AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' underlying rating to the following unlimited tax bonds of Eagle Mountain-Saginaw Independent School District, Texas (the district):
--$53.8 million unlimited tax refunding bonds, series 2013-A;
--$8.6 million unlimited tax refunding bonds, series 2013-B.
Fitch also assigns an 'AAA' rating to the series 2013-A bonds, which is based on a guarantee provided by the Texas Permanent School Fund, whose claims paying ability is rated 'AAA' by Fitch.
The series 2013-A and series 2013-B bonds are scheduled for a negotiated sale the week of April 8, 2013. Proceeds from both series will be used to refinance a portion of the district's outstanding unlimited tax bonds for debt service savings.
In addition, Fitch affirms the following rating:
--$605 million outstanding unlimited tax bonds (pre-refunding; includes current accreted CAB values) at 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district.
KEY RATING DRIVERS
SOLID FINANCES, PRESSURES CONTINUE: The district has maintained a sound financial profile through a period of rapid enrollment growth and reduced state funding. Limited revenue flexibility, increasing costs and uncertainty surrounding future state funding led the district board to declare financial exigency last fall. This move, which has been done by a number of Texas school districts to explore cost-cutting options, is not considered by Fitch an indication of weakening credit quality.
HIGH DEBT, LIMITED CAPACITY: The district's overall debt (including overlapping debt) is high, and the pace of debt retirement is slow. The district is completing a sizable construction program that will provide capacity for several years based on current demographic projections. The district's debt service tax rate is at the statutory ceiling for new debt issuance, limiting its ability to issue debt for new construction in the near term.
PART OF DALLAS FORT WORTH REGIONAL ECONOMY: The district is located just north of Fort Worth, and residents can access employment opportunities throughout the large and diverse regional economy. Natural gas exploration boosted the district's tax base over the past decade, although declining gas prices have dampened values recently.
STRONG DEMOGRAPHIC PROFILE: Income and wealth measures compare favorably to state and national averages, fueled by steady regional job growth. Top employers represent the airline and defense industries, as well as government, education, and health service sectors.
RATING SENSITIVITIES
Any debt-related operating pressures, or recurring debt restructurings to extend repayment, could have negative rating implications.
CREDIT PROFILE
Eagle Mountain-Saginaw ISD is located in Tarrant County, approximately seven miles from the center of Fort Worth, and includes the northernmost portion of the city as well as the cities of Saginaw and Blue Mound.
POSITIVE FINANCIAL PERFORMANCE
The district budgets conservatively and has registered positive financial results in four of the past five fiscal years. These results occurred despite rapid enrollment growth and a reduction in state funding for the current biennium. Fiscal 2012 general fund results exceeded earlier projections with a $2 million operating surplus after transfers. At year-end, the unrestricted fund balance totaled $27.4 million or a healthy 23% of spending.
Management reports a cumulative $11.5 million cut in state funding for the 2012-2013 biennium. While some of the impact from these cuts was softened with increasing enrollment, the district also took a number of measures to reduce spending. These steps included a tax rate increase, cost savings from attrition, a retirement incentive program, suspended cost-of-living adjustments, increased class sizes, and utility and supply cost reductions. The fiscal 2013 budget also included operating costs for the district's new high school, further ramping up operating pressures. The current forecast is for a general fund shortfall of $2-2.5 million for fiscal 2013, which is consistent with the original budget projection.
DECLARATION OF FINANCIAL EXIGENCY
The district board declared a state of financial exigency on Sept. 17, 2012 to position the district for additional spending reductions in the event of further state funding cuts. A declaration of financial exigency gives the district flexibility to manage cost reductions that are otherwise not available, including layoffs. While no layoffs have occurred to date, staffing cuts in future years reportedly are likely. According to district staff, the district likely will operate under this declaration through fiscal 2015.
Management reports that the fiscal 2014 budget will include another $4.6 million reduction in spending. To achieve this amount, planned measures include further class size increases, a restructuring of health clinics, and adjustments to various programs and services.
Management also states the district plans to seek voter approval this fall for an increase in its operating tax rate (currently at $1.04 per $100 of TAV) through a tax ratification election. The total tax rate is not expected to increase, however, (assuming TAV does not decline) as the debt service rate reportedly would decline by the same amount of increase in the operating rate approved by voters.
LIMITED BORROWING CAPACITY
Overall debt of $8,625 per capita (10% of market value) is high and amortization is slow, with less than 25% of debt scheduled for repayment in the next 10 years. Proceeds from the series 2013-A and 2013-B bonds will be used to refund a portion of the district's outstanding debt for savings without extending principal repayment.
The district's debt service tax rate of $0.50 per $100 of TAV is at the statutory cap for new debt issuance, severely limiting the district's ability to borrow until consistent TAV growth resumes. However, management does not expect to issue new debt for several years, given current campus capacity and enrollment projections.
Also, the district has pledged operating funds to meet the state attorney general's $0.50 debt service tax rate test for new debt issuance. In the event the district could not generate sufficient money for debt service from collections at a tax rate of $0.50 per $100 of TAV, statute requires a transfer of pledged operating funds to pay debt service before an increase in the debt service tax rate beyond $0.50. If necessary, such a transfer could further reduce operating flexibility and also have negative credit implications.
The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). 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. Including debt service, pension and other post-employment benefit contributions, payments on long-term liabilities were moderate at 20% of governmental spending in fiscal 2012.
TAX BASE EXPANSION, STRONG DEMOGRAPHICS
The tax base tripled over the past 12 years as economic activity throughout the Dallas Fort-Worth metro area and local activity spawned a housing boom in the district. The district's population doubled over the same period.
Recessionary pressures and declining mineral values slowed both TAV and population gains the past several years. TAV dipped by 6.2% in fiscal 2011, from $6.49 billion in fiscal 2010 to $6.1 billion, as revaluations placed pressure on existing property values. TAV has essentially stabilized at this level over the past two years, as lower natural gas prices have offset modest gains in residential, commercial, and industrial values.
Management expects that recent receipt of a foreign trade zone designation, proximity to the Fort Worth Alliance (industrial) airport, and ongoing transportation improvements will continue to attract new residents and businesses to the district. Fitch considers this projection reasonable, based on the size and resiliency of the regional economy and recent trends.
The district's median household income represents 135% of the Texas and 130% of the U.S. average, with a poverty rate less than half of the state and national levels. The city of Fort Worth unemployment rate of 5.9% as of December 2012 matches that of the state and compares favorably to the U.S. level of 7.6%. Management reports several commercial projects either planned or underway in the district and cites ongoing highway construction in the area and available land as contributing to a recent increase in inquiries from developers regarding residential construction.
TEXAS SCHOOL DISTRICT LITIGATION
In February a district judge ruled 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 unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding as a constitutional flaw in the current system.
Fitch will monitor the appeal process of the suit, which may go directly to the state supreme court. If the supreme court upholds the lower court ruling, the state legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 Global Insight, and the National Association of Realtors.
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
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