Fitch Rates Schertz-Cibolo-Universal City ISD, TX's ULT Bonds 'AAA' PSF/'AA-' Und; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Schertz-Cibolo-Universal City Independent School District (ISD), Texas' (the district) unlimited tax (ULT) bonds:

--$27.765 million ULT school building and refunding bonds, series 2014.

The 'AAA' long-term rating reflects the guarantee of the Texas Permanent School Fund (PSF; bond guarantee program is rated 'AAA' by Fitch).

The bonds are expected to sell competitively on Dec. 18. The bonds are current interest bonds with a final maturity of Feb. 1, 2044. Proceeds will be used to refund certain outstanding bonds for interest cost savings, fund technology improvements, bus purchases, and construction and design costs for additions to several campuses.

Fitch has also assigned an underlying 'AA-' rating to the series 2014 bonds and affirms its 'AA-' underlying rating on $295.9 million of the district's outstanding ULT debt.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the Texas PSF guaranty. The bonds are also secured and directly payable from the district's levy of an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

EXCELLENT FISCAL TRACK RECORD: Consecutive years of positive operating results over the past decade have yielded strong fund and cash balances. Management has maintained a balanced operating profile despite the cost pressures from rapid enrollment growth and recent state aid cuts.

LOCATION IN BROAD SAN ANTONIO MSA: District residents enjoy access to the broad, diverse employment base and strong economy of San Antonio (ULTGOs rated 'AAA' by Fitch). Population, employment, and assessed value in the district continue to climb.

FAVORABLE DEMOGRAPHICS: District wealth and educational attainment levels are slightly above average and poverty and unemployment rates are very low when compared to state and national norms.

HIGH DEBT BURDEN POISED TO GROW: The district's debt profile remains the key credit weakness. Fitch anticipates a continued high debt burden given the enrollment-driven capital pressures and future debt needs in the near term. The district is actively managing its tax rate to maintain adequate headroom under the state's statutory tax rate limit on new money debt issuance.

AFFORDABLE LEGACY COSTS: The state has historically and currently funds the bulk of retiree pension and healthcare costs on-behalf of districts, resulting in affordable fixed cost to the district for these benefits.

RATING SENSITIVITIES

DEBT ISSUANCE & CAPACITY: The district's prudent management of growth-related capital needs and debt plans in sync with tax base trends and the state's tax rate capacity parameters is a key credit consideration.

FINANCIAL FLEXIBILITY: The district's preservation of its strong fiscal cushion is an important mitigant to the district's high debt burden and will be a key determinant in rating stability.

CREDIT PROFILE

The district sits about 25 miles northwest of downtown San Antonio and is bordered by two major interstate highways to its north and south. The fiscal 2013 student count was 13,523 and enrollment growth continues at about 5% annually.

FINANCIAL PERFORMANCE A CREDIT POSITIVE

The tenured management has generated positive operating margins (before capital outlays) in each of the last 10 audited fiscal years (2003-2012) and is expecting another surplus in fiscal 2013. Notably, the district achieved positive operating margins in fiscal years 2012 and 2013 (expected) in spite of state funding reductions. Conservative budget assumptions for attendance-based state revenues and expenditures, as well as careful cost-monitoring throughout the year, underpin the district's strong fiscal track record.

Audited fiscal 2012 unrestricted general fund balance stood at $33.9 million or a strong 39% of spending, down from a year prior only due to a one-time capital outlay. However, draft audit results for fiscal 2013 indicate a larger net increase to fund balance of $8.9 million (after transfers) reflecting another 3.5% operating surplus and the reimbursement of the land purchase costs with bond proceeds. Unrestricted fund balance should climb to a high 50% of spending in fiscal 2013.

The district's liquidity position also remains robust. Liquid general fund assets totaled $39.1 million to conclude fiscal 2012 and are expected to increase again in fiscal 2013 to $43 million or a robust 6.9x current liabilities net of deferred revenue.

General fund operations in fiscal 2014 are supported by a partial restoration of state funding levels. District officials provided a 3% pay increase to staff, which is estimated to have a recurring cost of about $2 million, and added additional teaching positions in order to maintain service levels for the growing enrollment base. Management again expects to outperform the balanced budget and may prudently use some fund balance this year and in fiscal 2015 to pay-go fund capital improvements. Fitch does not foresee substantial changes to the district's strong financial performance and position.

FAVORABLE LOCATION IN SAN ANTONIO METRO AREA

The district benefits from its proximity to the broad economic base of the San Antonio metropolitan area and location along two major interstate highways (IH-35 and IH-10). Randolph Air Force base is located adjacent to the district and the military remains a large area employment sector. The effect of federal sequestration on military civilian employment has had little apparent effect on overall economic performance. Other key employment sectors of the San Antonio area include government, domestic and international trade, health and education services, and the growing oil and gas sector due to shale activity in the south Texas region.

