AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following White Settlement Independent School District (ISD), Texas' bonds:
--$40.5 million unlimited tax (ULT) refunding bonds, series 2013.
The 'AAA' long-term rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
The bonds are scheduled for negotiated sale the week of April 15, 2013. Proceeds from the sale will be used to restructure debt for tax-rate capacity purposes and also to yield interest cost savings.
Fitch also assigns an 'A+' underlying rating to the bonds and affirms the 'A+' rating on the district's $168.9 million in outstanding ULT bonds.
The Rating Outlook is Stable.
SECURITY
The bonds carry the guaranty of the Texas PSF and additionally are secured by an unlimited ad valorem tax pledge of the district.
KEY RATING DRIVERS
LIMITED DEBT FLEXIBILITY: The district's debt profile is Fitch's key credit concern. Overall debt levels are high, amortization is slow, and the annual debt cost on the budget is growing. Absent continued healthy tax base growth, the district will need to restructure outstanding debt to avoid transferring general fund revenues to subsidize debt service prior to raising the debt service tax rate above the state's statutory maximum for new issues, where it currently stands.
SOUND FISCAL CUSHION MAINTAINED: Conservative budgeting of attendance-based state aid, attention to spending levels, and previous debt restructurings have facilitated consecutive years of general fund surpluses that have improved fund balance. The district's high level of reserves is the primary mitigant to Fitch's concerns regarding the debt profile and limited ability to raise revenues.
ENROLLMENT GROWTH COOLING: Previously very rapid enrollment growth has subsided to a moderate pace, resulting in sufficient facility capacity for the near term.
TAV GROWTH/TAXPAYER CONCENTRATION: Taxable assessed valuation (TAV) has climbed measurably in recent years, but the growth has been accompanied by heightened top taxpayer concentration that is now well above average.
LOCATION IN FORT WORTH MSA: The district benefits from its location within the broad economic base of Ft. Worth. The area employment picture is favorable but remains vulnerable to federal defense spending cuts given the prominence of this sector in the local economy.
RATING SENSITIVITIES
DETERIORATION OF FINANCIAL FLEXIBILITY: Due to the district's high tax rate, growing fixed cost burden, revenue inflexibility and need to restructure current debt service to mitigate pressure on the general fund, any deterioration of key credit positives - including ample reserves and healthy tax base growth - will put negative pressure on the rating.
CREDIT PROFILE
White Settlement ISD is located 11 miles due west of Fort Worth (the city) and serves a student population of about 6,200 in the primarily residential communities of west Tarrant County.
HIGHLY LEVERAGED; NEGLIGIBLE DEBT FLEXIBILITY
A key credit concern is the district's ascending debt service schedule and high debt service tax rate, which at $0.50 per $100 of TAV is at the maximum allowed by state law for the purposes of issuing new money debt. While the bonds still carry an unlimited tax pledge, the district has a strong incentive to ensure that debt service can be met with a debt service tax rate no higher than $0.50, as the difference must be made whole with general fund moneys per an agreement made with the state attorney general.
The agreement was made in 2008 at the time of the last new money debt issuance in order to meet the state's tax rate capacity test. The district agreed to dedicate $5.1 million (equal to 11.8% of 2012 revenues) of general fund moneys to make whole the projected gap between the debt service revenue yield from the $0.50 tax rate and maximum annual debt service.
Recent debt restructurings, together with this refunding and an additional restructuring planned later this year, provide near-term flexibility as to the tax rate. Officials project revenues from the $0.50 tax rate, coupled with state debt service aid, will adequately cover debt service through fiscal 2019 without the use of general fund resources. These projections include what appear to be fairly reasonable assumptions for tax collections and TAV growth: 3% over the near-term compared to average annual 3.5% growth over the last five years.
However, absent a change to state law and even with moderately positive tax base momentum, the district will need to further restructure its debt to address a 37% rise in debt service occurring in fiscal 2020. The district has no near-term debt needs due to excess facility capacity. However Fitch views the severely limited debt flexibility negatively and expects district capital needs to grow over the intermediate term.
