Fitch Downgrades Brownsville ISD, TX's ULTs to 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has downgraded the following Brownsville ISD, Texas bonds to 'AA-' from 'AA':

--$166.1 million unlimited tax (ULT) bonds, series 2001, 2005, and 2006.

The Rating Outlook is revised to Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax pledge. The bonds additionally carry a guarantee from the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

DIMINISHED FISCAL CUSHION: The key rating drivers supporting the downgrade to 'AA-' are the significantly diminished fiscal cushion of the district and limited ongoing budget flexibility. A projected fiscal 2012 surplus would arrest the trend of significant draws on fund balance. However, the current level of available reserves, which Fitch expects to remain below the district's formal target, together with limited revenue raising ability and mixed economic base is more consistent with the lower 'AA-' rating.

FINANCES APPARENTLY STABILIZING: The Stable Outlook reflects positive steps the district has taken to return to budgetary balance, including management of state aid cuts in fiscal 2012 and adoption of a fiscal 2013 balanced budget.

STABLE TAX BASE: The district's proximity to Mexico and an extensive and expanding transportation network support strong international trade activity. Tax base growth resumed in fiscal 2013 after being flat in the prior two years.

WEAK SOCIOECONOMIC INDICATORS: District wealth levels are low, and the region suffers from structurally high unemployment and poverty rates.

MANAGEABLE DEBT LOAD: Overall debt ratios are low to moderate due to generous state aid for debt service. The rate of amortization is average.

FLAT ENROLLMENT: Current-year enrollment is flat after declining modestly in 2012, demonstrating the impact of charter-school competition.

CREDIT PROFILE

BUDGET FORECASTS MISSED THE MARK FROM 2009 - 2011

Declines in operating reserves in fiscal years 2009 - 2011 were largely to fund facility construction but were exacerbated by construction cost overruns, unplanned capital outlays, and over-budgeting of enrollment-driven state revenues. The net effect has been a cumulative 44% decline in general fund balance during this three-year period and a drop in the unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) to $83.3 million or 19% of expenditures and transfers in fiscal 2011. While this level of reserves still provides a solid fiscal cushion, the declining trend is troubling and the budgetary fund balance is below the district's formal fund balance floor of 75 days of operating costs.

Of concern to Fitch is the instability in the administrative team in recent years, which coincided with the trend of negative budget variances. In addition, in contrast to Fitch's prior understanding, the district lacks the ability to increase its operating tax rate without voter approval which limits budget flexibility.

RETURN TO BUDGET BALANCE FORECAST IN 2012; OUTLOOK FOR 2013 UNCERTAIN

The new management team, which has been in place since June 2011, is forecasting a modest operating surplus after transfers in fiscal 2012 (June 30 fiscal year), which is notable given that interim projections called for a $4 million draw-down on reserves to fund targeted campus improvements added to the budget. The original budget was trimmed to absorb a nearly $18 million reduction (6%) in state formula-funding; officials froze salaries and hiring and initiated an early retirement incentive to achieve measurable attrition savings, while also using $9 million in one-time federal aid. Management reports that tighter cost controls and ongoing attrition savings will yield a $600,000 surplus after transfers. This would keep the unrestricted portion of general fund balance at roughly $84 million or 19.0% of spending and transfers on a GAAP basis.

The $423.7 million 2013 budget was balanced due to a stabilizing revenue picture, as gains in local funding from climbing AV and modestly improved state revenues more than offset the loss of one-time federal funds. Spending is up 5.7% from the 2011 budget to absorb a one-time staff retention payment, costs associated with the opening of three new campuses, and expansion of a federally-reimbursed school breakfast program. However, an unbudgeted lawsuit settlement ($700,000 net cost to the district) was just recently paid from general fund resources. Average daily attendance, which is a key revenue driver, remains flat in 2013 after declining modestly last year due to charter-school competition. Management expects a level enrollment trend for the near-term, but further enrollment declines could also pressure operating revenues.

MANAGEABLE DEBT BURDEN DUE TO GENEROUS STATE DEBT SERVICE AID

The state currently supports about 67% of the district's debt. As a result of the generous state support and pay-go capital spending practices, direct debt levels and the debt burden on the budget are very low; overall debt is low to moderate at $1,629 per capita and 4.9% of market value.

The district issued $41.2 million in limited tax qualified school construction bonds (QSCBs) in 2009 and 2010 to complete several new campuses and make district-wide facility improvements, but has no ULT authorization and no current plans to issue new debt. The QSCBs are paid from general fund moneys and could have a modestly adverse impact on the budget if the federal sequestration were to reduce the subsidies, a situation Fitch is continuing to monitor. Pension costs are statutorily determined by the state and were a low 1.3% of 2011 spending as most of the cost belonged to the state.

ECONOMC HUB OF THE RIO GRANDE VALLEY

Brownsville is the population and economic center of the expanding lower Rio Grande Valley. The area economy is largely driven by manufacturing reflecting its location across from Matamoros, Mexico and extensive transportation network (including the Port of Brownsville). The city's low cost of living and doing business support continued economic growth, and a growing healthcare and education sector, including a branch of the University of Texas, contributes to the stability of the region. The potential for prolonged manufacturing stress coupled with the shortcomings of a relatively low-skilled labor force and vulnerabilities in Mexico's economic outlook are concerns inherent to Fitch.

Growth in the district's tax base accelerated in fiscal 2013 after stalling in the prior two years; TAV has averaged 1% annual gains from fiscal years 2008 to 2012 but climbed 3% in fiscal 2013 to $4.8 billion. Typical for the border area, the city's unemployment rate is high (12.3% in July 2012) and income levels are very low.

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 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);

--'U.S. Local Government 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

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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