TMCnet News

Fitch Rates Alvin ISD, TX Series 2014C ULT Schoolhouse & Rfdg Bonds 'AAA' PSF/'AA' Underlying
[November 20, 2014]

Fitch Rates Alvin ISD, TX Series 2014C ULT Schoolhouse & Rfdg Bonds 'AAA' PSF/'AA' Underlying


AUSTIN, Texas --(Business Wire)--

Fitch Ratings assigns an 'AAA' rating to the following Alvin Independent School District, TX (the district) bonds:

--$146.9 million unlimited tax (ULT) schoolhouse and refunding bonds, series 2014C.

The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

Fitch also assigns an 'AA' underlying rating to the series 2014C bonds and affirms the 'AA' underlying rating on the district's approximately $461.4 million outstanding parity bonds (pre-refunding).

The series 2014C bonds are scheduled to sell the week of Dec. 1 via negotiated sale. Proceeds will be used to construct and renovate various school facilities, refund certain outstanding maturities for economic savings, and to pay related costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are payable by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment by the PSF guaranty.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The district's strong financial profile is characterized by conservative budgeting, proactive forecasting, and consistently large financial reserves. Reserves are healthy despite periodic pay-go capital spending and operating pressures associated with rapid enrollment growth trends.

ELEVATED DEBT BURDEN: Overall debt ratios are very high, especially relative to the district's market value. Fitch believes ratios will remain elevated given expectations of growth-related capital needs that will necessitate future borrowings. The maximum debt service tax rate anticipated for the district's authorized bonds preserves some tax rate cushion below the state's test for new issuance. Carrying costs are low and are expected to remain manageable despite an ascending debt service schedule

STRONG REGIONAL ECONOMY: The district benefits from its close proximity and improved transportation corridors to the Houston metropolitan statistical area (MSA). Residents have easy access to a large employment market that continues to outperform the nation in terms of population, employment, and income growth.

CONTINUED TAX BASE EXPANSION: Some of Fitch's concerns about the district's increasing debt load are mitigated by a trend of taxable assessed value (TAV) growth since fiscal 2012 from a broadening tax base. A mix of residential, attendant retail and commercial development, and the district's own growing energy sector have contributed to the TAV gains, which have outpaced enrollment gains. Taxpayer concentration is moderate.

RAPID ENROLLMENT GROWTH: Fitch believes that ample developable land and affordable home prices will facilitate additional enrollment growth, demonstrating the need for continued strong financial and debt management practices.

RATING SENSITIVITIES

ANTICIPATED CAPITAL PRESSURE CAPS RATING: Fitch does not expect any positive rating action over at least the near to intermediate term given the district's already very high overall debt levels. The maintenance of budgetary balance and solid reserve levels is necessary to mitigate credit concerns over the large debt load, very slow amortization, and some taxpayer concentration.

CREDIT PROFILE

PROXIMITY TO HOUSTON SUPPORTS LONG-TERM GROWTH PROSPECTS

The district is located 25 miles southeast of Houston in the northern portion of Brazoria County (GO bonds rated 'AA+', Stable Outlook by Fitch) and within proximity to the expansive Houston medical center.

Aided by its easy access to Houston's employment base, ample developable land, and affordable home prices, the district's population has seen rapid growth of 5% annually since 2000. These gains exceeded population gains made by the county and Houston MSA for the same time period; the district's current population is estimated at about 130,000. Nonetheless, only about one-third of the district is currently built-out. Wealth/income and educational attainment metrics in the district are generally comparable to those of the MSA, state & U.S. Annual enrollment growth over the last five fiscal years (fiscals 2010-2015) has also been solid, averaging just under 5%. District enrollment currently totals about 21,000 and management anticipates full build-out to occur over the next 25-30 years or at roughly 57,000-60,000 students.

ENERGY SECTOR AND CHEMICALS DOMINATE COUNTY ECONOMY

As a complement to the strong metro economy, activity in the county centers on chemical manufacturing and petroleum processing. The county benefits from the Port of Freeport, the 16th largest port in the U.S. in terms of foreign tonnage, which provides critical shipping access for the region's industries. Dow Chemical Co is the largest employer in the county with 4,300 employees. Sizeable expansion plans were recently announced for its Freeport chemical complex, in addition to the construction of a research and development center in Lake Jackson.

While the area economy is dominated by the chemical and energy sector, the essentiality of these industries and the ongoing diversification of the regional economy somewhat offsets concerns regarding economic concentration. Other active economic sectors include fishing, tourism, government, and agriculture. Unemployment levels dropped to 5.2% in September 2014 from 6.5% a year ago due to strong employment growth that exceeded a still healthy 2% gain in labor force during that period. The county's unemployment rate remained generally in line with the MSA (4.9%) and state (5%), and below the nation (5.7%).

STRONG FINANCES MAINTAINED DESPITE ENROLLMENT PRESSURES

The district's historically strong financial performance is notable for the consistent positive operating results realized in a high enrollment growth environment and despite previous state funding cuts. The district posted general fund operating surpluses in five of the last six fiscal years (fiscals 2009-2014). Management's conservative budgeting of enrollment growth and adherence to established financial policies have contributed to these results.

Management implemented a change to the district's fiscal year end to June 30 from Aug. 31 in fiscal 2013, resulting in a 10-month audit. The shorter timeframe typically genrates favorable financial results given the year includes only 10 months of expenditures. The fiscal 2013 audit recorded a roughly $13 million operating surplus that was used for pay-go capital spending. Unrestricted general fund reserves held steady at about $71.5 million or 51% of spending at fiscal 2013 year-end.



