AUSTIN, Texas--()--Fitch Ratings affirms its underlying 'AA-' rating on Alvin Community College District, Texas' (the college) approximately $16.2 million in outstanding limited tax bonds.
The Rating Outlook remains Negative.
The bonds are secured by an annual property tax levy limited to $0.50 per $100 assessed valuation (AV) on all taxable property within the district.
KEY RATING DRIVERS
PRELIMINARY SIGNS OF STABILIZING FINANCES: The Outlook remains Negative, reflective of Fitch's view that a trend of positive financial performance has not yet been established. Financial operations are thinly balanced and remain pressured by unbudgeted enrollment declines.
MODEST TAX BASE GAINS: The college's tax base is generally stable and has regained some of its footing since the recession with modest annual growth. Various petrochemical, energy, and associated industries comprise the top 10 taxpayers and provide moderately high tax base concentration.
STRENGTHENED ECONOMIC PROFILE: Year-over-year county unemployment levels have fallen at a fast pace and now hover slightly above those of the Houston metropolitan statistical area (MSA) and state. The college benefits from its favorable location in the broader metropolitan area, although its enrollment base is limited.
BELOW AVERAGE SOCIO-ECONOMIC INDICATORS: Population growth trends and local income/wealth levels are generally below MSA, state, and national averages.
MIXED DEBT PROFILE: High overall debt levels are balanced against the district's rapid principal amortization, absence of future borrowing plans, and low carrying costs.
A lack of demonstrated trend of stable to positive financial results that are structurally balanced would likely lead to negative rating action.
Located about 25 miles southeast of downtown Houston, this comprehensive, two-year institution serves a relatively small local enrollment base in and near the towns of Alvin, Manvel, and portions of the city of Pearland. Population growth and income/wealth levels are somewhat below those of the MSA and state.
STABILIZING FINANCIAL POSITION
Operations benefit from a relatively diverse revenue stream of tuition, property taxes, and state aid. Nonetheless, reduced mid-year state appropriations in fiscal 2010 and 2011 drove the college's already slim operations to slip further into a pattern of modestly negative operating performance in fiscal years 2010 and 2011. This was despite tuition/fee increases and some enrollment gains. Unlike many community college districts in the state, management chose to offset neither state revenue losses nor modest TAV declines with an increase to its operating tax rate.
The college faced steeper budget challenges with further reductions to state appropriations for all Texas community colleges over the fiscal 2012-2013 state biennium and a reduction in the state's contribution to employee benefits that totaled $1.5 million. The college addressed this loss in revenue with additional spending cuts (offering a retirement incentive for future salary savings) and increased student fees. Also, management budgeted the use of about $400,000 in reserves to offset the funding loss for employee benefits.
In contrast to budgeted expectations for fiscal 2012, enrollment fell counter-cyclically with improving economic conditions. Management maintained some additional expenditure flexibility given reduced enrollment trends and held to tight spending throughout the fiscal year; total operating/non-operating spending fell about 4%. This allowed the college to generate a positive operating margin (3%) for the first time in four fiscal years and generate a modest $200,000 surplus.
MODERATE USE OF RESERVES BUDGETED TO OFFSET PAY INCREASES
For fiscal 2013, management increased its operating tax rate modestly for the first time in five fiscal years, generating additional property tax revenue from the year's TAV growth. Tuition and fees were not increased. The year's adopted maintenance and operations (M&O) budget was held flat at $25 million, inclusive of a moderate amount (about $350,000) in Board-designated reserves for pay increases. Buoyed by stronger tax collections, management reports fiscal 2013 year-to-date financial performance is likely to modestly outperform the budget by $90,000 that should necessitate a reduced use of reserves despite the year's enrollment declines. Reserves are projected to remain stable at $2.3 million or about 9% of fiscal 2013 M&O budgeted spending.
Preliminary budget plans for fiscal 2014 include modest tuition and fee increases already approved and some operational cost savings from the closure of the existing Pearland campus with eventual sale of the property. With this decision, management expects to consolidate its Pearland operations by offering coursework at a new area high school. This should serve to offset the modest state funding cut anticipated due to the prior year's enrollment declines. Fiscal 2014 enrollment is expected to remain flat, bolstered by some expansion of dual enrollment at local high schools. The college does not anticipate use of reserves unless further pay increases are approved.
MODEST TAV GROWTH CONTINUES IN MODERATELY CONCENTRATED TAX BASE
The college benefits from a generally stable tax base. Rapid annual TAV gains have subsided since fiscal 2010, but TAV evidences some traction since the recession. The second year of modest TAV gains was realized in fiscal 2013, reflective of increases to nearly all taxable property categories. Totaling $7 billion in market value as of fiscal 2013, the tax base is moderately concentrated at 15.5%, with the largest taxpayer at 7%. Top taxpayers include a number of large petrochemical plants and other associated industries.
Management projects another year of modest AV growth for fiscal 2014 which Fitch believes is reasonable given the economic growth associated with the energy sector. Also reflective of the area's strengthening economy are the Brazoria County's year-over-year unemployment levels that have fallen faster than the MSA and state, down from 8.2% in December 2011 to 6.1% in December 2012. County unemployment hovers slightly above the MSA and state's rate of 6% in December 2012 and well below the national rate of 7.6%.
OVERALL DEBT LEVELS HIGH BUT CARRYING COSTS LOW
The overall debt burden is high at approximately 8.6% of market value or $7,400 on a per capita basis. This is in contrast to the college's more moderate direct debt profile. The college has been an infrequent borrower. Management has no near-term revenue or tax-supported debt plans. Capital needs appear to be manageable and are expected to be met with pay-go spending. Amortization of the district's debt is rapid, with 80% of principal retired in 10 years.
The college's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the college provides the bulk of the employer's annual pension contribution. The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. Carrying costs (debt service, pension, OPEB costs, net of state support) totaled a low 5.1% of total operating/non-operating spending in fiscal 2012 even after considering the increased payment for employee benefits passed on to the college by the state.
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 and the Case-Shiller Home Price Index.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria