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Fitch Rates Harlandale ISD, TX's ULT Bonds 'AAA' TX PSF/'AA-' Underlying; Outlook StableFitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA-' underlying rating to the following Harlandale Independent School District, Texas' (the district) unlimited tax bonds: --$16.5 million unlimited tax (ULT) refunding bonds series 2015. The bonds are expected to sell via negotiation the week of February 2. Proceeds of the bonds will be used to refund a portion of the district's outstanding debt for interest cost savings. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited property tax levy and are further secured by the Texas Permanent School Fund (PSF) bond guarantee program (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014). KEY RATING DRIVERS SOLID FINANCES: The district's financial condition is sound, with strong fund balances that have increased significantly in recent years and provide ample flexibility. LOW-INCOME DISTRICT IN SAN ANTONIO: The district benefits from its location within the city of San Antonio, TX. However, wealth indicators are well below state and national averages. District taxable assessed values have shown growth recently after a period of contraction. MANAGEABLE DEBT LEVELS REFLECT STATE SUPPORT: District debt levels are manageable due to significant state funding support for debt service. Capital needs are moderate and are being addressed via pay-as-you-go spending, with affordable near-term debt plans. RATING SENSITIVITIES FINANCIAL DETERIORATION: Financial deterioration, potentially due to major state aid reductions or a spending down of fund balances beyond the stated policy, could put downward pressure on the rating. CREDIT PROFILE The district is located within San Antonio, about three miles south of the downtown center and encompasses 13.7 square miles. The urban area is mostly residential interspersed with a limited number of commercial establishments. In recent years the district has regained some population it lost post-recession but has yet to return to previous levels. Enrollment has also shown modest gains, averaging 1.3% growth since 2009. Improved student counts reflect the initiation and expansion of a district pre-K program, the opening of an early-college high school, as well as the district's efforts to increase attendance rates. SIGNIFICANT STATE SUPPORT As a property-poor district under the Texas Education Code, the district receives significant state support for both operations and debt service. State aid constituted about 80% of general fund revenues and covered 77% of debt service in fiscal 2014. Stable debt service and enrollment should keep state funding levels constant for the near term assuming consistency in the state funding formula. SOLID FINANCES FEATURE STRONG ENDING BALANCES The district has increased general fund ending balances in recent years, adding significantly to reserves since 2009. The general fund unreserved ending balance increased from about $3 million (2.8% of spending) in fiscal 2008 to $61.8 million (47.6% of spending) at the end of fiscal 2014. Positive operating results were augmented by additional state support, partly driven by average daily attendance (ADA) exceeding budgeted figures. District officials have built up reserves in anticipation of a six-year $21 million plan that utilizes fund balance for operational and one-time purposes to improve the educational process through additional teachers in specialized areas, instructional materials, and equipment. Fiscal 2015 marks the first year of this plan, which is incorporated into the adopted budget and includes the use of $7.3 million in fund balance in addition to $4 million in carryover encumbrance from the previous fiscal year. The full realization of the roughly $21 million plan in the mid-term is contingent upon certain factors, including changes, positive or negative, to the amount of operational support the district receives from the state. Management reports their commitment to maintaining at least 2.5 months of operations in general fund reserves (the state recommended target) or $25 million (19% of 2014 general fund spending) and will not spend down fund balance beyond stated policy. ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO The district is small but benefits from its location within the broader city of San Antonio economy (city limited tax bonds rated 'AAA' with a Stable Outlook by Fitch), which is primariy composed of military and government, domestic and international trade, tourism, health care, financial services, and telecommunications sectors. City employment has shown recent annual growth and unemployment remains lower than county, state, and national levels. The city's unemployment rate was 4.2% as of November 2014, down from 5.5% a year prior and below state (4.6%) and national (5.5%) rates. However, district wealth indices are below average and poverty rates are well in excess of state and national levels. Taxable assessed value (TAV) contracted a cumulative 14% from fiscals 2010-2013 as a result of the high number of foreclosure sales which lowered overall residential values. Fewer foreclosures and higher demand for district housing have reversed that trend, with fiscals 2014 and 2015 showing growth of 1.8% and 4.6%, respectively. Management expects continued moderate growth to continue, likely returning the tax base to pre-recession levels of $1.4 billion from $1.3 billion currently with the help of the construction of a 300-unit single-family housing subdivision. Fitch views these projections as reasonable given similar growth in the regional economy. The district's operations tax rate is at the state's maximum permitted of $1.17 per $100 TAV subsequent to the passage of a tax ratification election effective fiscal 2009. The debt service tax rate has room under the $0.50 new money cap at $0.359 for fiscal 2015, coming down from a higher $0.435 just four years prior. Management reports refunding activity will allow for maintenance of the current rate despite near-term debt plans. MANAGEABLE DEBT AND CAPITAL PLANS The district's debt levels are manageable as debt is supported by state funding allocations. Without state support, the debt burden is very high at 14% of market value, yet is more manageable on a per capita basis ($3,198), reflecting the district's low property wealth and somewhat high population density. Amortization is average with 48% retired in 10 years. Current debt plans consist of a series of refunding bonds for interest cost savings, and $65 million of new money debt in the 2015 calendar year, pending voter approval. The additional bond authorization is part of a reimbursement resolution that the board approved in October 2013 for construction of the early-college high school, a health science/technology building, and an auto shop building expansion, among other additions. Bond proceeds will reimburse the capital projects fund for the $20 million in incurred project costs, with remaining bond proceeds contributing to other facility improvements. School capacity is adequate for the current student population while maintaining recommended student-teacher ratios and limited use of portable classrooms. OTHER LONG-TERM LIABILITIES MANAGEABLE The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers 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's cost for pension and other post-employment benefits (OPEB) represented just over 1% of governmental fund expenditures in fiscal 2014, as plan contribution amounts are principally paid by the state and district employees. The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of an elevated and growing debt burden. Carrying costs for the district (debt service, pension, and OPEB costs net of state support) remain low, consuming 4.2% of governmental fund spending in fiscal 2014. Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015. TEXAS SCHOOL FUNDING LITIGATION For the second time in the past 18 months a Texas district judge ruled in August 2014 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. Fitch expects the state will appeal the 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 additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors, and the Municipal Advisory Council of Texas. 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=978857 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. |
