Fitch Affirms Port Arthur ISD (TX) ULT Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the following ratings of Port Arthur Independent School District, Texas (the district):

--$261.6 million unlimited tax (ULT) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The ULT bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.

KEY RATING DRIVERS

HISTORICALLY STRONG RESERVES: The district's strong reserve levels are a key credit strength given its highly concentrated tax base and relatively flat enrollment growth.

HIGHLY CONCENTRATED TAX BASE: The district's tax base is highly concentrated in terms of industry composition (oil, gas and chemicals) and among individual taxpayers, resulting in a tax base inherently susceptible to ongoing assessment appeal activity which can have a magnified impact on revenue loss. The districts high reserves provide an adequate cushion to partially offset these concerns.

WEAK SOCIO-ECONOMIC METRICS: The local economy is limited, evidenced by stagnant employment levels and an unemployment rate significantly higher than state and national averages. Wealth indices remain below average.

STRONG TAX BASE GAINS: Significant investments among some of the top taxpayers led to strong tax base growth in fiscals 2013 and 2014. This activity offsets the effects of the appeals to some extent but suggests that the tax base will remain highly concentrated.

MIXED DEBT PROFILE: Elevated debt ratios and slow amortization are partially balanced by manageable capital needs and moderate pension costs. There are no immediate plans for additional debt issuance.

RATING SENSITIVITIES

EROSION OF FINANCIAL FLEXIBILITY: Fitch views a healthy level of reserves as the primary mitigating factor to the credit risks associated with the district's highly concentrated tax base, settled and potential future tax payer appeals, lack of revenue flexibility to address such settlements, and high debt levels. Notable erosion in reserves could result in negative rating action, but the risks make positive action unlikely.

CREDIT PROFILE

The district is part of the Beaumont-Port Arthur metropolitan statistical area (MSA), a three-county region in southeast Texas whose economy is primarily supported by petroleum-related industries. The district's average daily attendance (ADA) was 8,179 students in 2013 across 15 schools. Management projects ADA will remain relatively flat over the next several years.

SIZEABLE RESERVES PROVIDE AMPLE CUSHION

Fiscal 2012 results were bolstered by a $7.4 million state reimbursement which was used to make a $4 million payment related to the Valero lawsuit in fiscal 2012 and a $3 million payment in fiscal 2013, resulting in a (net) $1 million general fund deficit (1.3% of spending) in fiscal 2012 followed by a (net) $1 million general fund surplus (1.4% of spending) in fiscal 2013, increasing the unrestricted general fund balance to a very strong 44% of spending.

A property tax dispute settled in May 2011 between Valero Energy (Valero; formerly Premcor)- the district's second largest taxpayer- and the county appraisal district resulted in an adverse ruling for the district and subsequent gross tax rebate of $18.5 million, payable over six years through fiscal 2017. The district received a $7.4 million reimbursement from the state in fiscal 2012 to replace state aid owed under the revised tax base valuation, resulting in a net liability for the district of $11.1 million. The district used the state reimbursement to make its required payments in fiscals 2012 and 2013. The $3 million payment due in fiscal 2014 is projected to result in a general fund drawdown to a still strong $30 million, or 39% of spending. The remaining $8.5 million liability will be paid over the next three fiscal years ($3 million each in fiscal 2015 and 2016, and $2.5 million due in fiscal 2017).

ADDITIONAL PROPERTY TAX DISPUTE COULD PRESSURE FLEXIBILITY

An additional lawsuit filed by Valero with the county appraisal district, could impact the district's local tax levy for the 2013 and 2014 fiscal years. The lawsuit is scheduled for trial in Jefferson County on Feb. 3, 2014. Based on information provided to the district, management estimates a negative outcome from the lawsuit could result in potential revenue loss of $3 million (net of state equalization funding) in fiscal 2013 and $6 million in fiscal 2014. The fiscal 2014 budget does not include this contingency.

The uncertain effect of current and potential future appraisal litigation on the district's budget is a key credit concern. Although Fitch believes that the district's general fund reserve levels provide an adequate cushion to absorb the tax rebate liability currently due, recurring revenue losses arising from a negative outcome could rapidly erode financial flexibility and result in negative rating action.

HEAVY TAX BASE CONCENTRATION IN THE OIL/GAS & CHEMICAL SECTORS

Taxpayer concentration is a credit concern; the top 10 payers comprise a high 34% of fiscal 2013 TAV and are nearly all part of the oil, gas, and chemical sectors. Motiva Enterprises LLC (Motiva) is the leading taxpayer at 11.4% of fiscal 2013 TAV, followed by Valero at 10% of TAV. Fitch believes the essentiality of oil and gas refining in the U.S. make the closure of these plants unlikely but expects the exposure to TAV volatility to continue.

Fiscals 2013 and 2014 experienced strong tax base growth of 26% and 16%, respectively, driven by capital improvements and expansions of major refineries. Due to the expansive industrial base, the district's market value per capita is a high $150,000, making this a property-rich district under the state's funding framework. While the district does not currently make equalization payments to the state as a result of its property-rich classification, local property taxes comprise over 50% of total general fund revenue, making the district more susceptible to revenue loss as a result of declining TAV not offset by state aid. Wealth and income indices are below state and national averages.

MIXED DEBT PROFILE

The district's debt burden is elevated at $6,226 per capita and 5.2% of full market value (MV). Amortization is slow with 32% or principal retired within 10 years. The district's fiscal 2014-2018 capital plan totals a manageable $6.2 million. Approximately $2.5 million of projects will be funded with remaining bond proceeds. Management indicates there are no immediate plans to issue additional debt.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district's modest annual required contribution is based on salaries in excess of the statutory cap; however, the district is expecting increases to pension contributions going forward as a result of recently enacted legislation. Other post-employment benefits (OPEB) are similarly provided through TRS and contributions are nominal. Total carrying costs for debt service, pension and OPEB are moderate at 18% of total governmental funds spending.

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 and districts' inability to exercise 'meaningful discretion' in setting tax rates as constitutional flaws in the current system.

The judge agreed to reopen testimony after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. The testimony, which began Jan. 21, 2014, is expected to last roughly three weeks. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

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, and the 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=819512

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Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Associate Director
+1-212-908-0735
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gabriela Guiterrez
Director
+1-512-215-3731
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Associate Director
+1-212-908-0735
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gabriela Guiterrez
Director
+1-512-215-3731
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com