AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Galena Park Independent School District, Texas (ISD; the district) bonds:
--$9.675 million unlimited tax refunding bonds, series 2013;
--$29.455 million unlimited tax refunding bonds, taxable series 2013.
The 'AAA' long-term rating reflects the guarantee provided by the Texas Permanent School Fund (PSF; bond guaranty program rated 'AAA' by Fitch).
The bonds are expected to sell competitively on June 26. Proceeds from the sale of the bonds will be used to refund certain outstanding obligations for interest cost savings and to pay issuance costs. The refunding bonds do not restructure debt or extend maturities.
Fitch has also assigned an underlying 'AA+' rating to the series 2013 bonds. Additionally, Fitch has affirmed the 'AA+' rating on the district's approximately $220 million of outstanding unlimited tax bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a guaranty from the Texas PSF as well as an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
STRONG RESULTS & BALANCE SHEET: The district's strong financial management yields consistently strong financial performance resulting in solid general fund reserves and ample liquidity.
ECONOMIC STRENGTH OF HOUSTON MSA: The district benefits from its location within the broad and diverse Houston metropolitan statistical area (MSA). The expansive regional economy continues its solid post-recession recovery, with the oil and gas sector leading the rebound though remaining susceptible to declines in commodity prices.
TAX-BASE CONCENTRATION: Reflecting the regional economy, the district's tax base is concentrated in oil and gas companies and its top taxpayers due to its location along the Houston Ship Channel. Somewhat offsetting concerns of top payer concentration are the significant asset investments associated with these more stable industrial and downstream petrochemical manufacturers.
HIGH DEBT; LIMITED CAPITAL NEEDS: Overall debt levels are high and principal amortization is average. Offsetting this concern, the district has sufficient facility capacity to accommodate build-out and future capital needs for renovations and upgrades are expected to be funded from cashflow and excess fund balance. Furthermore, retiree costs are very low.
OPERATING TAX RATE CAPPED: Recent voter approval of an increase to the operating tax rate generated additional revenues for the district, but the operating tax rate is now at the statutory cap.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Galena Park ISD is located in southeastern Harris County and is surrounded by Houston. The district serves six communities, including Galena Park, Jacinto City, and a portion of Houston. Student enrollment totaled about 22,000 in fiscal 2013 and modest growth of about 1% annually is expected to continue, reaching a projected 25,000 students at full build-out.
SOLID FINANCIAL RESERVES PROVIDE AMPLE FLEXIBILITY
The district's financial position is a key credit strength supporting the high underlying rating. Fund and cash balances are ample due to consistently positive operating margins; the district last recorded a general fund deficit in fiscal 2005. The fiscal 2012 budget was adopted with a $6.8 million deficit due to state funding cuts that affected all Texas school districts. However, management significantly outperformed the budget and interim forecasts, spending 93% of the original budget due to lower payroll costs produced by attrition and careful monitoring of hiring. Historical results have typically been better than budget. The district concluded the year with an impressive $6.6 million operating surplus after transfers equal to 4.3% of spending. Unrestricted general fund balance climbed to $53.5 million or a very strong 35% of spending and sits well above management's formal fund balance floor of 10%-15% of spending.
OPERATING TAX RATE NOW CAPPED FOLLOWING VOTER APPROVAL OF INCREASES
The district has historically enjoyed a higher degree of taxing flexibility than most school districts in the state that dates back to the 1960s when voters approved an initial tax override as authorized in special statute. Voters more recently approved a tax rate increase in fiscal 2007 and a shift in the tax rates for fiscal 2013 so that the district is now taxing for operations at the statutory limit. Under state law Texas school districts levy separate property taxes for operations (M&O) and debt service (I&S), whereby all funds from the debt service levy are restricted for that purpose. The district strategically adjusted its tax rates in fiscal 2013, shifting 6 cents away from debt service and to the M&O tax rate to generate additional funding for operational purposes. This adjustment was approved by voters and maintained the total tax rate level at $1.51 per $100 of taxable assessed value (TAV). The substantial TAV growth offset the potential revenue loss from the reduction in the debt service tax rate.
The district expects to realize another operating surplus of about $5 million relative to its fiscal 2013 $170.8 million budget, even after amending the budget to use $5 million to pay-go fund capital items. The positive results are in part due to the aforementioned tax rate re-structuring, which yielded about $6 million in additional operating revenue, as well as continued conservatism in regard to budgeting of attendance (a key revenue driver) and spending during the year. The district's full time equivalent employee (FTE) count remains about 5% lower than the fiscal 2011 FTE count.
Looking forward to fiscal 2014 and beyond, officials expect to use surplus cashflow for capital expenditures while maintaining fund balance at or around current levels ($53 million-$58 million). Fitch views the district's forecasts as realistic given management's track record of strong financial management and the improving revenue picture coming out of the state legislature.
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 as a positive credit consideration.
HISTORICALLY POSITIVE TAV TREND; CONCENTRATED TAXPAYER BASE
Growth in the district's TAV has historically been quite strong, averaging about 10% annual gains prior to the economic slowdown. TAV, which is weighted heavily in industrial values, did weaken in fiscal 2011 before quickly stabilizing in fiscal 2012; very strong growth in industrial values boosted this year's fiscal 2013 TAV by 13.2%. Much more modest TAV growth is forecast by management for fiscal 2014.
Top taxpayers are concentrated in the downstream sector of the oil and gas industry (petrochemical manufacturing) and the top 10 payers account for a high 24.2% of fiscal 2013 TAV. The district has a mixed wealth profile, with the strong industrial values balanced against an above-average proportion of economically disadvantaged students in the district.
BROAD AND DIVERSE HOUSTON MSA ECONOMY
Energy and petrochemical manufacturing remain major determinants of employment and tax base growth in the Houston MSA, although the area's economy has diversified into biomedical research, aerospace, and international trade. Houston's post-recession recovery continues to outpace that of many other large U.S. cities, as the robust energy sector is a leading contributor to population and employment gains.
Regional employment registered a notable increase of 3.1% in the 12-month period ending in April 2013, and the local unemployment rate of 6.1% for the month was down from 6.7% at this time last year, consistent with the state average and below the U.S. rate (7.1%). The metro population continues to expand at an annual rate of nearly 2%, in line with state growth trends and double the U.S. average.
HIGH OVERALL DEBT BURDEN SOMEWHAT OFFSET BY LIMITED CAPITAL NEEDS AND AFFORDABLE CARRYING COSTS
Overall debt levels are high at $4,623 per capita and 5.8% of full value without considering state debt service support. Debt ratios rise slightly higher when the currently accreted interest of outstanding capital appreciation bonds (CABs) is included in the debt calculation. Amortization of direct debt is about average with just over 50% retired in 10 years. The district has no remaining bond authorization and no plans to seek debt authority. Future capital needs will primarily consist of rehabilitation, facility upgrades, and maintenance rather than construction for additional classrooms, as the district is nearly built-out and existing facilities contain adequate capacity for the current enrollment growth rate.
Costs to the district for retiree benefits are affordable. Pension and other post-employment benefits (OPEB) for healthcare are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer plan. District employees contribute to TRS for pensions at 6.4% of annual compensation, and the state pays the local district's contribution (6% in fiscal 2012), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. OPEB contributions paid by the district are nominal, as the state and employees also pays the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2012 totaled $2.9 million or a very low 2.4% of non-capital expenditures.
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=794021
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