Wealth and income metrics of the district are favorable, with per capita and median household income equal to 105% and 138% of the nation and a low poverty rate. Per capita market value of the district has increased to $75,000, which is competitive with the median for the 'AA' rating category. The area's 5.1% unemployment rate in October 2013 is better than the state (6%) and national averages (7%) and has trended lower than average for several years.

CONTINUING TAX BASE & ENROLLMENT GROWTH

The district's predominantly residential tax base saw extraordinary growth through 2009, as the availability of affordable land drew development northward from San Antonio. Taxable assessed value (TAV) growth slowed coming out of the recession but still registered 4.1% compound average annual growth from fiscal years 2010-2014. A large Amazon distribution center is currently under construction and is projected to add at least 2.6% ($100 million) to AV in fiscal 2015.

Significant enrollment growth has accompanied the residential development, varying from 5%-9% annually in the past five years. Attendance increased by 4% in fiscal 2013 and officials expect this pace of growth to continue as residential development continues. The enrollment growth will continue to drive operating revenues/costs and capital needs.

HIGH & RISING DEBT

Debt ratios are above average at $7,368 per capita and 9.8% of full market value. Fitch's debt ratio calculation includes the currently accreted value of capital appreciation bonds and does not consider annual state support for debt service as it is subject to legislative appropriation. Debt ratios will remain elevated given the future capital needs of the district. Debt service carrying costs consumed a manageable 14% of governmental fund expenditures in fiscal 2012 but rise to 22% at maximum annual debt service (MADS) in 2022 (based on current spending and before considering any offsetting state debt service aid, as the latter is subject to changes based on tax base and enrollment trends). The pace of debt retirement is average, with 55% of outstanding principal retired in 10 years.

PRESSURE TO MANAGE TAX RATE & RETAIN DEBT CAPACITY IS EVIDENT

The new money portion of this offering ($10 million) represents a second-phase of the district's $92 million in total bond authorization approved by voters in a May 2013 election. District officials plan to issue the remaining $42 million of debt authority in 2014. Voters were told up to a 3-cent tax rate increase, or a $0.45 debt service tax rate, would be necessary to support the additional debt and the roughly 40% increase in debt service that occurs to reach MADS in 2022. In order to maintain this promoted tax rate, and also to maintain adequate tax rate capacity for future debt needs, the district plans to use capitalized interest and excess debt service fund balance over the next five years to subsidize debt service. This offering also refunds certain outstanding debt to take up-front debt service savings.

Officials are assuming annual TAV growth of between 3.5% and 5.6% for tax rate planning purposes. Fitch believes the TAV growth assumptions are plausible given the development underway and 4% average annual growth rate in the last five years; however, lower TAV growth than presently forecast may push tax rates closer to the state's $0.50 tax rate ceiling for new money debt issuance, thereby diminishing the district's future debt capacity and potentially requiring debt restructuring to carve out additional capacity.

Future capital needs after the planned debt issuance consist of additional campuses and expansion of facilities to accommodate enrollment growth. Officials anticipate requesting additional bond authority from voters sometime in the next 3-4 years. Fitch will continue to assess the district's capital needs and debt plans, and their effect on the already high key debt ratios, diminishing tax rate capacity for new debt, and overall budget flexibility.

AFFORDABLE RETIREE COSTS

Retiree pension and healthcare benefits are provided to employees through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer plan. District employees contribute to TRS for pensions at 6.4% of annual compensation, and the state pays the local district's contribution (6% in fiscal 2012), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. Other post-employment benefit (OPEB) contributions paid by the district are nominal, as the state and employees also pays the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2012 totaled $1.1 million or a very low 1% of governmental fund expenditures.

The state plan is adequately funded at 73.8% as of fiscal Aug. 31, 2012, based on Fitch's 7% return assumption. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs for the district affordable, despite the high and growing debt burden. Starting next fiscal year (2015) all district pension contributions will rise to 1.5% paid on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in funding requirements beyond fiscal 2015 would create negative pressure on the rating.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013, a district judge ruled that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding as a constitutional flaw in the current system.

The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. A new trial date of Jan. 6, 2014 has been set. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools as a positive credit consideration.

Additional information is available at 'www.fitchratings.com'.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.,

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811616

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Contacts

Fitch Ratings
Primary Analyst
Blake Roberts
Associate Director
+1-512-215-3741
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Blake Roberts
Associate Director
+1-512-215-3741
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com