AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its underlying 'AA-' rating on Odessa Junior College District, Texas' (the college or district) approximately $68.5 million in outstanding limited tax bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are a direct obligation of the district, secured by an annual property tax levy limited to $0.50 per $100 of taxable assessed valuation (TAV) on all taxable property within the district.
KEY RATING DRIVERS
STABLE FINANCIAL POSITION; FLEXIBILITY REMAINS: The college maintains positive financial margins and solid reserves despite state funding cuts. A diverse revenue base provides adequate pricing and tax rate flexibility.
SIZEABLE TAX BASE CONCENTRATION: Healthy TAV growth has been realized in a tax base that is highly concentrated in the energy sector, susceptible to fluctuations in mineral values and oil/gas activity.
STRENGTHENED LOCAL ECONOMY: Unemployment is low despite strong labor force gains, falling rapidly on a year-over-year basis due to a booming energy sector.
MIXED SOCIO-ECONOMIC METRICS: Local income levels have risen rapidly, but remain at or slightly below state and national averages. Educational attainment is below average.
MODERATE LONG-TERM LIABILITIES: The overall debt burden is modest. Capital needs are expected to remain manageable over the intermediate-term and not require additional debt issuance given the significant facility improvements completed or underway. Carrying costs are manageable, but this partially reflects the very slow amortization of outstanding debt.
RATING SENSITIVITIES
DETERIORATION OF FINANCIAL PERFORMANCE, TAX BASE: A trend of negative financial performance that would lead to material deterioration of solid reserve levels and/or prolonged, significant weakening of the tax base could signal a fundamental shift in the district's credit profile, leading to negative rating action.
CREDIT PROFILE
Odessa Junior College District is an accredited, two-year community college that offers a full range of academic, vocational, and workforce training programs. Located in central west Texas, the college is in the heart of the Permian Basin, which holds much of the nation's proven, accessible oil and natural gas reserves.
ENERGY SECTOR CONCENTRATION
Activity in mineral extraction and other energy-related businesses drive much of the local economy, although the larger Midland-Odessa metro area also serves as a retail/commercial and health care hub for surrounding, primarily rural counties. High oil prices have contributed to additional exploration and production activity. Evidence of this economic expansion is apparent in rapidly declining unemployment levels. On a year-over-year basis, county unemployment fell to a low 3.7% in December 2012, which was down from 4.6% as of December 2011 and well below the state and U.S. national rates of 6% and 7.6%, respectively. Conversely, local income levels have grown on average at nearly 5% annually since 2007 or almost double the income gains made over the same time period in the state.
The district's tax base, which is coterminous with the county, reflects sizeable sector and taxpayer concentration. The 10 largest taxpayers, nearly all of which are an oil/gas business concern, represent about 30% of TAV, led by Occidental Permian Ltd at 6.4%. In total, about 60% of TAV comes from mineral values and commercial/industrial property; residential values contributed an additional 30%.
TAV gains have generally been strong and averaged annual growth of almost 10 % since fiscal 2008, although some fluctuation in taxable values reflects the inherent volatility of mineral values. Management anticipates a similar TAV gain in fiscal 2014, which Fitch believes is likely given healthy economic activity represented in the area's low unemployment levels and expectations of comparable energy prices over the near term.
STABLE FINANCES MAINTAINED
About 42% of the college's revenues or $21 million came from property taxes in fiscal 2012; the next largest revenue source was tuition/fees at 22%. State aid provided a reduced 17% or $8.4 million after biennium funding levels for all community colleges were cut (fiscals 2012 and 2013) in light of the state's own budget woes. Board-approved tuition/fee increases that retain the college's competitive pricing and some growth in property tax revenues largely offset the state's funding cuts. In addition, the college benefits from better than average retention of its enrollment base despite the area's favorable economic conditions.
Financial performance in fiscal 2012 produced another positive operating margin, which at 4.6%, was slightly below the prior year's but generally strengthened from narrowed levels reached in fiscal 2010. Management's conservative budgeting and spending practices have consistently enabled the college to produce positive margins over the last seven fiscal years. Reserves remained solid with nearly $18 million in unrestricted net assets at fiscal 2012 year-end, exceeding management's policy to maintain three months of operations in reserve, a policy Fitch considers prudent.
The fiscal 2013 $38.3 million unrestricted funds operating budget was adopted as balanced under flat enrollment assumptions. Growth in the year's budget included the impact of a 4% salary increase and an added $470,000 due to the state's reduced contribution for employee pensions. The college's operating tax rate remained comfortably below the locally voted operating tax rate cap of $0.25 per $100 TAV, set at just over $0.15 per $100 TAV for the year. Management reports year-to-date trends are favorably running slightly ahead of fiscal 2012; a modest operating surplus of about $500,000 is projected at year-end.
DEBT BURDEN AND OTHER LONG-TERM LIABILITIES MODERATE
Overall debt levels are modest at approximately 1.5% of market value or $1,500 on a per capita basis. The college has historically been an infrequent borrower. Capital needs are expected to remain manageable over the intermediate term without requiring additional debt issuance as the college is nearing completion on various, prioritized facility upgrades/renovations from full use of its nearly $70 million bond authorization. Amortization of the college's tax-supported debt is very slow with 21% of principal retired in 10 years with annual debt service fairly level over much of the schedule at $4.7 million.
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 moderate 11% of total operating/non-operating spending in fiscal 2012 even after considering the increased payment for employee pension 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 report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, Case-Shiller, 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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