AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following 'AA+' ratings of North East Independent School District (ISD), Texas:
--Issuer Default Rating (IDR);
--$1.3 billion unlimited tax (ULT) bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy on property in the district.
KEY RATING DRIVERS
The 'AA+' IDR and ULT ratings reflect the district's strong operating performance, solid expenditure flexibility and moderate long-term liability burden.
Economic Resource Base
North East ISD is one of the 10 largest school districts in Texas, with a fiscal 2016 enrollment of 67,700. The district serves a 2015 urban-suburban population of 436,463 in north and northeast Bexar County, including portions of San Antonio. Fitch rates both Bexar County and San Antonio GO bonds 'AAA'/Stable Outlook.
Revenue Framework: 'a' factor assessment
North East ISD revenues realized a strong growth rate in excess of U.S. GDP for the 10-years ended in 2015. Fitch anticipates future growth in line with GDP considering strong tax base growth, the expectation for stable state support and moderating enrollment. Increases in the district's maintenance and operations (M&O) tax rate require voter approval. The 'a' revenue framework factor assessment results from the district's inability to independently raise operating revenues without voter approval, despite its solid revenue growth prospects.
Expenditure Framework: 'aa' factor assessment
The district's natural pace of spending is expected to grow at a pace similar to or marginally above that of revenues. The district's solid expenditure flexibility is derived from management of its workforce costs and is not impeded by moderate carrying costs. The majority of employer pension and other post-employment benefit contributions are borne by the state of Texas.
Long-Term Liability Burden: 'aa' factor assessment
North East ISD's long-term liability burden is moderate at 13% of estimated personal income. Fitch expects the burden to remain moderate because population and personal income are likely to grow at a rate consistent with regional debt needs.
Operating Performance: 'aaa' factor assessment
Fitch expects the district to demonstrate strong financial resilience in a moderate economic downturn based on its solid expenditure flexibility, further supported its current sound reserve level.
RATING SENSITIVITIES
Strong Fiscal Health: The rating is sensitive to shifts in fundamental credit characteristics, including the district's ongoing revenue growth, alignment of operating spending with revenues, and affordability of debt as reflected in of the district's carrying costs and long-term liability burden.
CREDIT PROFILE
The diverse San Antonio metro economy features large employers in the insurance, government, healthcare, telecommunications, grocery, education and military sectors. The city also benefits from traditionally strong tourism and trade. IHS projects robust medium-term growth for the city, driven by professional/business services, education, and health services.
North East ISD's taxable assessed valuation (TAV) realized a strong 4.8% compound annual growth rate (CAGR) for the 10 years ending in fiscal 2015 and a greater 8.9% and 9.8% CAGR in fiscal 2016 and 2017 respectively. The Federal Reserve's October 2016 San Antonio regional economic update reports a strong residential housing market and the expectation for ongoing healthy regional growth.
Revenue Framework
Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per-pupil amount (which varies from district to district). State funding contributed 33% of fiscal 2016 general fund revenues, with property tax revenues providing 65%.
North East ISD's revenues realized a strong 4% CAGR over the 10 years that ended in fiscal 2015 and grew by a stronger 4.6% in fiscal 2016. These trends reflect the district's ability to capture year-over-year tax base gains due to a one-year lag in state aid adjustments, as well as modest enrollment growth and state funding adjustments. Fitch anticipates revenue growth in line with U.S. GDP considering regional tax base trends, modest enrollment growth and stable state support over the medium term.
Similar to the vast majority of Texas school districts, North East ISD's $1.04 per $100 of TAV M&O tax rate is at the statutory ceiling. The district has the ability to raise operating revenues by a limit of an additional $0.13 through a tax ratification election, although no immediate plans are in place.
Expenditure Framework
The majority of the district's budget is consumed by instructional and support costs. The district's fiscal 2016 general fund included pay-as-you-go capital spending equal to about 4% of the operating budget.
Fitch expects the district's recurring operating expenditures to grow in line with to marginally above its expected revenue growth over the medium term.
North East ISD maintains discretion over its labor costs, contributing to solid expenditure flexibility. The district's debt and pension contribution carrying costs are a moderate 15% of governmental spending and do not appear to pressure operations. Fitch expects carrying costs to remain moderate based on expected proportional growth in the district's operations and debt service. Pension contributions are currently limited to the 1.5% of salaries and include pension contributions on the portion of salaries above the statutory maximum. The assessment assumes ongoing state funding for the majority of employer pension and OPEB contributions. The district's 10-year principal amortization is considered somewhat below average at about 41%.
Long-Term Liability Burden
North East ISD's $3.0 billion long-term liability burden is moderate at 13% of estimated personal income. The burden is comprised primary of $2.7 billion in debt, $1.3 billion of which is direct. The district expects to issue its approximate $500 million in authorization over the next several years primarily for campus renovations with an $80-$90 million variable-rate bond issue planned for February 2017 to clear the balance of the district's commercial paper program. The district plans to keep its interest and sinking fund (I&S) tax rate ($0.345 per $100 of taxable assessed value in fiscal 2017) flat for the next five years. The I&S tax rate is comfortably below the $0.50 statutory rate cap for new debt issuance.
North East ISD historically maintains a moderate amount of its debt portfolio in variable-rate unlimited tax bonds, estimated at about 20% of total debt outstanding subsequent to the district's planned variable rate issuance in February, well within the district's policy ceiling of 25%. Terms of the district's variable-rate bond series include one-to-five-year fixed-rate terms, a soft put to bondholders in lieu of liquidity support, and the option to reset the rate to a long-term fixed basis until final maturity. Fitch considers the risks associated with a failed remarketing (which would result in an elevated interest rate of up to 7%) manageable, based on assumed ready market access given the district's sound credit profile.
Operating Performance
Fitch expects the district to demonstrate strong financial resilience during a moderate economic downturn based on its solid expenditure flexibility, supported further by its current reserve levels. The district maintains discretion over headcount and workforce costs as a means to maintain an adequate financial cushion during revenue declines.
The district typically outperforms its conservative budget which includes funding for all positions. The current rating assumes that the district will continue to prudently manage its costs in order to maintain a financial cushion consistent with the current rating.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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