Fitch Rates Progreso ISD, Texas' ULT Bonds 'AAA' PSF; 'A' Underlying

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to Progreso Independent School District, Texas' (the district) unlimited tax (ULT) bonds based on a guaranty provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch.

Fitch also assigns an underlying rating to the district's ULT bonds as follows:

--$8.25 million school building bonds, series 2010 'A'

The bonds are expected to sell via negotiation as early as Aug. 19, 2010.

In addition, Fitch affirms the following ratings:

--Approximately $21 million in outstanding ULT bonds at 'A'

The Rating Outlook is Stable.

RATING RATIONALE:

--The district's finances are heavily dependent on the state, and reserve levels are strong.

--Debt levels are low to moderate, including substantial state support for debt service. Amortization of existing debt is slow.

--The district's tax base is small and moderately concentrated with below average collection rates.

--The district's service area is limited, with high unemployment rates and low wealth levels.

KEY RATING DRIVERS:

--Maintenance of strong general fund balance reserve levels and structural balance is essential to the district's credit quality.

--Given the district's very limited tax base, growth pressures, slow amortization of outstanding debt, and maintenance of a manageable debt burden are key to the rating.

SECURITY:

The bonds constitute a general obligation of the district secured by an unlimited continuing direct ad valorem tax levied against all taxable property within the district.

CREDIT SUMMARY:

Financial operations have remained consistently strong with healthy reserves and undesignated fund balances of 21%-30% of expenditures and transfers out from fiscal 2006 to 2008. For fiscal 2009, the district reported an approximate $815,000 net surplus and posted a prior period adjustment from an accounting correction increasing unreserved general fund balance to over $7 million, or nearly 44% of operating expenditures and transfers out. For fiscal 2010, the district anticipates adding another $800,000 to general fund reserves. The district plans to reserve some funds for one time capital outlays.

A major determinant in the amount of state financial aid for Texas school districts is local wealth levels. The district's property wealth per student is among the lowest in state and, therefore, the district is heavily dependent on state aid for operating support. State financial support has consistently represented nearly 80% of general fund revenues and property taxes account for only about 10%. Tax collections, typical of the border region, are somewhat weak but have improved in recent years due to a change in delinquent tax collection procedures.

The state also contributes significantly to the repayment of district debt, including the current issuance. Currently about 80% of annual debt service is paid from state financial assistance programs due to the district's very low property wealth. As a result, debt ratios remain modest on a per capita basis and moderate as a percent of taxable assessed value (TAV). The pace of principal repayment is below average with 39% of debt retired in 10 years.

The district is located in Hidalgo County and includes the town of Progreso, a trading center located at the intersection of U.S. Highway 281 and Farm to Market Road (FM) 1015. The town's 2000 population was 4,851, a 150% increase since the 1990 census. Population growth has averaged approximately 6% annually since 2003; the 2010 district population estimate is roughly 6,150. Student enrollment in the district has also grown during the past several years but at a slower average rate of 3% annually. District administrators anticipate enrollment growth to continue in the 3%-5% range in the near to intermediate term.

District TAV, while very limited in size, witnessed substantial growth in recent years but has moderated significantly and even contracted in the current year. For fiscal 2011 TAV is anticipated to decrease by about 6.7% from fiscal 2010, after experiencing only a modest 3% increase in the prior year. This deceleration is significant compared with an average annual growth rate of about 17% from fiscal years 2006 to 2009. The growth in TAV was attributable to significant commercial and residential development in the area. Taxpayer concentration exists, with the top 10 taxpayers accounting for 17% of TAV. Despite some improvement, TAV per capita remains very low at just under $21,000.

Tourism, agriculture and trade with Mexico are the leading sectors of commerce in Hidalgo County. In particular, tourism and trade have contributed to rapid population growth; the county's population increased nearly 50% from 1990-2000. Unemployment rates in the county historically have been significantly higher than state and national levels, and although they have shown a dramatic drop in recent years despite strong gains in the labor force, have currently returned to prior levels. The June 2010 unemployment rate was 12.2%, up from 11.2% in June 2009 but still below the 1999 high of nearly 15%. Likewise, local wealth indicators traditionally have lagged significantly behind state and national averages. These statistics are not atypical for border counties in Texas.

In addition to the sources of information identified in the 'Tax-Supported Rating Criteria', this action was additionally informed by information from LoanPerformance Inc.

Related Research:

'Tax-Supported Rating Criteria', dated Aug. 16, 2010;

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009;

'State Revolving Fund and Municipal Loan Pool Rating Guidelines', dated April 28, 2008;

'Revenue-Supported Rating Criteria', dated Aug. 16, 2010.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Additional information is available at 'www.fitchratings.com'.

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

State Revolving Fund and Municipal Loan Pool Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

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