Fitch Rates Forney ISD, TX's ULT Rfdg Bonds 'AAA' PSF; 'BBB' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Forney Independent School District, Texas' (the district) bonds:

--$5.5 million unlimited tax (ULT) refunding bonds, series 2013.

The rating is based on a guaranty provided by the Texas Permanent School Fund, whose bond guaranty program is rated 'AAA' by Fitch.

In addition, Fitch assigns an underlying 'BBB' rating to the series 2013 bonds.

The bonds are expected to price via negotiated sale on Dec. 12. Proceeds will be used to refund certain outstanding bonds for interest cost savings.

Fitch also affirms its 'BBB' underlying rating on approximately $283.7 million in outstanding ULT bonds.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds carry the guaranty of the Texas PSF and are secured by an unlimited ad valorem tax pledge of the district.

KEY RATING DRIVERS

MEASURABLE ONE-YEAR BUDGET IMPROVEMENT: The Stable Outlook reflects the new management team's demonstrated ability to return the general fund to balanced operations despite reduced operating cashflow. District finances remain weak due to the state's identification in 2011 of several years of state aid overpayment based on inflated attendance figures not reconciled by the prior management team.

LONG TERM FISCAL PRESSURE: The 'BBB' underlying rating reflects Fitch's concern about this fast-growth district's willingness and ability to sufficiently raise revenue to cover financial obligations. The district's tax rate is at the state's $0.50 tax rate cap for new money debt issuance due to a large and growing debt service burden on the budget, tax base stasis and reduced state debt service aid. Fitch is concerned about the district's agreement to subsidize debt service from general fund operations prior to raising the tax rate above $0.50 which has prompted the district to plan for multiple debt restructurings over the next 10 years and creates long-term fiscal pressure.

DEBT FLEXIBILITY HAS DISAPPEARED: A debt service tax rate at the state's new debt cap coupled with the district's ascending debt service schedule will likely preclude the district from issuing new money debt in the near term. While management cites no pressing capital needs, Fitch views the lack of future debt issuance flexibility as a long-term risk.

MODEST TAX BASE GROWTH: Taxable assessed valuation (TAV) gained modestly in fiscal 2013 after a period of slight contraction. The rate of TAV growth remains well below the rapid appreciation seen pre-2009, though long-term growth prospects remain positive given the transportation improvements underway, proximity to the Dallas-Fort Worth (DFW) metro area, and availability of affordable land.

CONCENTRATED TAX BASE: Taxpayer concentration persists, with the largest payer, a power plant, representing 17% of TAV and the top 10 payers representing an elevated 23.5%.

WHAT COULD TRIGGER A RATING ACTION

FINANCIAL DETERIORATION: A reversal of the positive momentum in financial performance, including budget imbalance beyond fiscal 2013 or material weakening of the district's liquidity position, could prompt negative rating action.

CREDIT PROFILE

Forney ISD is located approximately 20 miles east of Dallas in Kaufman County and encompasses 84 square miles that includes the city of Forney. The district serves 8,565 students.

LARGE LIABILITY TO THE STATE

Forney ISD's restoration of financial flexibility since fiscal 2009 was artificially enhanced by state aid payments for overstated attendance not reconciled by the prior management team, uncovered by the auditor in September 2011. The state discovered the discrepancy which resulted in a $17.4 million aggregate liability to the state in September 2011. The fund balance was restated in fiscal 2011 showing a negative unrestricted fund balance (the sum of committed, assigned, and unassigned per GASB 54) of 7.1% of spending at the end of fiscal 2011, down from the overstated positive 10.2% of spending in fiscal 2010.

A new management team took charge in fall 2011 and, with the help of a state appointed financial monitor, developed a financial solvency plan. The plan returns the overpaid funds to the state over a five-year period via a reduction in the district's annual formula funding. The annualized loss is $2.7 million for operations and $750,000 for debt service, each to be repaid in fiscal years 2012-2016. The fiscal 2013 repayment represents 5% of the $68.7 million combined general and debt service fund budget.

POSITIVE VARIANCE FROM 2012 BUDGET

The adopted 2012 general and debt service fund budget of $72.9 million, prepared by the prior staff, appeared to close a $3 million revenue shortfall caused by state budget cuts and the lower, corrected attendance figures. However, the new management team identified significant understatement of expenditures, which when coupled with the first year of the $2.7 million repayment to the state, produced a $5.1 million budget deficit (8.5% of spending). Additionally, while the repayment plan was pending approval, the district's fiscal 2012 state aid payments were reduced by the total amount of the liability, prompting officials to draw $3 million from a line of credit for cashflow purposes. Following approval of the plan, state aid was adjusted and the line was fully repaid.

