AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Alvin Independent School District, TX (the district) bonds:
--$127.5 million unlimited tax (ULT) schoolhouse and refunding bonds series 2016.
The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
Fitch has also assigned an 'AA' underlying rating to the series 2016 bonds. The series 2016 bonds are scheduled for a negotiated sale Feb. 18. Proceeds will be used to construct school facilities, purchase land, and refund certain outstanding maturities for economic savings as well as pay related costs of issuance.
The Rating Outlook is Stable.
SECURITY
The bonds are payable by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment by the Texas PSF guaranty.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The district's strong financial profile is characterized by conservative budgeting, proactive forecasting, and consistently large financial reserves. Reserves remain healthy despite periodic pay-go capital spending and operating pressures associated with rapid enrollment growth trends.
ELEVATED DEBT BURDEN: Overall debt ratios are very high. Fitch believes ratios will remain elevated given growth-related capital needs that will necessitate future borrowings. Carrying costs are low and are expected to remain manageable despite an ascending debt service schedule given modest retiree benefit costs.
STRONG REGIONAL ECONOMY: The district benefits from its close proximity and improved transportation corridors to the Houston metropolitan statistical area (MSA). Residents have easy access to a large employment market that while slowed, has historically outperformed the nation in terms of population, employment, and income growth.
CONTINUED TAX BASE EXPANSION: Some of Fitch's concerns about the district's increasing debt load are mitigated by a trend of taxable assessed value (TAV) growth since fiscal 2012 from a broadening tax base. A mix of residential, attendant retail and commercial development, and the district's own growing energy sector have contributed to the TAV gains, which have generally outpaced enrollment gains. Taxpayer concentration is moderate.
RAPID ENROLLMENT GROWTH: Fitch believes that ample developable land and affordable home prices will facilitate additional enrollment growth, demonstrating the need for continued strong financial and debt management practices.
RATING SENSITIVITIES
GROWTH-RELATED PRESSURES: The maintenance of budgetary balance and solid reserve levels despite ongoing growth-related spending pressure mitigates credit concerns over the large debt load, slow amortization, and some taxpayer concentration. Fitch does not expect any positive rating action over at least the near to intermediate term given the district's already very high overall debt levels.
CREDIT PROFILE
PROXIMITY TO HOUSTON SUPPORTS LONG-TERM GROWTH PROSPECTS
The district is located 25 miles southeast of Houston in the northern portion of Brazoria County (GO bonds rated 'AA+', Stable Outlook by Fitch) and in proximity to the expansive Houston Medical Center.
Aided by its easy access to Houston's employment base, particularly to the nearby and growing health care sector, ample developable land and affordable home prices have combined to rapidly expand the district's population base by 5% annually since 2000. These gains exceeded population gains made by the county and Houston MSA for the same time period; the district's current population is estimated at about 135,000. Data indicate that the district's housing market continues to perform well, with ongoing new starts and housing prices continuing to trend up. Nonetheless, only about one-third of the district is currently built-out.
Annual enrollment growth over the last five fiscal years (fiscals 2010 - 2015) has been steady, averaging about 5%. District enrollment currently totals about 22,100 and management anticipates full build-out to occur over the next 25-30 years at roughly 57,000 - 60,000 students.
ENERGY SECTOR AND CHEMICALS DOMINATE COUNTY ECONOMY
The Houston MSA economy made a robust post-recessionary recovery due in part to the strength of the energy sector. However, Fitch believes the recent plunge in oil prices may dampen the pace of growth over the near term. As it is one of the state's petrochemical centers, the positive impact of lower energy prices on that activity may serve as a partial offset to any economic softening (see Fitch's report, 'How Will Local Oil Patch Governments Fare? (Financial and Economic Impacts of Fluctuating Energy Prices)' dated August 2015).
As a complement to the strong metro economy, activity in the county centers on chemical manufacturing and petroleum processing. The county benefits from the Port of Freeport, the 16th largest port in the U.S. in terms of foreign tonnage, which provides critical shipping access for the region's industries. Dow Chemical Co is the largest employer in the county with 4,300 employees. Sizeable expansion plans were recently announced for its Freeport chemical complex, in addition to the construction of a research and development center in Lake Jackson.
While the area economy is dominated by the chemical and energy sector, the essentiality of these industries and the ongoing diversification of the regional economy somewhat offsets concerns regarding economic concentration. The county's economic momentum has slowed modestly year-over-year due to the stability of its other employment sectors and those of the larger Houston MSA. Unemployment levels are up slightly to 4.8% in November 2015 from 4.5% a year ago due to faster erosion of employment (2%) than labor force (1.5%). The county's unemployment rate remained generally in line with the MSA (4.9%) and nation (4.8%) while rising slightly above the state (4.5%). Wealth/income and educational attainment metrics in the district are generally comparable to those of the MSA, state & U.S.
STRONG FINANCIAL POSITION
The district has historically maintained a strong financial position and consistently positive operating results despite a high enrollment growth environment and previous state funding cuts. The district posted general fund operating surpluses in six of the last seven fiscal years (fiscals 2009 - 2015).
Management's conservative approach to budgeting enrollment and operational spending as well as adherence to established financial policies have contributed to these results.
Finances in fiscal 2015 remained strong, exceeding prior expectations of a moderate drawdown on reserves with an $8.8 million (about 5% of spending) operating surplus. The district benefitted from increased state per pupil funding levels in the biennium (fiscals 2014 - 2015) and expenditure savings.
