Edinburg’s Bond Rating Remains Strong
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The City of Edinburg’s bond ratings remain strong and have shown improvement over the last few years.
Andre Ayala, managing director with Hilltop Securities, the city’s financial advisors, spoke to the Edinburg City Council during their Aug. 16th meeting. He covered the city’s outstanding debt obligations and future prospects. He covered the city’s general obligation bonds, utility revenue bonds, and the bonds issued by the city’s two subsidiaries, the Economic Development Corporation and the Local Government Corporation.
The city right now has $108,870,000 of outstanding general obligation bonds. Those bonds have been issued since 2012 up until last year when the city issued the 2021 Certificates of Obligation. The interest rates are relatively low ranging from 1.5% up to 5%. These are all fixed rate bonds, meaning the rate will not change or fluctuate over the life of the bonds. The different bonds will be paid off at different points between 2025 and 2041.
The vast majority of the bonds are paid off from ad valorem taxes and a small portion from the land fill revenues.
The city has projected to have $8 million in debt service through 2030. From 2031 to 2036, the debt service is project to drop to approximately $7.3 million. From 2037 to 2041, the debt service is expected to drop significantly as existing bonds are paid off.
“The city’s debt service payments do not increase year by year. They are either flat or lower as time moves on,” Ayala said.
The city’s utilities systems have $36,530,000 in bonds that are scheduled to be paid off by March 2040. These have interest rates ranging from 0.25% to 4.25%. The city spends approximately $3.7M per year to pay off the bonds. This comes from water and service fees.
The bonds have fixed interest rates, and the debt service payments do not increase over time. Like the general obligation bonds, the debt services payments are the same year after year or decrease over time as each bond is paid off.
The city’s Economic Development Corporation has $34,735,000 in outstanding bonds, which are paid off by the city’s sales tax revenues. No city ad valorem tax revenues are used to pay off these bonds. The interest rate on those bonds ranges from 0.55% to 5.25%. The bonds will be paid off by 2046.
The Edinburg Local Government Finance Corporation has $36,830,000 in bonds to by paid off by 2045. The interest rate on those ranges from 4% to 5%. These bonds were for the Bert Ogden Arena.
“All of the bond ratings you have are either mid-investment rate or high investment rate,” Ayala reported.
The city is rated AA- by Standard and Poors (S&P) and AA by Fitch. Those two ratings that the city has achieved are high investment grade ratings.
According to Ayala, S&P marked the city as “stable outlook.” S&P cited the city’s strengths as:
- It’s a regional trading center in the Rio Grande Valley with stable industries and tax base.
- It has strong management practices, adequate budgetary performance, very strong budgetary flexibility and very strong liquidity.
- Ongoing tax base growth and stable revenue collections.
However, S&P did note the community’s below national average wealth and income levels as one of its weak points.
Noting the positive points S&P identified, Ayala said, “There’s really not much more city management can do.”
Fitch rated the city a notch higher. In its analysis, Fitch saw Edinburg as having:
- A diverse tax base with steady growth.
- A strong revenue framework, solid expenditure flexibility, moderate fixed costs and moderate long-term liability burden.
- Has demonstrated financial resilience through economic cycles.
- Could see more improvement due to the ongoing diversification of the employment and economic base.
- Has a “triple a” assessment for revenue framework and for operating performance.
However, Fitch also noted the community below average wealth and income indicators.
Mayor Garza asked whether location has anything to do with the city’s ratings and its credit.
“The bad news about the credit ratings in this area,” Ayala said, “is that they are constrained by wealth and income. So, when they do a national statistical analysis, they compare us to all other parts of the country, and we are below the average for the country. But as far as what can be controlled by this council and staff, you have good marks on everything.”
According to Ayala, the ratings for the utility bonds are considered high investment grade. However, the two ratings agencies reverse their rankings, with Fitch rating the city’s utility system bonds as AA- while S&P ranks them as AA.
In S&P’s analysis, the city’s utilities system has some key strengths, including:
- A growing customer base, prudent water and wastewater system management, and a consistent track record of financial performance.
- Sufficient water supply and storage, water treatment capacity, and wastewater treatment capacity with plans for expansion.
- Adequate debt service coverage
- Upside scenario dependent on strengthening of the service area economy.
They did note the economic weakness of low income and wealth levels for the region.
Fitch also provided similar analysis of the city’s utilities system, including:
- Very strong revenue defensibility, very low operating risk, affordable rates, ample rate flexibility, stable demand in rapidly growing service area.
- Midrange wealth metrics for the service area.
- Low operating costs
- Expected increase in leverage to expand water rights and wastewater treatment capacity.
- Adequate debt service coverage.
- Upside scenario dependent on manageable leverage, stability in revenue defensibility and operating risk.
Ayala also addressed the work to finance further expansion of the city’s utility system with a planned $44 million Phase 1 Project to expand the city’s wastewater treatment capacity. This is being done through a loan application to the Texas Water Development Board. A decision on the loan is not expected until October of this year. While a subsidized loan rate from the state would be approximately 2.32% if signed today, the final interest rate will be determined once the loan is approved.
The city is also planning to seek another $7.7 million utility bond for Phase 2 of the planned wastewater treatment plant expansion. The financing will be sought from the Texas Water Development Board or the open market.
At this point Mayor Ramiro Garza Jr. asked if the funds could be requested as grants through the most recent federal funding legislation, the Infrastructure Investment and Jobs Act.
Ayala pointed out that the Phase 1 funds were solicited under a previous funding cycle, but that the Phase 2 funds might be sought as grants.
Directing his comments to the city staff, Garza said, “If we can look into that because, if we can get some of those funds as grants, we don’t have to apply for that much in loans.”
Ayala concluded his presentation by noting that the city has no immediate plans for future bond projects. However, he reported that the city’s debt service under the new budget would still allow the city for an additional $10-12 million in capital project in new bonds if needed. This would not require any additional tax increases beyond the expected $0.64 per hundred valuation.
According to Ayala, the city’s taxable assessed property valuations doubled in the last ten years from $3.3 billion to $6.3 billion. The city has been growing every year during the last decade, even during COVID. The city’s tax rate had been at $0.635 per hundred valuation for approximately ten years until 2019 when Edinburg voters approved a $33 million bond election for drainage and streets. That is when the tax rate was increased to $0.68 per hundred valuation.