AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following DeSoto Independent School District, Texas (ISD; the district) unlimited tax (ULT) bonds:
--$37.7 million ULT refunding bonds, series 2013.
The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of May 13, 2013 (pending market conditions). Proceeds will be used to refund outstanding debt for interest savings. Fitch also assigns an 'AA-' underlying rating to the series 2013 bonds.
In addition, Fitch affirms the following ratings for the district:
--$238.3 million (fully accreted value) in outstanding ULT bonds at 'AA-';
The Rating Outlook is Stable
SECURITY
The bonds are secured by an unlimited tax, and are secured further by the PSF guarantee.
KEY RATING DRIVERS
FINANCIAL PRESSURES/IMPROVEMENTS EXPECTED: Reduced property tax revenues and relatively flat enrollment have dramatically reduced the district's general fund balances from previously healthy to a below district-established target. Fitch notes that several factors are expected to culminate in reserve replenishment over the next two reporting periods, including projected net surplus results for fiscal 2013, a planned Maintenance & Operations (M&O) tax rate increase, and a favorable outlook for improved state funding in the next biennium.
SOFTENING TAX VALUES: A slowdown in construction and the still recovering local housing market continue to dampen the district's largely residential tax base; values approximate those of seven years prior. Management expects values to remain flat in the near term, which Fitch considers conservative given more moderate regional growth.
HIGH DEBT; AMPLE INFRASTRUCTURE: Debt is high in relation to market value, reflecting previous levels of rapid enrollment. Pursuant to this refunding, the district expects the current interest & sinking fund (I&S) tax rate to support debt service with no tax base growth for several years. The district's debt service schedule escalates and includes significant capital appreciation bonds (CABs), but Fitch notes that the district's CABs are predominantly callable in nature.
DALLAS AREA SUBURBAN DISTRICT: The district benefits from its proximity to the ninth largest metropolitan statistical area in the nation, Dallas-Fort Worth-Arlington. The region is characterized by strong job growth, above-average median household income and low poverty rates.
RATING SENSITIVITIES
EROSION OF FINANCIAL CONDITION: The district has been financially challenged over the past five years. The rating is sensitive to the district's ability to execute on its multiple strategies to improve financial flexibility while maintain a manageable carrying cost burden without frequent and recurring debt restructuring.
CREDIT PROFILE
The district serves approximately 8,940 students and is located 15 miles southwest of downtown Dallas in a suburban area traversed by major transportation corridors.
TAX BASE CONTRACTION
A slowdown in building activity beginning in 2009 caused taxable assessed valuation (TAV) to stall and eventually decline 14% from the recent fiscal 2008 peak. Fitch believes the prospect of near-term growth is somewhat limited based on the lack of significant development at this time. The tax base is stable and without concentration; top 10 taxpayers represent electric delivery, retail shopping, apartment, land/investment, and public utility and hotel properties. Although there are no immediate and material economic development investments on the horizon, Fitch anticipates strong regional growth will benefit the district's tax base given its proximity to Dallas.
BUDGETARY CHALLENGES
The revenue shortfall resulting from TAV declines, combined with slowed enrollment growth, pressure the district's previously growth-oriented budget. From a high of $15.8 million or 29.7% of spending in fiscal 2007, unrestricted reserves declined to a still adequate $4.7 million (7.6%) of spending in fiscal 2012.
Management implemented various cost saving measures to address ongoing budget challenges and a $1.5 million loss in fiscal 2012 state funding. Solutions include 10% - 15% across the board budget cuts, staffing reductions and a hiring freeze. Despite lower than projected enrollment, the district completed fiscal 2012 favorable to budget, with an operating deficit (after transfers) of $847,000 (1.4%). Officials project favorable fiscal 2013 performance in relation to the balanced budget, which Fitch believes is reasonable given modest enrollment gains and continued cost controls.
EXPECTED RESERVE IMPROVEMENT/ANTICIPATED TAX RATIFICATION ELECTION
The district reports limited remaining flexibility in its cost structure and salaries at below-market levels. An M&O tax rate at the statutory cap of $1.04 per $100 of TAV can increase up to $1.17 only with voter approval. The fiscal 2014 budget includes an increased tax rate (dependent on voter approval), salary increases and a change in the fiscal year-end from August to June. This reporting period change typically infuses one-time monies into the general fund from two months of salary accruals.
Officials expect to approach the electorate in the coming year for a yet-to-be-determined M&O tax rate increase to replenish reserves to policy targets and support more competitive salaries The district's unrestricted general fund policy target equals 10% to 15% of spending. Proposed school funding legislation, if enacted, could also provide a modest revenue gain in the upcoming biennium.
DEBT PRESSURES OFFSET BY LIMITED CAPITAL NEEDS
Overall debt is high at 10.6% of market value due to previous levels of rapid growth. The district's debt service increases over time and includes a preponderance of CABs. Fitch views the extensive use of CABs as a credit negative as they limit flexibility due to the long duration, creating slow amortization. Fitch notes however, that the district's CABs are predominantly callable in nature.
The district's fiscal 2013 I&S tax rate of $0.40 per $100 of TAV is expected to rise to $0.47 over the next several years without the benefit of tax base growth, subsequent to the current refunding. Further tax base weakness could necessitate debt restructuring for the I&S tax rate to remain below the current statutory cap of $0.50 for new debt issuance. However, a reported lack of debt plans reflects adequate facility capacity into the foreseeable future.
AFFORDABLE PENSION COSTS
District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the state on behalf of the district, leaving the district with a modest residual contribution and eliminating any pension liability. The district's carrying costs, including debt service and pension contributions, represent a low 10.9% of fiscal 2012 general government expenditures net of capital. The district's low carrying costs reflect a below-average 10-year principal amortization rate of 39.7% and affordable pension contributions.
DALLAS AREA SUBURBAN DISTRICT
Solid economic characteristics of the district reflect its participation in the Dallas-Fort Worth regional economy. Median household income exceeds the Texas and U.S. averages by 21% and 16%, respectively. The local February 2013 unemployment rate of 7.2% is representative of the region and lower than the U.S. average (8.1%) for the same period. District population grew 27% over the last five years, reaching 56,000. Enrollment growth averaged 11% per year over the same period.
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'.
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790427
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