AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following Port Arthur Independent School District, Texas' (the district) bonds:
--$49.1 million unlimited tax (ULT) refunding bonds, series 2012.
The bonds are schedule for negotiated sale on March 7, 2012. Proceeds from the sale will be used to refund a portion of the district's outstanding ULT debt for interest savings.
Fitch also affirms the 'AA-' rating on the district's $276.7 million in outstanding ULT bonds (pre-refunding).
The Rating Outlook is Stable.
SECURITY
The ULTs are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
STRONG RESERVE LEVELS: The district has maintained strong general fund reserves at over one-third of annual spending. Recent net deficits have, in part, been due to planned capital outlays.
SOME BUDGET PRESSURE: State funding cuts and a tax rebate liability are applying moderate budget pressure. Management took action to maintain structural balance in fiscal 2012 but will utilize a sizable portion of general fund reserves to refund a major taxpayer over the next several years.
HIGHLY CONCENTRATED TAX BASE: The district's tax base is highly concentrated in oil & gas refining and chemical plants. Fitch expects tax base concentration to remain substantially high due to expansions underway by several top taxpayers.
CONTINUING TAX BASE GAINS: The district experienced very strong taxable assessed value (TAV) growth over the last several years, although growth levels have been uneven from year-to-year.
WEAK DEBT PROFILE: Overall debt levels and the fixed annual debt burden on the budget are high, while amortization is slow. Debt concerns are somewhat mitigated by a relatively low debt service tax rate.
WHAT COULD TRIGGER A RATING ACTION:
EROSION OF FLEXIBILITY: In light of planned drawdowns on reserves to rebate a major taxpayer, long-term credit quality is predicated on management's ability to maintain structural balance and avoid further, unbudgeted fund balance declines. Fitch views a healthy level of reserves as the primary mitigant to the credit risks associated with the district's highly concentrated tax base, moderately high debt levels, and state funding uncertainty.
SECURITY:
An unlimited ad valorem tax pledge levied against all taxable property within the district.
CREDIT SUMMARY:
SIZABLE RESERVES PROVIDE GOOD FLEXIBILITY
Consecutive years of positive operating results from fiscal years 2004 to 2009 lifted operating reserves to a robust $33.4 million or 46% of spending at fiscal year-end 2009. The annual surpluses were facilitated by the successful management of expenditures to combat a declining attendance trend, on which state aid is largely based.
Modest net deficits in fiscal years 2010 and 2011, which were in part due to pay-go capital spending, reversed the trend of positive results. Spending edged up in fiscal 2010 due to cost pressures from the opening of new campuses and a large capital outlay, resulting in a modest deficit of $1.6 million (2% of spending); however, a prior-period accounting adjustment increased general fund balance to over $35 million. A more sizable fiscal 2011 deficit of $5.3 million (7% of spending) was prompted by an unexpected 3% drop in attendance and corresponding loss in state aid, optimistic budgeting of local revenues (property taxes and payments-in-lieu of taxes), and another capital outlay from the general fund. Even with the deficit, the unrestricted general fund balance remained strong at $29.9 million or 37% of spending.
BUDGET PRESSURE FROM STATE AID CUTS & ADVERSE TAX SETTLEMENT
State funding cuts for the fiscal 2012-13 biennium coupled with an adverse tax ruling have provided the district with a fresh set of budgeting challenges. The district lost about $5 million in fiscal 2012 state aid it would have received under prior-year funding formulas, but management prudently implemented cost-saving measures to adopt a balanced operating budget; measures included the elimination of positions through attrition and non-renewals, cuts to new capital improvement spending, and reductions to campus and department budgets. Year-to-date revenues have also benefited from an uptick in attendance. Officials do, however, plan to use about $2.8 million of reserves in fiscal 2012 for capital items carried forward from the prior-year.
A property tax dispute settled in May 2011 between Valero Energy (Valero; formerly Premcor) - the district's second largest taxpayer - and the county appraisal district resulted in an adverse ruling for the district and subsequent gross tax rebate liability of $18.5 million, payable over six years through fiscal 2017. Partially offsetting the liability is a $7.5 million reimbursement from the state to replace aid owed under the revised tax base valuation. Management has confirmed an initial $4 million payment made to Valero and offsetting state reimbursements totaling $3.7 million as of February 2012. The timeline for receiving the remaining balance from the state will impact the district's fiscal 2012 ending fund balance, but Fitch notes year-end reserves would still provide ample flexibility at over 1/3 of spending.
The baseline Valero repayment scenario - assuming full reimbursement by the state and future balanced operating results - would result in a cumulative 45% decline in general fund reserves to about 20% of spending by fiscal 2017, which is near the district's formal fund balance target of 2.5 months of operating costs. While Fitch believes this level of reserves would still provide satisfactory financial cushion, management's ability to maintain structural budget balance to avoid additional fund balance declines will be integral to long-term credit quality.
HEAVY TAX BASE CONCENTRATION IN THE OIL/GAS & CHEMICAL SECTORS
The district is part of the Beaumont-Port Arthur metropolitan statistical area (MSA), a three-county region in southeast Texas whose economy is primarily supported by petroleum-related industries. The majority of the district's tax base is industrial, comprised of oil refineries and chemical plants. Due to the expansive industrial base, the district's market value per capita is a high $121,000, but individual income levels are below state and national averages.
Top taxpayer concentration is a credit concern; the top 10 payers comprise a high 38% of fiscal 2012 TAV and are nearly all part of the oil, gas, and chemical sectors. Motiva Enterprises LLC (Motiva) is the leading taxpayer at 16.5% of fiscal 2012 TAV, followed by Valero at 7% of TAV. Motiva, which is co-owned by Shell Oil Company (an affiliate of Royal Dutch/Shell Group; Fitch long-term IDR of 'AA'), has neared completion of a $7 billion plant expansion. Upon completion expected in 2012, Motiva's Port Arthur facility will be the nation's largest refinery. Valero also has an over $1 billion expansion of its refining plant underway with expected completion in 2013. Fitch views the top taxpayer and industry concentration with concern but notes the essentiality of oil and gas refining in the U.S. makes the closure of these plants unlikely even in the event of an ownership change.
Annual tax base gains have continued but at an uneven pace in recent years, driven in large part by fluctuations in industrial values. TAV grew by a compound annual average of over 13% from fiscal years 2007 to 2011 before slowing to 1.7% growth for fiscal 2012. Given the continued capital improvements of major refineries, district officials expect continued, moderate growth in industrial values and overall TAV, a projection which Fitch believes is reasonable.
RECENTLY COMPLETED BOND PROGRAM ELEVATED DEBT LEVELS
Overall debt ratios are high at $6,443 per capita and 5.3% of full market value (MV). Debt levels rose measurably following the entire issuance of $189 million in 2007 ULT authorization, issued in three installments from 2008 to 2010. The fixed debt burden on the budget is also high at 19% of audited fiscal 2011 general fund and debt service spending. Debt service ticks up slightly in fiscal 2013 and marginally descends thereafter, so the debt carrying cost will remain elevated in future years. Amortization remains slow at 30% of principal retired in 10 years.
This issuance is a refunding for interest savings to be taken over the life of the bonds. Management is in the process of establishing a comprehensive list of capital needs, which broadly consist of renovations and upgrades to existing facilities. However, the amount and timeline for additional ULT authorization is presently undefined.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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', dated Aug. 15, 2011.
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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