Overall debt on a current accretion basis is high at $7,278 per capita and 13.4% of market value without consideration of state support. Annual debt service charges net of state debt aid are manageable at 12.5% of governmental (less capital) fund expenditures in fiscal 2012 but will rise given the escalating debt service structure. Amortization slows with this offering to 34% retired in 10 years. Fitch views as a credit negative the escalating debt service and slow amortization rate which largely result from the district's reliance on capital appreciation bonds (CABs).
SOUND FISCAL CUSHION
The district's stable operating performance has been aided by management's continued conservative budget of enrollment growth, on which state aid for operations is largely based, and more recently, management's decision to restructure debt rather than budget general fund moneys to make up the tax rate-debt service shortfall. State budget cuts reduced revenues to the district, which officials offset with attrition savings, department budget cuts, and use of nearly $1 million of one-time federal funds for salaries.
The district concluded fiscal 2012 with a $2 million operating surplus after transfers (4.8% of spending), marking the third consecutive year of positive margins. Net fiscal 2012 results also prudently reflect a $4.1 million capital outlay, of which $2 million was reimbursed by insurance proceeds, for roof repairs. Unrestricted fund balance grew to $13.1 million or 32% of spending, up from 22% to close fiscal 2010.
MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY
The current fiscal 2013 $44.5 million general fund budget increases non-capital spending by 6% from the revised 2012 budget. Spending increases include a 1% raise for staff, increased staffing, and the residual salary costs that were funded by the one-time federal funds in fiscal 2012. However year-to-date results are trending better than the budget, with officials currently projecting a $1 million operating surplus.
The district plans to use roughly $4 million of unrestricted (assigned) fund balance over fiscal 2013 and 2014 for district-wide technology improvements. Funds will come from accrued natural gas royalty payments; these funds, totaling $3.7 million to close fiscal 2012, are prudently earmarked for one-time capital items. Net of this draw-down and the surplus expected to close fiscal 2013, unrestricted fund balance would decline to between 22%-25% of spending.
Management does not have a formal fund balance target but has expressed the goal of maintaining general fund reserves at between 2.5 to 3 months of operating costs. Fitch views the presence of this robust fiscal cushion as critical to stability in the underlying 'A+' rating given the debt profile, limitation in revenue raising capacity and taxpayer concentration risk factors.
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.
BEDROOM COMMUNITY IN FORT WORTH MSA
The district benefits from its location in the extensive Fort Worth labor market. Military-related spending still accounts for an estimated one-quarter of the Fort Worth MSA economy, but recent gains in other sectors, such as services, construction, and trade, have helped diversify the labor market. In addition, mining (natural gas), ranching, manufacturing, technology, education, and aerospace are significant economic sectors and add a measure of diversity.
The area has maintained an overall positive employment profile despite recent layoffs at major employers, including the AMR Corporation (parent of American Airlines with Fort Worth corporate headquarters) and Lockheed Martin, whose headquarters sit just north of the district. Tarrant County, which encompasses the district and city of Fort Worth, continues to add jobs at a faster rate than both the state and nation since the recession ended in 2009. County-wide unemployment improved to 6.8% from 7.4% in January 2013, just below the state (6.9%) and national averages (8.5%).
The level of residential development activity has slowed in the district, and consequently enrollment growth is at a more moderate pace than in prior years. Previously rapid annual enrollment gains of between 4%-6% have moderated to a more manageable 2%-3% per year and officials expect this more moderate level of growth to continue in the next few years.
TAX BASE CONCENTRATION
The district's primarily residential tax base has resumed strong growth following a fiscal 2011 decline caused by housing market weakness. TAV climbed 7% in fiscal 2012 and an additional 9% in fiscal 2013 (as of the most recently adjusted certified values). However, the current year increase came primarily due to robust TAV growth of the largest taxpayer, SPM Flow Control (SPM), an oil and gas manufacturer. SPM's TAV increased 170% in fiscal 2013 due to the expansion of its corporate headquarters and large amount of business personal property held on-site. SPM now makes up a high 17% of TAV (up from 6% in 2012) and the top 10 payers comprise a high 32% of TAV. Market value per capita, a measure of tax base wealth, also remains below average at $54,000 in fiscal 2013.
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, 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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