SIZEABLE PAY-GO FUNDING FOR CAPITAL CONTINUES

Financial performance in fiscal 2014 was again strong, outperforming prior expectations of a moderate drawdown on reserves. The district benefitted from increased state per pupil funding levels in the current biennium (fiscals 2014-2015). This additional revenue provided the bulk of support for the roughly $20 million increase in year-over-year spending, largely for additional teachers and staff as well as a 3% cost of living adjustment.


The district generated a large $26.3 million (16% of fiscal 2014 budgeted spending) operating surplus, which was primarily used for pay-go spending in support of the district's capital program as planned. A modest net $4.6 million net surplus (after capital outlays) brought the unrestricted general fund balance to approximately $76 million or 42.4% of the year's spending, well above the district's formal fund balance policy of between 17% and 25% of spending. Liquidity remained stout at $51.6 million or nearly four months of operations.

The $177.4 million fiscal 2015 operating budget was adopted with a modest surplus. Additional pay-go capital spending is anticipated with a moderate use of reserves ($8-$10 million) while the general fund balance is expected to remain at no less than 3 months of spending (consistent with policy). Management indicates year-to-date results are currently tracking budget, while actual enrollment trends and associated revenues are slightly higher. Fitch believes that the district's policy of committing reserves above 25% of spending for pay-go capital funding is a credit positive and recognizes that reserves may be maintained at a level closer to the policy maximum going forward.

The district prepares multi-year budget forecasts, which Fitch views favorably. The district's current financial forecast projects modest annual drawdowns of reserves for capital projects (no more than 6% of budgeted spending) over the near term (fiscals 2016-2017), under what Fitch believes may be feasible but somewhat optimistic annual TAV growth assumptions of 6%-10%. These assumptions factor in the various residential, retail and commercial projects reportedly underway or planned, and a large CO2 recovery plant soon to hit the tax rolls. Operating performance is assumed to tighten in fiscal 2017 given the opening of several new campuses, although these preliminary projections still anticipate a solid fund balance position of roughly $60 million or 30% of operational spending.

TAX BASE GROWTH STRENGTHENS

The district's tax base is predominately residential. A growing population base largely in the western portion of the district continues to fuel residential development and TAV gains, due in part to close proximity and improved transportation corridors to the Houston MSA. Notably the district's tax base continued steady, albeit modest growth during the recession, and began to strengthen after fiscal 2012. TAV grew by a healthy 4% in fiscal 2013 and another 8% in fiscal 2014, aided by the mix of residential, attendant retail/commercial development, as well as the district's own growing energy sector. Another strong 12% gain was realized in fiscal 2015.

Taxpayer concentration is moderate at just under 11% in fiscal 2014, led by top taxpayer Denbury Onshore LLC at 5.3%. The company invested almost $1 billion for a high-pressure compression system designed to inject carbon dioxide into a previously dormant oil field. Its success has resulted in a very healthy uptick in district mineral values.

DEBT PROFILE TO REMAIN PRESSURE POINT

Overall debt levels are high with debt to market value at 12.5% in fiscal 2015 (or about $6,650 on a per capita basis). These debt ratios do not consider state support. Despite unfavorable debt ratios, the district's fixed-cost burden for debt service is relatively low at about 6% of governmental spending in fiscal 2014. The manageable burden is aided by state debt service support (about 40% of ULT debt service in fiscal 2014) received by the district due to its comparatively lower per pupil property wealth. Amortization is slow with about 37% of principal retired in 10 years, inclusive of this issuance.

The new money portion of this offering (about $49 million) exhausts nearly all of the 2013 GO authorization that was approved by voters at a strong 68% margin for a broad range of capital needs. About $12 million of the authorization remains outstanding, but district officials report there are no plans to utilize this portion as the capital projects approved by voters have already been completed with the use of pay-go funding. In support of the bond program, the fiscal 2015 debt service tax rate increased by just under $0.09 per $100 TAV to $0.3770 per $100 TAV, which remains below the maximum promised voters and preserves some tax rate cushion below the Attorney General's $0.50 per $100 TAV test for new money issuance.

Management reports preliminary plans to seek further bond authority from voters in November 2015 given strengthening annual enrollment trends. Capital needs are likely to include new elementary school facilities, which are expected to confront capacity constraints first. Fitch believes that a trend of faster than anticipated enrollment growth in conjunction with slower than expected TAV growth could heighten the existing pressure on the district's debt profile. Fitch will continue to assess the district's capital needs and debt plans and their effect on the already high debt ratios, diminishing tax rate capacity for new debt, and overall budget flexibility.

AFFORDABLE RETIREE COSTS

Fitch's concern about the district's overall long-term liabilities is lessened by its low retiree cost burden. Pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. District employees contribute to TRS for pensions at 6.4% of annual payroll, and the state pays all but a small percentage of the local district's contributions (6.4% of payroll in fiscal 2013). Other post-employment benefit (OPEB) contributions paid by the district are nominal, as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2014 totaled less than 1% of governmental fund expenditures.

TRS is adequately funded at 81.9% as of Aug. 31, 2012, although Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of a high and growing debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a low 6.5% of governmental fund spending in fiscal 2014 due in part to slow principal amortization, and they are expected to remain manageable despite an ascending debt service schedule. Starting in fiscal 2015, pension contributions for all districts in the state increased to 1.5% from zero on the statutory minimum portion of payroll. Increases in district pension funding requirements beyond fiscal 2015 could create additional budget pressure.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February, 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, Texas Municipal Advisory Council, and IHS (News - Alert) Global Insights.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=930415

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


[ Back To TMCnet.com's Homepage ]