NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following rating on Beaumont Independent School District (the district), Texas' unlimited tax (ULT) bonds:
--$410 million various series ULT School Building Bonds - 'AA' underlying rating.
The bonds are additionally secured by a guarantee provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem tax pledge of the district and are secured further by the PSF guarantee.
STRONG RESERVE LEVELS MAINTAINED: Consecutive years of operating surpluses have resulted in a build-up of strong financial reserve levels. The rating assumes the district will maintain high reserve levels given economic concentration, potential revenue volatility and high debt levels.
CONCENTRATED TAX BASE: The district's tax base is heavily concentrated in the petrochemical industry. This concern is mitigated to a degree by industry diversification in both production and end users as well as the key role oil refineries play in the national economy. Leading taxpayers comprise a high 26% of the 2011 tax base.
STABLE VALUATIONS: Taxable assessed values (TAV) are stable with small increases in 2011 and 2012 following a modest contraction in fiscal 2010.
HIGH BUT MANAGEABLE DEBT: Overall debt levels are high with below average amortization. Debt levels are expected to remain high even with modest additional borrowings planned over the next few years. However, debt service is a moderate burden on the budget.
STEADY ENROLLMENT TRENDS: Student enrollment has stabilized over the past decade and is expected to remain constant.
The district serves an estimated population of about 124,000 primarily in the city of Beaumont, TX. The city is a major commercial and industrial center in the 'Golden Triangle' of southeast Texas along the gulf that also includes the cities of Port Arthur and Orange.
STABLE ECONOMY WITH BELOW AVERAGE INDICATORS
The area economy is heavily concentrated in the petrochemical, oil and gas sectors complemented by retail, government and healthcare employment. City wealth levels are generally below state and national averages and unemployment levels, which have historically trended above state and national levels, have increased during the recent economic downturn evidencing cyclicality. Fitch expects the district economy to remain concentrated with elevated economic cyclicality over the long term.
The district's estimated 2013 enrollment is just below 20,000, which reflects modest growth and a return to 2005 levels. Enrollment has modestly increased since 2008 following some volatility from 2005 - 2007 as a result of hurricanes Katrina and Rita. Officials expect continued modest enrollment gains driven by current housing development and refinery expansion projects. Fitch expects enrollments to remain manageable.
CONCENTRATED TAX BASE
The district's concentrated tax base is led by ExxonMobil (senior unsecured debt rated 'AAA' by Fitch Ratings), which comprised a high 16.5% of the district's tax based for 2011 (down from 23% in 2008 given overall tax base growth). However, there is some diversity between upstream (oil exploration and refining) and downstream users (chemical and manufacturing) that helps stabilize the impact of swings in oil prices. Additionally, the oil refineries' key role in the national economy mitigates some credit concerns over the long-term prospects of the district's tax base. Fitch expects the district's tax base to remain concentrated.
Until fiscal 2010, TAV grew at between 6% ? 10% annually over the three previous years. After registering a moderate 4% dip in fiscal 2010, TAV expanded by a total of 5.6% in 2011 and 20122. Officials expect flat to modest TAV gains in the next few years due to strengthening of industrial values but continued weakness in residential values. Fitch believes this projection is reasonable given the recent return to growth.
STRONG FINANCIAL PERFORMANCE AND RESERVES
Financial performance remains very strong, evidenced by consecutive years of general fund surpluses which have enabled a build-up of solid reserve levels. Fitch expects management to continue to meet budgetary challenges and maintain strong reserves. The district registered a sizable $1.5 million surplus in fiscal 2011, ending with an unreserved general fund balance of $42.8 million or a solid 24% of spending. Management adopted a balanced budget for fiscal 2012 with conservative revenue assumptions and expects a small surplus and continued strong reserves. The district expects to maintain budgetary balance by offsetting reduced state funding with conservative budgeting of nonrecurring federal EduJobs funds and expenditure savings from some school consolidation and lower maintenance costs as a result of facility renovations and improvements.
The 2013 budget incorporates continued state funding declines and is expected to be balanced largely due to conservative revenue assumptions. Management anticipates potential further state funding reductions in the 2014 and 2015 budgets and is evaluating various actions including a combination of expenditure reductions from a salary freeze, increased class sizes and modest use of fund balance. Additionally, district tax rates remain competitive with margin to increase with voter approval, although voters have already approved steep debt service rate increases over the past five years.
HIGH BUT MANAGEABLE DEBT WITH MODERATE NEEDS
Total debt levels are high at $5,741 per capita and 7.6% of market value (MV). With the recent completion of a $388 million bond program, the district's future capital needs are moderate. The district capital improvement program includes the possible construction of three new elementary schools and renovations to an existing middle school, which may be proposed to voters for authorization within the next 5 years. Debt amortization is below average with a low 28% retired in 10 years. Additional debt would not materially change district debt characteristics. The districts total tax rate increased from 1.095 in 2008 to a peak of 1.325 in 2011 due to the voter-approved debt issuances. The rate for 2012 fell modestly to 1.315 and is expected to remain stable as AV growth continues to rebound.
The district contributes to the Teacher Retirement System of Texas (TRS), a public employee retirement system that is a cost-sharing, multiple employer defined benefit pension plan. The district contributes 100% of its annually required contribution which has remained stable over the last few years. The plan is funded at an estimated 75%, using a Fitch-adjusted funding ratio at a 7% discount rate. Other post-employment benefits are also provided through TRS. Overall carrying costs for debt service, pensions and OPEB are moderate at 14% of GF expenditures.
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 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
U.S. Local Government Tax-Supported Rating Criteria