AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' enhanced rating and 'AA' underlying rating to the following Denton Independent School District, Texas unlimited tax (ULT) bonds:
--$25.03 million ULT refunding bonds, taxable series 2012-C;
--$38.1 million ULT refunding bonds, series 2012-D.
The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.
The bonds are expected to sell via negotiation the week of Oct. 15. The bonds will refund certain outstanding bonds of the district for interest cost savings.
In addition, Fitch affirms the 'AA' underlying rating on outstanding parity ULT bonds.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem property tax pledge, and further secured by the PSF guarantee.
KEY RATING DRIVERS
ROBUST FINANCIAL CUSHION: Strong financial performance, aided by conservative budgeting practices, has yielded ample reserves and liquidity.
DIVERSE AREA ECONOMY: The district's solid and diverse tax base benefits from its proximity to the Dallas-Fort Worth (DWF) metropolitan area, which continues to outpace the nation in total employment, population, and income growth. District residents enjoy access to employment opportunities in the DFW metro area as well as local employment opportunities in the education, healthcare, and manufacturing sectors.
EXPANDING TAX BASE: Assessed valuation climbed for a second consecutive year in fiscal 2013 after contracting modestly in fiscal 2011. Fitch believes forecasts for modest growth over the near term are reasonable given a fairly stable housing market and continuing development.
NEGLIGIBLE DEBT FLEXIBIILTY: The district is highly leveraged as a result of the rapid enrollment growth that occurred over the past decade. Key debt ratios are high, amortization is slow, and a high debt service tax rate - which is very close to the state's statutory test for new debt issuance - limits capital flexibility.
SOLID FINANCIAL PERFORMANCE, RESERVES, & LIQUIDITY
Financial performance has remained strong despite the continuing capital and operating pressures associated with rapid enrollment growth. The district outperformed its 2011 deficit budget in the areas of attendance-based state aid and local property tax revenues to produce an $8.2 million operating surplus after transfers (4.6% of spending). The unrestricted general fund balance (committed, assigned and unassigned balances per GASB 54) rose to a robust $63.2 million, or 34% of operating expenditures and transfers out, and year-end cash & investments exceeded five months of operating costs.
State budget cuts in fiscal 2012 resulted in the district receiving $11.5 million less in state formula-funding than anticipated but management reduced spending sufficiently to adopt a balanced budget and now expects to add at least $11 million to fund balance (a 17% increase). The original budget eliminated 7% of personnel via attrition, froze salaries, and reduced departmental spending. Approximately $4 million in one-time federal aid was prudently excluded from the operating budget, and this revenue, together with better than forecast property tax collections, other federal aid, and ongoing cost savings, triggered the significant surplus after transfers. The 2012 surplus would mark the third consecutive year of positive results and available fund balance above 30% of expenditures.
The fiscal 2013 $197 million general fund budget increases spending 4.5% from the prior-year budget and the amended budget calls for a modest $3 million use of fund balance, in part due to the second year of state budget cuts and a 3% pay-raise for staff. Fitch draws comfort from the district's history of outperforming budget expectations and still-ample reserves net of the forecast draw-down.
HIGH DEBT RATIOS STEM FROM ENROLLMENT-DRIVEN CAPITAL NEEDS
The district's debt profile is Fitch's key credit concern. Overall debt ratios and the annual debt burden on the budget are high while the pace of principal amortization is slow, reflecting the district's fast-growth environment and related needs to meet facility demands while attempting to limit the effect on existing taxpayers.
Overall debt levels comprise a very high 10.7% of market value and $7,859 per capita and are slightly higher when accreted interest from capital appreciation bonds (CABs) is included. The high overall debt load is a function of the direct debt, and large amount of debt from the city of Denton and various fresh water supply districts. Debt service also consumes a high 20% of the fiscal 2012 operating and debt service fund budgets. The district's debt portfolio contains about 18% of mostly hedged variable-rate debt, which Fitch views as an acceptable range for the 'AA' rating category. However, given the high debt service burden this concern is somewhat elevated.
These refunding transactions are for interest cost savings to be taken over the life of the bonds. The bonds do not extend repayment but the rate of payout of outstanding ULT debt remains below average at 39% retired in 10 years.
TIGHT MARGIN ON DEBT SERVICE TAX RATE LIMITS CAPITAL FLEXIBILITY
Of additional concern to Fitch is the district's limited flexibility in meeting future capital needs due to a debt service tax rate ($0.49 per $100 TAV) that is very near the state's statutory limit for new debt issuance ($0.50). The district has $76 million in remaining debt authorization for new campuses and officials do not plan to issue this debt unless it can be supported by the current tax rate. The tax rate cap for new money debt somewhat mitigates the risk of sharp increases in debt levels over the near term but may also constrain the district's ability to meet capital needs, absent sufficient tax base growth.
DIVERSE & GROWING LOCAL ECONOMY ENHANCED BY PROXIMITY TO DFW METRO AREA
Denton ISD is located approximately 35 miles north of Dallas and Fort Worth in Denton County, at the convergence of Interstate Highways 35 East and 35 West. Proximity to the DFW metro area and the access provided by major highway, air, and rail transportation have attracted a variety of industry and business to the area, and an expanding service sector and manufacturing development continues to diversify the district's mostly residential tax base.
Education and health services top the list of major area employers, offering a measure of stability during the economic downturn. The University of North Texas and Texas Woman's University are located in the city of Denton. Area employment indicators are strong, evidenced by continuing employment and labor force gains in the city and county. The Denton County unemployment rate improved to 6.4 from 6.9% for the 12-month period ending July 2012 and has trended consistently below area, state, and national rates.
TAX-BASE GROWTH CONTINUING
The district's TAV grew by a 2.4% compound annual growth rate from 2008-2012 and is up nearly 4% for fiscal 2013. While growth remains significantly slower than the double-digit rate seen prior to 2009, Fitch believes prospects for continuing modest growth are positive given the development occurring within the district, the stable housing market, and growing regional economy.
Population and enrollment gains, which were significant over the past decade, are also continuing. Enrollment has increased annually by about 1,000 students (5%) over the past five years to just under 26,000, and the district projects continuing enrollment gains at between 800-1,000 annually over the next five years.
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
U.S. Local Government Tax-Supported Rating Criteria