Fitch Rates Galena Park ISD, Texas' ULT Rfdg Bonds 'AAA' PSF/'AA+' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Galena Park Independent School District, Texas (ISD; the district) bonds:

--$9.03 million unlimited tax refunding bonds, series 2014.

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

The bonds are expected to sell via negotiated sale the week of April 7 pending market conditions. Proceeds from the sale of the bonds will be used to refund certain outstanding obligations for interest cost savings and to pay issuance costs. The refunding bonds do not restructure debt or extend maturities.

Fitch has also assigned an underlying 'AA+' rating to the series 2014 bonds. Additionally, Fitch has affirmed the 'AA+' underlying rating on the district's approximately $205 million of outstanding unlimited tax obligations.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a guaranty from the Texas PSF as well as an unlimited ad valorem tax pledge levied against all taxable property within the district.

KEY RATING DRIVERS

STRONG FINANCIAL FLEXIBILITY: Prudent financial management supports the district's consistent financial performance, resulting in solid general fund reserves and ample liquidity.

HOUSTON METRO DISTRICT: The district is located in the heart of the Houston Ship Channel and participates in the broad and growing Houston economy, as is reflected in unemployment rates below the national average. Below average wealth is characteristic of the metropolitan area's high incidence of poverty.

TAX-BASE CONCENTRATION: The district's tax base is concentrated in industrial and oil & gas properties. Significant ongoing asset investment helps to mitigate top payer concerns and diversity between upstream and downstream petroleum usage within the base softens the impact of oil price volatility.

HIGH, BUT MANAGEABLE DEBT: Overall debt levels are high, but the burden of long-term liabilities on the budget is low, reflecting the district's maturity, and state support for the district's debt service, pensions and other post-employment benefit (OPEB) obligations.

OPERATING TAX RATE CAPPED: Recent voter approval to shift 6 cents to the district's maintenance and operations (M&O) tax rate from the interest and sinking fund (I&S) tax rate provided a net revenue increase to the district, but brought the M&O rate to the statutory cap.

RATING SENSITIVITIES

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 unlikely.

CREDIT PROFILE

Galena Park ISD is a mature district serving six Houston area communities, including Galena Park, Jacinto City, and a portion of Houston with 2014 enrollment estimated at 22,572.

BROAD ECONOMY WITH GROWTH PROSPECTS

Houston's economy is based on energy, petrochemicals, trade, transportation and utilities, tourism, biotechnology, health care, and business services. IHS Global Insights expects to see an expanding trade, transportation and utilities sector associated with the Panama Canal expansion, as well as increased job growth in business services over the medium term horizon.

A fiscal 2013 taxable assessed value (TAV) increase of 13.2% follows two years of uncharacteristically low growth and reflects the construction and capital investment resulting from the current energy boom. Top 10 taxpayers represent industrial and oil & gas sectors and comprise a high 22.4% of fiscal 2014 TAV. The top payer, Helmerich & Payne (an energy exploration and production company) contributes 3.7%. Based on development underway, the district anticipates moderate near term TAV growth consistent with a fiscal 2014 gain of 2.3%.

SOLID FINANCIAL RESERVES PROVIDE AMPLE FLEXIBILITY

A fiscal 2013 net surplus of $21 million (13% of spending) reflects TAV growth, cost savings largely due to unfilled positions, and the district's higher M&O tax rate based on its voter authorized tax rate shift which provided a net revenue gain due to the level of state funding for the district's operations. Strong tax base performance is projected to provide sufficient near term debt service revenues to service the debt without a transfer from the general fund, which typically follows a tax rate shift. Fitch views the tax rate shift as unconventional, but recognizes that the district could raise the I&S rate without voter authorization if needed in the future. The district's fiscal 2013 performance brought unrestricted reserves to $53.5 million, a strong 45% of spending.

Officials project a fiscal 2014 state aid decline of about 1.5% resulting from increased ad valorem revenues associated with fiscal 2013 tax base growth. The decline in state funding would have been greater but for 2% enrollment growth in the current year and a partial reinstatement of earlier state funding cuts.

The district anticipates a fiscal year 2014 net surplus of about $9 million, reflecting ongoing cost controls. Budgeted reserve draws, including $6 million to fund technology and facility renovations will likely maintain fiscal 2014 reserves in the approximate range of the prior year.

Officials anticipate the potential for more substantive reserve draws in the future to fund capital, but expect to maintain the fund balance well in excess of the district's 10% to 15% of spending policy floor. Fitch considers robust reserve levels a key credit mitigant to help offset volatility related to the district's tax base concentration.

MANAGEABLE DEBT

Overall debt levels are high at 6.4% of market value; principal amortization is moderate. Pursuant to the outcome of a facility assessment currently underway, officials anticipate using a portion of reserves to fund capital in lieu of debt. There are no debt issuance plans at this time.

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 annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan (OPEB). Including debt service, pension and OPEB contributions, carrying costs were a low 8.8%% of fiscal 2013 governmental spending, benefitting from the state's strong pension funding system currently in place. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

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. 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, 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=825139

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.,
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.,
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com