AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Leander Independent School District (ISD), Texas (the district) unlimited tax (ULT) bonds:
--$48.96 million ULT refunding bonds, series 2011.
In addition, Fitch assigns an underlying rating to the district's series 2011 bonds at 'AA'.
The bonds are expected to price via negotiation the week of June 20, 2011. Proceeds will be used to refund a portion of the district's outstanding ULT bonds to reduce near-term debt service payments.
In addition, Fitch affirms the underlying rating for the district's outstanding bonds as follows:
--Approximately $1.3 billion (net of refunding) outstanding ULT bonds at 'AA'.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
--Revision of the Outlook to Negative from Stable is due to the limited flexibility the district will likely encounter as annual debt service on existing debt continues to escalate and as the district approaches the debt service tax rate cap of $0.50 per $100 assessed value it needs to maintain in order to access the credit markets for new debt; tax base growth significantly below historically strong levels over the next three to five years would exacerbate the pressure.
--Debt levels are very high and amortization of principal is slow. Fitch notes that capital pressures have moderated and are expected to remain more manageable, as evidenced by management's slowed pace of new school construction, projected lower levels of enrollment growth, and capacity in existing facilities.
--The district has historically maintained a strong financial position and generated sizable operating surpluses despite rapid enrollment growth pressures. Projected results for fiscal 2011 are expected to maintain the district's solid reserve levels.
--Tax base growth was strong during the district's period of rapid growth; however, growth halted recently due to the weaker economy and housing market.
--Leander ISD benefits from its location in the broad economic and employment base of the Austin-Round Rock metropolitan area, which has above-average wealth levels.
WHAT COULD TRIGGER A DOWNGRADE?
--A scenario of slow tax base growth over the near term will challenge the district's ability to meet escalating annual debt payments while remaining under the state attorney general's $0.50 debt tax rate cap for new issuance; the inability to remain below the cap or reliance on regular debt restructurings or other actions (e.g. application of state basic aid money) to meet the $0.50 test would not be consistent with the current 'AA' rating and likely would trigger negative rating action.
--The district's ability to sustain strong reserve levels also will be integral to maintaining credit quality.
SECURITY:
The bonds are secured by ad valorem taxes levied on all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are secured by the Texas PSF guaranty.
CREDIT SUMMARY:
Largely residential in nature, the district benefits from its location in the broad economic and employment base of the Austin-Round Rock metropolitan area. At 6.8% in March 2011, unemployment in the metro area had declined on a year-to-year basis while remaining below state and national levels. Area wealth levels generally exceed those of the state and the U.S. While the district had historically experienced double-digit levels of tax base growth due to the availability of affordable land, taxable assessed valuation (TAV) grew at a more modest pace recently (about 4% from the prior year in fiscal 2010) and decreased modestly in fiscal 2011 by 1%, primarily reflecting a weaker housing market. As a result of area residential development, enrollment grew very rapidly, increasing at an average annual pace of about 10% between fiscal years 2003 and 2008. With the economic slowdown, annual enrollment growth trends have slowed as well but remain strong at about 6% in the past three years; district enrollment currently approximates 32,000 students. At present, demographic studies project a somewhat slower pace of enrollment growth going forward in light of the slowed development of single-family homes; however, increased density trends in the district may bring a return to higher levels of enrollment growth over the longer term.
Fitch considers the district's debt levels very high. Overall debt levels approximate 13% of market value and $15,600 per capita, which are well above average for the current rating category. In addition, amortization is slow, reflecting in part the use of capital appreciation bonds (CABs) to minimize tax rate impacts and shift the debt burden to future taxpayers. Approximately 38% of the district's direct debt is retired in 10 years on a non-accreted basis. Annual debt service represented almost 21% of general government spending in fiscal 2010, and annual payments as currently scheduled increase by 18% by fiscal 2013 and by 37% by fiscal 2015. The debt service tax rate was set at $0.3823 in fiscal 2010, $0.4148 in fiscal 2011, and management has preliminary plans to raise the rate to $0.45 in fiscal 2012. Upward pressure on the tax rate will likely continue to ramp up in coming years if TAV growth remains sluggish. Management will find it increasingly difficult to maintain a debt service tax rate at or below $0.50 under this scenario, which will impair the district's ability to access the credit markets. Debt ratios will likely remain high for some time. However, Fitch expects capital pressures to continue easing if the pace of enrollment growth remains relatively low. Accordingly, management reports plans for new school facilities have been pushed back; the remaining $229 million bond authorization is now expected to last three years beyond the original projection, until 2017, with another bond election projected no earlier than the fall of 2013.
The district's financial position is a positive credit factor. The district has historically recorded operating surpluses that have resulted in strong reserve levels, which enhance its financial flexibility. However, in fiscal 2009 results reflected a modest $3.6 million operating deficit due primarily to revenue losses from lower than projected enrollment growth. In spite of this modest draw on reserves, fund balance levels remained solid; the unreserved general fund balance totaled $58 million, which represented almost 27% of spending and exceeded the district's formal reserve policy of maintaining no less than two months of operating reserves. Management curbed spending slightly in fiscal 2010 to achieve balanced operations; audited results showed an $8.2 million general fund surplus which strengthened the unreserved fund balance to $66 million or 29% of spending.
Management further tightened spending in fiscal 2011, and the adopted $236 million general fund operating budget was fundamentally balanced without an operating tax increase, while providing pay raises, and maintaining the use of a portion ($0.01) of its maintenance and operations (M&O) tax levy, albeit at a reduced level, for major maintenance projects. The decision to delay the opening of two school facilities until fiscal 2012 or fiscal 2013 with its subsequent impact on the operating budget also provided savings for the district. While actual enrollment is less than previously projected, fiscal 2011 revenues and expenditures are reported to be generally on track with budget; a modest $3 million addition to reserves by year's end is preliminarily projected at this time. Preliminary expectations for the fiscal 2012 budget include further spending reductions due to state funding cuts of approximately $15 million. District officials have formulated a preliminary budget that includes reductions in spending that will effectively bridge the gap without using reserves or raising operating taxes.
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, Case-Shiller Quarterly Index, the Municipal Advisory Council of Texas, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Oct. 16, 2010);
--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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