Fitch Affirms Palestine ISD, TX's ULT Bonds at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the 'AA-'on the following Palestine Independent School District, Texas' unlimited tax (ULT) bonds:

--$61.7 million ULT schoolhouse building bonds, series 2009.

The Rating Outlook is Stable.

SECURITY: The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Financial operations are strong, as demonstrated by robust reserves and healthy levels of liquidity.

MIXED DEBT PROFILE: Debt levels are moderate on a per capita basis but above average relative to market values; however, both should improve over time given the district's lack of future debt plans. Principal amortization is very slow.

LIMITED ECONOMY: The area's economic base is generally rural and agricultural, characterized by below average wealth indicators. The government and retail sectors provide a significant share of local employment.

FLAT TAX BASE: District tax base growth has been moderate and consistent, although it has slowed recently.

STAGNANT ENROLLMENT BASE: Enrollment levels have declined significantly over the past decade, although some stabilization over the past two years has occurred.

RATING SENSITIVITY

CONTINUED STRONG FINANCIAL POSITION:

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE:

The district is located in Anderson County approximately 95 miles southeast of Dallas and 135 miles north of Houston. The city of Palestine serves as the population center and commercial hub of the district. The area is predominantly rural with agricultural interests and oil and gas production serving as the primary economic components.

LIMITED ECONOMY

The district's limited rural economy is based on agriculture and oil and gas production. In addition to energy production, primary employment sectors are led by government (including a number of correctional facilities), retail trade, and manufacturing. County employment levels have ramped up notably since 2010 and grew significantly in 2012 by 2.6%. Concurrently, county unemployment rates declined steadily and totaled 7% in December 2012, above the state average (6%) but below the U.S. average (7.6%). Wealth indices are low, with per capita income for the city of Palestine at 73% and 67% of the state and national averages, respectively.

MANAGEABLE CONCENTRATION WITHIN FLAT TAX BASE

In the wake of the last recession, the district's tax base growth has been modest, growing by 1.6% or less since fiscal 2011. Market value per capita remains moderate at $72,000. Some concentration is apparent among the top 10 taxpayers; they account for 15% of taxable assessed value, led by Wal-Mart with approximately 4% of the tax base. Other leading taxpayers include an oil and gas producer and an electric utility.

DISTRICT ENROLLMENT IMPACTED BY COMPETITION

Competition from charter schools and private schools contributed to a decline in the district's Average daily attendance (ADA) which fell by 4.2% between fiscals 2007 and 2013. However, a modest current year rebound may indicate some stabilization despite the opening of a new charter school within the district. Management attributes the ADA increase to the recent completion of renovations to many of the district's facilities. Fitch will monitor future ADA figures to determine if the trend is sustainable. Fitch notes the district's practice to budget for flat enrollment and year-round monitoring of its ADA as positive management practices.

REVENUE ENHANCEMENT AIDS FINANCES

The district continues to build up its financial reserves, reporting general fund operating surpluses in six of the last seven fiscal years. Such performance is notable given the stagnant enrollment base and flat taxable values. In 2007, voters approved an increase to the district's operations and maintenance (O&M) tax rate to the state maximum ($1.17 per $100 TAV). Along with tight controls and attention to sustainable staffing, this revenue enhancement enabled the district to maintain structural balance despite state aid declines associated with ADA losses. State aid, once the district's largest revenue source, has decreased annually in fiscal years 2009-2012.

The fiscal 2012 unrestricted general fund balance totaled $10 million, equal to a strong 37.6% of spending, despite a planned draw down of $641,000 or 2.3% of spending for capital projects. Liquidity was also ample at 5.6 months of recurring operating expenses. Such results have enabled the district's compliance with its three-month fund balance policy.

The fiscal 2013 budget is balanced and based on a conservative projection of flat average daily attendance (ADA). District management reports that year-to-date ADA exceeds the budgeted level by 3.2%, which Fitch views favorably. Along with $1.5 million in new grant money (awarded annually through fiscal 2015), ADA growth-related funding is expected to offset $1.2 million (equal to 5% of general fund revenue) in state aid cuts in fiscal 2013. Fitch expects that a more modest projected fiscal 2014 state aid cut of $0.6 million (2.5% of general fund revenue) will also be offset by grant money.

MIXED DEBT PROFILE

The district's debt profile is mixed, characterized by an above average debt per market value (5.5%) and slow principal amortization rate (25% of principal retired in 10 years), balanced against moderate debt per capita ($3,984) and limited capital plans and debt needs. All of the district's six campuses were improved with the proceeds from the series 2009 bonds, leading management to expect a 10-15 year horizon before additional debt will be necessary. As the district's sole outstanding ULT bonds, the series 2009 bonds were structured with fixed rates and do not include any capital appreciation bonds (CABs).

The district participates in the Teachers Retirement System of Texas (TRS), which provides pension benefits to its members as well as other post-employment benefits (OPEB). In fiscal 2012, the district's carrying costs for its bonds and TRS contributions totaled a moderate 15% of fiscal 2012 total 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, LoanPerformance, Inc., IHS Global Insight

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated 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, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Senior Director
Jose Acosta, +1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Suite 2010
Austin, TX 78701
or
Secondary Analyst
Analyst
Matt Dustin, +1-512-215-3727
or
Committee Chairperson
Senior Director
Steve Murray, +1-512-215-3729

Sharing

Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Senior Director
Jose Acosta, +1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Suite 2010
Austin, TX 78701
or
Secondary Analyst
Analyst
Matt Dustin, +1-512-215-3727
or
Committee Chairperson
Senior Director
Steve Murray, +1-512-215-3729