Unrestricted general fund reserves totaled $73.6 million or just under 40% of spending at fiscal 2015 year-end after a net $2.5 million drawdown for non-operating spending. Reserves remained well above the district's formal fund balance policy of between 17% and 25% of spending. The year's surplus and size of reserves supported management's decision to fund various pay-go capital spending projects, contribute $3.2 million to modestly boost its debt service fund balance cushion, and eliminate the year's $2.2 million operating gap in its self-insured health care fund.
The $190.2 million fiscal 2016 operating budget was adopted as structurally balanced. This was despite adding roughly 150 new employees, a 3% cost of living adjustment, and an increased employer healthcare contribution that in total drove most of the year's 7% budget growth. Management indicates year-to-date results are currently tracking budget, while actual enrollment trends and associated revenues are higher. In addition, conservative expenditure budgeting and added state per pupil funding not factored into the adopted budget are currently projected to allow for roughly $11 million in pay-go capital spending with another $1.7 million planned to be contributed towards debt service reserves.
A modest use of reserves ($1.2 million or 1% of budgeted spending) is projected while the general fund balance is expected to remain at no less than three months of spending (consistent with policy). Fitch believes that the district's policy of committing reserves above 25% of spending for pay-go capital funding is a credit positive and recognizes that reserves may be maintained at a level closer to the policy maximum going forward.
The district prepares multi-year budget forecasts, which Fitch views as a favorable credit consideration. The district's current financial forecast projects modest annual drawdowns of reserves for capital projects (no more than 6% of budgeted spending) over the near term (fiscals 2016 - 2020), under what Fitch believes may be feasible but somewhat optimistic annual TAV growth assumptions of 7% - 9%. These assumptions factor in the various residential, retail and commercial projects underway or planned. Operating performance is assumed to tighten in fiscal 2017 given the opening of several new campuses, although these preliminary projections still anticipate a solid fund balance position of roughly $67 million or 32% of operational spending.
TAX BASE EXPANSION
The district's tax base is predominately residential. A growing population base largely in the western portion of the district continues to fuel residential development and TAV gains, due in part to close proximity and improved transportation corridors to the Houston MSA. Notably the district's tax base continued steady, albeit modest growth during the recession, and began to strengthen after fiscal 2012.
A very strong 12% TAV gain was recorded in fiscal 2015, reaching $6.5 billion. The subsequent 2% gain in fiscal 2016 was uncharacteristically slim, and in contrast to the year's 11% market value gain, as growth in real estate was offset by modest loss in mineral values ($200 million) that had comprised about 6% of the prior year's TAV as well as a another modest $200 million TAV loss from an increased homeowner tax exemption recently approved by voters. Fitch views the latter loss of tax revenue as a credit neutral since the state is required to make whole any revenue shortfall for operations and outstanding debt service and the fiscal 2016 - 2017 state budget includes this additional funding amount. Concentration among the top 10 taxpayers is moderate at 10% of TAV in fiscal 2016, led by top taxpayer Denbury Onshore LLC at roughly 4%.
DEBT PROFILE TO REMAIN PRESSURE POINT
Overall debt levels are high with debt to market value at 12.7% in fiscal 2016 (or about $7,200 on a per capita basis) inclusive of this issuance. These debt ratios do not consider state support. Despite unfavorable debt ratios, the district's fixed-cost burden for debt service is low at about 7% of governmental fund spending in fiscal 2015. The manageable burden is aided by state debt service support (about 23% of ULT debt service in fiscal 2015) received by the district due to its comparatively lower per pupil property wealth. Amortization remains slow with about 35% of principal retired in 10 years.
This issuance includes the first new money portion from a new $245 million GO bond authorization to fund the district's growth-related facility needs, approved by voters at a solid 60% margin. The authorization includes school facilities for all grade levels and is projected to last the district between 3 - 5 years, dependent on housing and enrollment trends.
Projects to be included will incorporate use of the roughly $12 million of 2013 authorization that remains outstanding.
Additional issuances are planned through fiscal 2019 and annual debt service for the entire authorization is projected to rise from $33.6 million in fiscal 2016 to peak at roughly $50.3 million over fiscals 2022 - 2033 (approximately 15% of fiscal 2015 governmental spending). The maximum debt service tax rate anticipated for the district's newly authorized bonds preserves a modest cushion below the state's $0.50 TAV test for new money issuance. In support of the new bond program, the debt service tax rate is projected to increase to a maximum of just over $0.08 per $100 TAV to $0.46 per $100 TAV based on somewhat optimistic TAV annual gains of 8% - 9%.
Fitch believes that a trend of faster than anticipated enrollment growth in conjunction with slower than expected TAV growth could heighten the existing pressure on the district's debt profile. Fitch will continue to assess the district's capital needs and debt plans and their effect on the already high debt ratios, diminishing tax rate capacity for new debt, and overall budget flexibility.
STATE FUNDING FOR PENSIONS CONTRIBUTES TO MODERATE CARRYING COSTS
Fitch's concern about the district's overall long-term liabilities is lessened in part by its low retiree cost burden. The district participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions.
However, like all Texas school districts, the district is vulnerable to future policy changes by the state, as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.
Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $4.7 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate of return assumption (approximately 75% based on a more conservative 7% investment rate of return assumption). The NPL represents less than 1% of the district's fiscal 2016 market value. Other post-employment benefit (OPEB) contributions paid by the district are also nominal, as the state and employees also pay the bulk of these costs. Carrying costs for debt service, pensions and OPEB are presently low at 8% of fiscal 2015 governmental spending, but Fitch estimates they will increase to a more midrange level once the authorized debt is fully issued.
TEXAS SCHOOL FUNDING LITIGATION
A Texas district judge ruled in August 2014 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 schoolchildren and was the second such ruling in the past two years, found the system inefficient, inequitable and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.
The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature would likely follow with change intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, Texas Municipal Advisory Council, and IHS.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999224
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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