Ongoing staff attrition yielded significant savings in fiscal 2012; management reports an 11% reduction in employee headcount (133 positions) since fiscal year-end 2011. These savings, together with a pay freeze, discretionary spending cuts, and one-time federal revenues delivered a $564,000 operating surplus after transfers. The fiscal 2012 unrestricted fund balance improved to a still negative $3.6 million from $4.2 million. General fund liquidity remains low, though improved, concluding fiscal 2012 with $7.3 million in cash and investments or 47 days of operating costs.

BALANCED FISCAL 2013 BUDGET DESPITE CHALLENGES

The fiscal 2013 operating budget is balanced and absorbs a $3 million revenue loss from additional state budget cuts and expiry of one-time federal funds with continued attrition, pay freeze, and department spending cuts as well as revenue gains from enrollment growth. Management expects to realize at least balanced operating results and to improve the deficit fund balance position by $1.8 million using one-time proceeds from a land sale and excess insurance proceeds from tornado damage to campuses. If the district is successful, the negative fund balance totaling 6.5% of spending in fiscal 2012 should improve to 0 in fiscal 2014, earlier than the 2016 date previously anticipated. Fitch views these forecasts as reasonable given prudent management of the acute 2012 budget challenges.

LACK OF DEBT FLEXIBILITY A LONG-TERM CREDIT CONCERN

An ascending debt service schedule that was structured under what proved to be aggressive assumptions for tax base growth and state debt service aid triggered an increase in the district's fiscal 2013 debt service tax rate to the state's cap for new debt issuance of $0.50, from $0.46, eliminating in the near term the district's ULT debt capacity. While the district does not presently have pressing capital needs due to the recent completion of several new campuses and adequate facility capacity, Fitch views this growing district's inability to borrow efficiently as a major credit weakness. Absent a surge in TAV growth or legislative change to the tax rate cap, this limitation will be present for the foreseeable future.

Fitch believes that the lower level of state debt service aid (resulting from the corrected attendance figures) as well as slow tax base growth will continue to pressure tax rates over the intermediate term. The total revenue yield from the current tax levy and state debt service aid is sufficient to cover the fiscal 2013 $13.7 million debt service payment but would only cover 60% of maximum annual debt service ($23.1 million in 2020).

In addition, to comply with the tax rate test for prior new debt issuances, the district agreed with the state attorney general to commit $11.7 million of general fund moneys to pay debt service prior to levying a debt service tax rate above $0.50. As a result, the district plans to implement multiple restructurings over the next 10 years, rather than raise the debt service tax rate sufficiently to cover.

HIGHLY LEVERAGED

Key debt ratios remain well above average in fiscal 2013 due to the lower level of state debt service aid. Overall debt ratios are a very high 12.2% of full market value (MV) and $8,485 per capita. This debt ratio calculation incorporates the currently accreted interest of outstanding capital appreciation bonds (CABs), representing 5.5% of direct debt. The high debt burden reflects the district's growth-related capital spending and management's efforts to build facilities slightly ahead of enrollment trends.

The 2012 refunding is for interest cost savings in fiscal years 2013-2037 and does not delay repayment or extend maturities. Amortization remains slow at 29.5% of principal retired in 10 years, and future debt restructuring will further extend the pace of debt retirement. With this refunding, the net debt service burden on the budget is high at 17.6% of fiscal 2013 general fund and debt service spending and will jump to 23% in fiscal 2014.

FAST-GROWTH DISTRICT LOCATED NEAR DFW METROPLEX

Housing affordability and the ongoing expansion of the DFW metro area led to significant population growth in the district over the past decade, though less than half of the district is currently built-out. Accompanying enrollment growth was rapid but has moderated to a 3.9% average annual growth rate since fiscal 2009. Officials expect this more manageable rate of growth going forward.

The district's predominantly residential tax base expanded at a rapid pace before slowing in fiscal 2009 as home construction cooled. A period of modest contraction preceded the 1.5% gain in the fiscal 2013 TAV, spurred by some continuing development. Fitch believes district projections for modest, near-term TAV growth are reasonable given transportation improvements underway and some residential development.

The county's September 2012 unemployment rate improved to 6.5% from 8.2% year-over-year as employment gains outpaced nominal labor force growth, mirroring the regional and statewide trend. The county unemployment rate remains just above the state and MSA rates of 6.3% each, and below the nationwide rate of 7.6%. Wealth indicators of district residents are average.

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.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Primary Analyst
Blake Roberts, +1-512-215-3741
Analyst
Fitch, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses, +1-512-215-3729
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Blake Roberts, +1-512-215-3741
Analyst
Fitch, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses, +1-512-215-3729
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com