AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following San Benito Consolidated Independent School District, TX's (the district) bonds at 'A':
--$58.6 million of unlimited tax (ULT) bonds, series 2004, 2005, 2005 refunding, and 2008.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. The bonds are additionally secured by the Texas Permanent School Fund, whose bond guarantee program is rated 'AAA' by Fitch.
KEY RATING DRIVERS
STABILIZED FINANCIAL POSITION: The Outlook revision to Stable from Negative reflects the district's improved financial position in fiscal 2012 and Fitch's expectation that conservative budgeting will allow the district to outperform its projections of modest general fund drawdowns in the current and future budgets.
UNCONVENTIONAL TAX RATE STRUCTURE: The transfer of a portion of the tax rate from debt service to operations, while designed to yield maximum overall state funding, requires annual general fund subsidization of debt service. The district retains the ability to raise the debt service tax rate as needed but this unconventional tax rate structure has remained unchanged since fiscal 2010.
RELIANT ON STATE AID: The district is highly reliant upon state revenues to fund operations as a result of its low wealth per student and remains subject to fluctuations in state funding as evidenced in the fiscal 2012-2013 biennium.
MIXED DEBT PROFILE: Debt ratios are above average as a percentage of the district's full market value while the pace of debt retirement is average. Positively, the aggregate fixed cost for debt, pension
SUBPAR SOCIECONOMIC INDICES: The area economy is fairly diverse but, typical of many Texas border communities, suffers from chronically high unemployment, high poverty, and low wealth metrics.
STABLE TAXPAYER BASE: Growth in taxable assessed value (TAV) has moderated in recent years after nearly doubling from 2001 to 2011. Fiscal 2013 TAV is essentially unchanged from the prior year.
RATING SENSITIVITIES
DECLINE IN RESERVES: Sustained drawdown of general fund reserves could apply downward pressure on the rating.
LEADERSHIP CONCERNS: The recent dismissal of the superintendent and lack of public disclosure as to the reasons why is a potential credit concern, particularly if such action negatively affects district operations or financial results.
CREDIT PROFILE
FINANCIAL POSITION STABILIZED
The district's fiscal 2012 audit posted a solid $2.4 million general fund surplus (equal to 2.7% of spending). Although a large $5 million deficit was projected to notably reduce its reserves, the district's fiscal 2012 results benefited from carryover funds from fiscal 2011, the reallocation of certain personnel to federal grant funds, and additional state aid due to the reclassification of career and technology education (CATE) average daily attendance. The reclassification of certain CATE offerings as non-remedial allowed the district to qualify for $2.4 million in additional state program revenues. The district's general fund liquidity position also improved notably in fiscal 2012, rising to $22.6 million, the equivalent of 92 days operating expenses, up from 71 days the year prior.
The fiscal 2013 $96.8 million operating budget appropriates $1.9 million of reserves (2% of spending) to fund operating expenditures while leaving the tax rate unchanged. A $4 million reduction in state revenues and the loss of one-time federal funds prompted management to cut about $1 million from the budget by reducing campus police hours, shuttering a day-care center and laying off its five employees, holding 14 budget positions vacant, and limiting eligibility for the district's pre-kindergarten program. Buoyed by the unexpected fiscal 2012 windfall, the district amended its fiscal 2013 budget midyear to include $1.6 million in retention incentives for district teachers. The district now projects to post a modest $1.8 million draw down (1.8% of spending), leading to a projected $14.5 million unrestricted fund balance or a still solid 15% of spending.
The proposed fiscal 2014 budget projects a modest $1 million drawdown of general fund reserves, based on a $4 million increase in restored state aid, a flat tax rate, and a projected refined average daily attendance (RADA) equal to fiscal 2012 levels. Fitch notes that such a projection may be cautiously optimistic given the modest 0.4% reduction of RADA in fiscal 2013. The district attributes the decline to an expansion of grades at a nearby charter school. The proposed budget also funds 3% pay hikes for professional non-teaching positions and 4% for all others. Expenditure growth is limited to $250,000 for restoring spending cuts to the pre-kindergarten program.
Fitch believes the district's current fund balance and limited drawdowns for fiscals 2013 and 2014 are acceptable at the current rating level. However, the rating could face negative pressure if the district ultimately is unable to restore budgetary balance. Credit concerns could also arise from the recent dismissal of the superintendent in May 2013 if district operations or financials are negatively affected.
SWITCH OF OPERATING & DEBT SERVICE TAX RATES REMAINS IN EFFECT
The district does retain a degree of financial flexibility with a relatively low tax rate that could be raised with board approval. The total tax rate has remain unchanged since fiscal 2010 when the district executed a tax-rate swap, whereby voters approved a $0.13 increase to the operating tax rate, yielding maximum state aid for operations, while reducing the debt service tax rate by the same amount.
The net effect of the swap was a level total tax rate and enhanced operating revenue, but an annual debt service fund shortfall of about $3.5 million that is subsidized by general fund resources. Fitch views the use of this tax rate structure with concern but notes the debt service tax rate can be raised as needed (without voter approval) - thereby easing pressure on the general fund - and the tax rate swap could be reversed, if necessary.
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.
MANAGEABLE LONG-TERM LIABILITIES
Overall debt is moderate on a per capita basis at $2,210 but high as a percentage of market value at 9.4%. The pace of principal amortization is average at 45% retired within 10 years. Because state debt service support is a function of property wealth and local taxing effort, the reduction of the debt service tax rate triggered a drop in direct state debt service aid - from 80% in fiscal 2010 to 45% in fiscal 2012. The gap is now being funded from a mix of the enhanced state and local operating revenues mentioned above. Adjusting for debt service offsets from the state, carrying costs for the unlimited tax bonds and lease revenue bonds totaled a modest 4.3% of governmental spending in fiscal 2012. Officials have no plans to issue additional bonds in the near term.
The district provides its employees with pension benefits through its participation in the Texas Retirement System of Texas (TRS), a cost sharing multiple-employer defined benefit plan. OPEB are provided through TRS-Care, also a cost sharing multiple-employer defined benefit plan. The district's combined fiscal 2012 required contribution to TRS for pension and OPEB was $683,000, which represented a low 0.6% of fiscal 2012 governmental spending. The aggregate fixed-cost burden for debt, pension and OPEB was an affordable 5% of fiscal 2012 governmental spending.
LIMITED BUT STABLE RESOURCE BASE
This Rio Grande Valley district covers a 100 square mile area in Cameron County (the county) and serves the city of San Benito and certain unincorporated areas of the county. The area economy is based on agriculture, fishing, manufacturing, trade and tourism and also benefits from its trade links with Mexico; the City of San Benito (rated 'A+' by Fitch) is a commercial and tourist center for the surrounding region.
Modest employment growth in Cameron County was matched with similar rates of labor force growth for the 12 months ending June 2013. As a result, the county's unemployment rate of 11.1% has not changed during this period and remains well above the state and national averages of 6.9% and 7.8%, respectively. The area's high unemployment rate and low wealth indices are typical of most Texas border communities.
The district's tax base registered consistent growth in the past five years, and, while slowing during the economic downturn, averaged 3% annual gains from 2007-2012. Certified fiscal 2013 assessed values are essentially flat from 2012 at $838 million. Almost 69% of the taxpayer base is residential properties and no single taxpayer accounts for more than 2.5% of total valuations.
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, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council.
Applicable Criteria and Related Research:
--'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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801097
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