AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Austin Independent School District, Texas' (Austin ISD or the district) unlimited tax bonds (ULTs):
--$100 million ULT refunding bonds, series 2013A;
--$8.5 million ULT refunding bonds, taxable series 2013B.
The bonds are scheduled for a negotiated sale on Aug. 6, 2013. Proceeds from the sale will be used to refund outstanding commercial paper issued for capital projects, refund certain outstanding obligations for savings, and to pay issuance costs. It is anticipated that the series 2013A bonds will also carry a guaranty by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch.
Fitch also affirms the underlying 'AA+' rating on the district's approximately $762 million (pre-refunding) outstanding ULT bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable and secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
STATE FUNDING CUTS WEATHERED: The district maintains its sound financial position and strengthened reserves after prudent fiscal management implemented significant budgetary cuts to address the loss of state funding in the last biennium.
TREND OF MODERATE TAV GROWTH: The tax base is diverse and has largely experienced moderate annual growth over the past five fiscal years despite the recession. Further taxable assessed valuation (TAV) growth is projected over the near-term.
STABLE REGIONAL ECONOMY: Economic indicators for the city of Austin (the city) indicate a generally sound service area with unemployment levels that remain below state and national levels despite solid labor force growth. Income and wealth metrics compare favorably to the state and are slightly below the national level. Educational attainment levels equal or exceed those of the U.S.
MODERATE LONG-TERM LIABILITIES: Overall debt levels and other long-term liabilities of the district are moderate. Amortization of tax-supported principal is average. Carrying costs are low and expected to remain manageable over the near-term.
RATING SENSITIVITIES
FINANCIAL DETERIORATION: Material deterioration of the district's financial position from growing structural imbalance could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectation that such near-term shifts are unlikely.
CREDIT PROFILE
Austin ISD is the fifth largest school district in the state with nearly 130 campuses and a current enrollment of about 87,350, serving the city (general obligation bonds rated 'AAA' by Fitch) and about 840,000 residents. Annual enrollment gains have remained steady, averaging about 1% over fiscals 2008 -2013, enabled by a stable yet growing regional economy that has fueled fairly rapid population expansion since 2000.
UNEMPLOYMENT FALLS FURTHER DESPITE LABOR FORCE GAINS
While not immune to recessionary forces, the city's economy historically has been buffered by the large and stabilizing presence of state government as well as seven colleges and universities, including the University of Texas (the University of Texas System is rated 'AAA' by Fitch with a Stable Outlook), one of the largest public universities in the country. High-technology manufacturing is also a major employer, attracted to the area by a well-educated workforce and the availability of major research facilities. Year-over-year unemployment trends reflect further economic improvement as unemployment levels have continued to fall despite solid labor force growth. City unemployment declined to 4.8% in April 2013, which was down from 5.2% in April 2012 and below the state and U.S. rates of 6.1% and 7.1% respectively. Income and wealth levels as measured by median household income are 98% of the state and 94% of the U.S., although slightly below those of the larger Austin-Round Rock-San Marcos metropolitan statistical area.
SECOND YEAR OF MODEST TAV GROWTH
The district's tax base has historically been characterized by strong, annual TAV growth pre-recession given area population trends and the resulting economic expansion. It remained resilient over the recession, registering only one year of a modest TAV decline and has since reflected modest gains. TAV grew by 4% in fiscal 2013 following a slightly more modest gain in fiscal 2012. Management anticipates another 3% - 4% TAV gain for fiscal 2014, which Fitch believes is reasonable given the improving economy and uptick in new development. Concentration among the top 10 taxpayers is minimal at 3%; about half of the top taxpayers are large, high-tech firms.
LARGE OPERATING SURPLUSES OVER FISCALS 2010 - 2012
The district is considered property wealthy and relies almost entirely on local property taxes, but its funding is subject to the state's formula and a portion of the district's operating tax levy is effectively recaptured by the state for distribution to less wealthy school districts. For fiscals 2012 and 2013, these payments approximated $125 million and $115 million, respectively, or around 15% of total general fund spending.
