Fitch Affirms Azle ISD, TX's ULTs at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings takes the following rating action on Azle Independent School District, Texas (the district) unlimited tax (ULT) bonds:

--$20.7 million ULT bonds, series 1997 and 2005 affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY:

The bonds are direct obligations of the district, secured by an unlimited ad valorem tax pledge levied against all taxable property within its boundaries.

KEY RATING DRIVERS:

GOOD FINANCIAL FLEXIBILITY: The district's financial position is sound, characterized by solid operating reserves and liquidity that have supported pay-as-you-go spending on facility repairs and renovations.

STABLE BUT MODEST RESOURCE BASE: Proximity to the larger Dallas-Fort Worth metropolitan statistical area (MSA) economy and employment base offsets concerns related to the limited nature of the district's population, economy, and tax base.

TOP TAXPAYER CONCENTRATION: Concentration in the oil and gas industry persists, particularly to XTO Energy and Barnett Gathering LP which combine to represent almost 9% of the district's tax base.

LOW DEBT BURDEN: The district's debt profile is a credit positive with low debt ratios, affordable carrying cost, and rapid amortization. Capital needs remain but the low tax rate preserves debt affordability.

CREDIT PROFILE:

Azle ISD is a 5,500 enrollment district located about 17 miles northwest of downtown Fort Worth, situated primarily in Tarrant County with portions extending into Parker and Wise Counties. The primary population center is the city of Azle with a 2010 census population of nearly 11,000.

SMALL RESIDENTIAL SUBURB OF FORT WORTH

The district has transitioned into a bedroom community of Fort Worth from its historically agricultural economy over the past decade. Area population growth is up 20% from the 2000 census, though accompanying enrollment growth has been comparatively modest due to population growth from retirees. District officials forecast flat to 1% growth in enrollment over the near term.

Wealth and income metrics for the district are about average. Per capita income of Azle residents is 101% of the national average and the district's per capita market value is $74,000. Employment figures are not available at the local level, though Tarrant County continues to register job growth. A 2.6% climb in the employment count for the 12-month period ending Sept. 2012 improved the unemployment rate to 6.2% from 7.9%, which is approximate to the state and below the nationwide 7.6% rate.

TAX BASE EXPOSURE TO OIL AND GAS SECTOR

The district's tax base is primarily residential, with portions situated over workable areas of the Barnett Shale formation, one of the largest natural gas fields in the U.S. Significant growth in both the housing and natural gas sectors spurred double-digit TAV growth from fiscal years 2007-2010. TAV trends have been flat to modestly lower since reflecting flat residential prices, a decreased level of home building activity, and a decline in oil and gas valuations due to increased drilling activity and supply. Fitch notes importantly that budget exposure to TAV weakness is mitigated by the state's target revenue funding system that subsidizes declines in local revenue with additional state aid.

Top taxpayer concentration in the oil and gas sector remains a negative credit factor with six of the top 10 payers oil and gas related companies. XTO Energy (a subsidiary of ExxonMobil; not rated by Fitch) is the district's top payer and comprised a high 7.4% of fiscal 2012 TAV.

FINANCIAL MANAGEMENT A CREDIT POSITIVE

The district concluded fiscal 2011 with a strong $18.3 million unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) equal to 47% of spending. Liquidity remained ample with $20.1 million of cash and investments covering current liabilities 8.5x.

Reserves remain robust despite the planned use of cash-on-hand for facility repairs and improvements in fiscal years 2009 and 2010. More modest capital outlays occurred in fiscal 2011, while significant under-spending of the budget and use of excess reserves in an external self-insurance fund yielded a $3 million operating surplus after transfers (7.7% of expenditures).

Statewide budget cuts to school districts resulted in a $2.4 million revenue loss in fiscal 2012 and additional $1.2 million revenue loss in fiscal 2013. District officials offset the bulk of the revenue cuts with attrition savings, absorbing a reported 100 positions (12.5% of total FTEs) since fiscal 2011. Other discretionary spending reductions, including a pay freeze, and the receipt of $930,000 in non-recurring federal aid have allowed the district to add between $1 million and $1.2 million to the fiscal 2012 unrestricted fund balance (unaudited; Aug. 31 fiscal year).

The fiscal 2013 $40.2 million operating budget is also balanced but relies on a transfer in of $700,000 from a self-insurance fund to offset the second round of state budget cuts and cessation of one-time federal aid. The self-insurance fund will retain a positive balance net of the transfer out of approximately $1.3 million and is a self-sufficient fund. On the spending side, recurring pay increases were appropriated for the first time in two years. Management may reduce the amount of external fund resources used in the general fund if enrollment-driven revenues continue to track above the budget.

Fitch expects stability in the district's financial profile will continue given the prudent management of state budget cuts thus far. While additional use of fund balance is possible for capital outlays beyond fiscal 2013, Fitch also views positively the district's formal commitment to maintain an unassigned general fund balance of at least 25% of spending.

AFFORDABLE LONG-TERM LIABILITIES AND CARRYING COSTS

The district's current debt profile is a credit positive. The district last issued new money debt in fiscal 2005 and consequently, overall debt levels are low at $1,289 per capita and 1.8% of full market value. This debt ratio calculation includes the currently accreted value of outstanding capital appreciation bonds (CABs) as well as debt from overlapping entities.

Amortization is rapid with the district repaying all outstanding debt in fiscal 2022. Annual debt service is level, totaling approximately $3.2 million or a low 7% of spending.

Debt levels may rise but remain moderate over the near term due to new facility needs, though the district does not presently have ULT debt authorization and does not plan to seek debt authorization until fiscal 2015. Fitch notes the district's low debt service tax rate of $0.15 per $100 of TAV provides significant debt capacity below the state's statutory $0.50 new money debt cap to support future debt issuance.

The district fully-funds it's statutorily required contributions for pension and other post-employment benefits (OPEB), both of which are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. Audited pension and OPEB contributions in fiscal 2011 totaled $617,000 or a modest 1.4% of general fund spending.

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, LoanPerformance, Inc., and IHS Global Insight.

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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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, +1-512-215-3739
Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

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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, +1-512-215-3739
Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com