenue gains. Officials report strong year-to-date revenue performance, particularly in sales tax. Management expects to maintain its sizable fiscal cushion at year-end.

HIGH SALES TAX DEPENDENCY MITIGATED BY SUBSTANTIAL RESERVES
Operating revenues are led by sales tax collections, which represented a substantial 48% of general fund revenues in fiscal 2013. Sales tax performance has been notably strong due to annual growth in retail sales, but this revenue stream is not immune to recessionary forces and declined by 7% and 2% in fiscals 2009 and 2010, respectively. Receipts flattened in fiscal 2014 following two years of strong growth, but year-to-date results for fiscal 2015 exceed budgeted projections, supporting management's expectations for a year-end 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 by Mexican shoppers. This trend exposes the sales tax revenue stream to political dynamics between the U.S. and Mexico and currency fluctuations. These concerns are offset somewhat by the city's substantial reserves, relatively low property tax rate, and ability to curb capital spending, all of which provide budget flexibility.

AFFORDABLE DEBT BURDEN
The city's overall debt level is moderate at \$2,763 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. The rate of amortization is average with 54% of principal retired in 10 years. Future debt needs are limited, given the city's ongoing cash funding of capital investments from general fund resources, a hotel occupancy tax, and an economic development sales tax.

The city's 2013 GO bond projects were accompanied by a tax rate increase of 4.5 cents (10%) per \$100 of TAV to service the debt. Debt service consumed a very low 2.8% of governmental fund spending in fiscal 2013. Inclusive of the current offering, debt service will increase to a still-modest 5.2% of spending (using current spending levels).

WELL-FUNDED LEGACY BENEFITS
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 maintains a high funded position of 100% 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 60% as of Sept. 30, 2012 (using a 7% discount rate). The city recently agreed to increase its contribution rate to this plan to 13% from 12.5% of pay effective in fiscal 2014.

Other postemployment benefit (OPEB) liabilities for retiree healthcare are modest; the unfunded liability equaled 0.1% of fiscal 2013 full market value. The city has set aside funds toward the unfunded liability, which reside in a retiree healthcare fund that 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 issuance at about 10% of fiscal 2013 spending.