Since fiscal 2009, the district has continued to generate solid net operating surpluses and build up reserves, improving its overall financial flexibility. Significant budgetary cuts implemented by management enabled the district to maintain its financial position despite a total $97 million cut in state funding over the last biennium (fiscals 2012 - 2013). In order to prepare for these budget cuts, the district declared financial exigency, as required by state law, to allow for the implementation of a reduction in force. In total, nearly 1,300 positions were eliminated by attrition or layoffs. District officials realized additional cost containment through salary and hiring freezes as well as the establishment of a self-funded health insurance program and employee health care contributions increases. Financial exigency ended roughly a year later on Jan. 30, 2012.
Implementation of these various cost saving measures and continued tight spending throughout the year was effective. The district generated a large net operating surplus of $33.7 million at year-end fiscal 2012, which was well in excess of previous break-even expectations and comparable with the large difference in actual to projected year-end performance in fiscal 2011. The receipt of $13.8 million in one-time, federal funding (EduJobs) also assisted the year's results as an offset to some general fund spending. Unrestricted reserves rose to $244 million or approximately 31% of fiscal 2012 spending, which was up from an already strengthened unrestricted reserve level of $218 million or about 28% of spending in fiscal 2011. Liquidity as measured by general fund cash/investments rose as well in fiscal 2012, totaling $257 million or nearly four months of general operational spending.
REDUCED DRAWDOWN PROJECTED FOR FISCAL 2013
For fiscal 2013, the budget realized a further drop in operating revenue as the district had to contend with a disproportionally higher $22 million reduction to the year's state funding for a total of $59.1 million and the additional loss of one-time federal funding. The year's $836 million budget was adopted with a $28 million draw on reserves, of which $14.2 million was used to provide one-time salary adjustments and improve district salary competitiveness. Year-to-date, management currently anticipates improved financial performance that will favorably half the budgeted drawdown and maintain reserves above the stated 20% unrestricted reserve policy.
MODERATE STRUCTURAL IMBALANCE FORECAST
Budget plans for fiscal 2014 are under development and also consider some level of drawdown on reserves despite generally modest improvement in state funding levels to Texas school districts over the fiscal 2014 - 2015 biennium. The district may again consider further one-time salary adjustments in an effort to remain competitive. A multi-year financial forecast through fiscal 2016 currently projects a generally even, moderate level of structural imbalance annually at roughly $45 million/year or about 6%-7% of general fund spending.
Fitch views these forecasts with some concern although recognizes the moderate nature of the imbalance while taking comfort from management's conservative fiscal practices that have typically maintained reserves above formal reserve requirements. Fitch believes the district maintains a moderate level of remaining expenditure flexibility with which to soften this projected imbalance. An operating tax rollback election also remains available to the district that would generate about $30 million annually, requiring voter approval.
TEXAS SCHOOL DISTRICT LITIGATION
In February 2013 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 funding system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.
DEBT BURDEN AND OTHER LONG-TERM LIABILITIES MODERATE
Overall debt levels are moderate at approximately $2,500 per capita and
2.8% of market value and little changed with this issuance. The district
will refund most of its currently outstanding commercial paper with the
majority of the series 2013A tax-exempt issuance; the district is one of
few Texas school districts to utilize such a program. Principal
amortization remains slightly above average at 55% in 10 years.
Solid
TAV gains have generally mitigated the debt service tax rate impact of
the district's previous borrowings, enabling the district to implement
its capital plan with limited tax rate impact. The district anticipates
continued utilization of its commercial paper program, issuing about
$100 million - $125 million annually for its more immediate construction
needs and subsequently, fixing it out into long-term debt allowable from
its remaining bond authority.
After this issuance, the district has about $619 million in remaining bond authorization, of which $490 million received slim approval by voters primarily for technology, renovations and additions to existing facilities in a May 2013 bond election. In the same election, voters also marginally rejected two other bond propositions totaling $400 million for new facilities, which reversed a long-standing trend of strong voter approval for the district's bond measures. Management indicates the district maintains enrollment capacity in its facilities district wide. Fitch anticipates district officials will likely implement some interim measures to address the failed capital needs for the pockets of enrollment growth district wide as well as sharpen its focus on key facility needs with near-term completion of the district's facilities master plan.
The district's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the district provides the bulk of the employer's annual pension contribution. 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; the district consistently funds its annual required contributions. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a moderate 9.7% of governmental fund spending in fiscal 2012, reflective largely of the district's annual debt load.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, and IHS Global Insight.
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=797149
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