Fitch Rates Judson ISD Texas' Series 2014 ULT Rfdg Bonds 'AA-' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA-' rating to the following Judson Independent School District, Texas' (the district) bonds:

--$5.5 million unlimited tax (ULT) refunding bonds, series 2014.

Fitch also affirms the 'AA-' rating on the district's $443.3 million (pre-refunding on a non-accreted basis) outstanding ULTs.

The 2014 ULT bonds are scheduled to sell April 29 via negotiation. Proceeds will be used to refund certain outstanding obligations for savings and to pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STABLE FINANCIAL POSITION: The district's financial position remains sound, supported by conservative budgeting, largely balanced operations, and solid general fund reserves which remain in line with historic trends and exceed adopted policy levels.

FAVORABLE ECONOMIC, DEMOGRAPHIC PROFILE: The district is part of the stable and diverse San Antonio metropolitan economy. Area unemployment rates are low and slightly below state and national averages. Income and wealth metrics are better than average.

MODEST TAV GAINS; SOME CONCENTRATION: Taxable assessed valuation (TAV) continues to trend positively, reflecting increased levels of development and recovery from the recession. Fitch believes further moderate tax base expansion appears reasonable given development projects underway or planned. Taxpayer concentration is moderately high.

HIGH DEBT; MANAGEABLE CARRYING COST: Overall debt levels are high and amortization of direct debt is slow. Fitch expects this debt profile will be maintained given ongoing capital needs stemming from steady enrollment gains. Carrying costs are modest largely due to the slow payout and state support for the district's pension plan.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's financial and capital funding flexibility. The district's history of maintaining solid reserves while addressing operating and capital needs suggests continued rating stability.

CREDIT PROFILE

SAN ANTONIO METRO DISTRICT

Located in the northeast part of San Antonio metropolitan area, the district serves nearly 122,000 residents in the suburban communities of Kirby and Converse and portions of Universal City, Live Oak, Selma, and San Antonio. Enrollment trends have moderated from prior fast-growth years (pre-2007), but the district continues to realize steady annual gains in average daily attendance (ADA) of 1%-3% over the past five fiscal years, which has increased average daily attendance to nearly 21,000 students in fiscal 2013. Median household income levels exceed those of the MSA, state, and nation by about 10%.

MODEST TAV GROWTH CONTINUES

The economy continues to show signs of improvement since the recession. At 5.5% in December 2013, year-over-year unemployment edged down slightly from 5.8% in December 2012 while remaining just under the state (5.6%) and comfortably below the nation's average of 6.5%. Fiscal 2014 marked the second year of continued, modest TAV growth (4%) after three years (fiscals 2010 - 2012) of stagnant performance. A stronger, 8% TAV gain is anticipated for fiscal 2015. Fitch believes this projection by management may be optimistic but potentially feasible given the various residential as well as retail/commercial development projects underway or planned.

The district's tax base is primarily residential at 60%, although it also includes sizeable distribution, warehousing, and food manufacturing businesses, stimulated by access to Interstate 35 which runs from Mexico to Canada. Top 10 taxpayer concentration is moderately high at 16% with the largest, HEB Grocery Company, LP at 7%. Development within the district that led to sizeable population and solid enrollment gains before fiscal 2010 was spurred by the northern expansion of the diverse and stable San Antonio metropolitan employment base and housing market. Proximity to several military bases adds to the local economy.

SOLID RESERVES MAINTAINED

The district's financial position remains stable and generally comparable to prior years, characterized by solid general fund reserves. Unreserved/unrestricted reserves have totaled no less than 20% over the last five fiscal years (fiscals 2009-2013). The district has generated operating surpluses in all but one of these five fiscal years, assisted by conservative budgeting practices. Fiscal 2013 operating results were stronger than previously anticipated due in part to slower than projected spending of a portion of its dedicated state revenues. Most of the year's $5 million net surplus was marked as restricted fund balance at year-end and management expects it to be spent in a balanced, steady manner over fiscals 2014-2016 for its specific educational uses.

Unrestricted general fund reserves in fiscal 2013 rose by about $1 million on a year-over-year basis to $40.2 million or about 26.3% of spending, which remained comfortably above the adopted fund balance policy requiring a minimum of two months or roughly 17% of general fund spending. Liquidity improved in fiscal 2013 as well with general fund cash and investments totaling $49.8 million or slightly less than four months of operations, up from $42.7 million the previous year.

For fiscal 2014, the district's $162.2 million general operating budget was adopted with a modest surplus, inclusive of employee salary increases and some new positions. Year-to-date, management currently projects a moderate $4 million draw on reserves (about 9% of total general fund balance) due largely to budget amendments that directed spending of the aforementioned dedicated state revenues as well as pay-go capital spending for school buses. Unrestricted general fund balance at fiscal 2014 year-end is projected at a solid $41 million (about 25% of spending) with $3 million of the total to be set aside for future land purchases.

Preliminary budget plans for fiscal 2015 anticipate another moderate $3 million draw on reserves despite modestly higher biennium state funding levels as well as some additional state aid for student growth. Fitch notes the year's revenue gains are offset by budgetary spending plans that include pay increases (estimated at a cost of about $4 million to the general fund), staff additions, as well as costs associated with opening a new elementary school and a STEM (science, engineering, technology & math) academy at an existing middle school. About half of the drawdown is reportedly due to one-time, pay-go capital spending with the remainder to be used for recurring operations. However, the district's established trend of conservative fiscal practices and stable finances suggest to Fitch that these additional operating costs will be absorbed successfully.

HIGH OVERALL DEBT BURDEN

Debt ratios are high, reflective of the district's previous fast-paced expansion. Overall debt levels approximate $5,960 on a per capita basis and 10.1% of full market value. This debt ratio calculation does not consider the state support received by the district for its debt (about 18% of ULT debt service in fiscal 2013) as a result of its comparatively lower per pupil property wealth. Payout is slow with about 33% of principal is retired in 10 years, inclusive of the Series 2014 refunding issuance (which does not extend or restructure outstanding maturities).

Future bond elections are expected over the near-to intermediate term given the district must continue addressing its enrollment-driven capital needs; the district has no outstanding bond authority presently. Plans regarding the timing and size of bond authority to be presented to district voters have yet to be finalized.

OTHER LONG-TERM LIABILITIES MANAGEABLE

Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's pension and other post-employment benefit (OPEB) costs presently are nominal as the state and employees pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2013 totaled less than 1% of governmental fund expenditures.

TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at roughly 74% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable. Carrying costs for the district (debt service, pension, and OPEB costs, net of state support) totaled a manageable 12.3% of governmental fund spending in fiscal 2013 due in part to the slow pace of amortization. Starting in fiscal year (2015), pension contributions by all districts in the state will rise from zero to 1.5%, increasing carrying costs modestly. Increases in district pension funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013, a district judge ruled that the state's school finance system was 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. The trial began January 2014; a new ruling is expected in the spring of 2014. After that, the case is expected to be appealed to the Supreme Court of Texas. 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 a positive credit consideration.

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

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, Texas Municipal Advisory Council, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827557

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Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com