Fitch Affirms Dallas County Community College District, Texas' GOs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'AAA' rating on the following Dallas County Community College District, Texas (DCCCD) outstanding general obligation (GO) debt:

--$355.8 million in GO bonds.

The Rating Outlook is Stable

SECURITY:

The GO bonds are secured by an ad valorem tax levied against all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE MAINTAINED: Recent financial performance reflects a continued trend of solid operating surpluses. Unrestricted reserves are expected to be in excess of the district's strong minimum threshold of no less than four months of spending. Considerable revenue raising flexibility remains available to the district from its low tuition and tax rates despite prior use by management to offset the fiscal impact of recent state funding cuts and modest enrollment declines in a strengthened economy.

STRONG MANAGEMENT PRACTICES: Financial management is strong with the district proactively utilizing long-term planning for capital and operations, conservative budgeting, and interim reporting practices.

RETURN TO TAV GROWTH: Taxable assessed valuations (TAV) gains over the last two fiscal years have strengthened and reversed a trend of flat to moderately declining TAV during the recession. Moderate TAV growth is conservatively projected by management over the near term, which Fitch believes is reasonable given the reported new commercial development completed or underway. There is no taxpayer concentration.

DEBT AND OTHER LONG-TERM LIABILITIES MODERATE: The overall debt burden is moderately high. Principal amortization of tax-supported debt is favorably rapid. The district's lack of future borrowing plans is supported by manageable capital needs that include largely renewal and replacement projects to be funded from dedicated tax revenue for annual pay-go capital spending. Carrying costs are moderate.

RATING SENSITIVITIES

SHIFT IN CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial position and conservative fiscal practices that support this high-level rating. The Stable Outlook reflects Fitch's expectations that such shifts are unlikely.

CREDIT PROFILE

Coterminous with the boundaries of Dallas County, the district encompasses 860 square miles and serves a large population base of nearly 2.5 million. DCCCD is the largest community college district in the state, with seven colleges located throughout the county, along with five neighborhood campuses. County income and educational attainment metrics are mixed, but typically exceed those of the state.

TAX BASE AND ECONOMIC GROWTH

The district benefits from its central location within the broad and diverse Dallas-Fort Worth metropolitan economy. County unemployment rates that typically exceed those of the larger MSA rose during the recession and peaked at 8.8% in 2010. Unemployment levels have continued to decline since then. The unemployment rate fell to 5.9% in December 2013 from 6.3% in December 2012 despite year-over-year labor force growth of nearly 2%, which was slightly above the state (5.6%) but below the nation (6.5%).

TAV gains have strengthened over fiscal 2013-2014 and nearly fully reverse a prior, three year period of moderate TAV declines (a cumulative 9%) over the recession, increasing to approximately $173 billion in fiscal 2014. Fitch believes management's projections of further, moderate TAV growth of 3%-5% in fiscal 2015 are reasonable given the reported strong increase in commercial and business personal property values (inclusive of new construction in the central business district) balanced against more modestly improving residential values.

COUNTER-CYCLIC ENROLLMENT TRENDS

Most students attend the college on a part-time basis and are residents of Dallas County. Tuition rates remain among the area's most affordable despite recent increases. Student enrollment as measured by full-time student equivalents (FTSEs) totaled 51,522 in fiscal 2013, reflecting the effect of modest annual erosion (a cumulative 3.7%) over the last three fiscal years (fiscals 2011-2013). Nonetheless, the district maintains some of the residual effect of gains made over the recession despite the recent trend of enrollment declines. Enrollment hovers closer to pre-2010 levels as growth in FTSEs has annually averaged 3.3% over the last five fiscal years (fiscals 2008-2013). Year-to-date enrollment in fiscal 2014 reflects a continuation of the flat to slightly declining trend, which remains generally in line with the year's budget. Management currently anticipates a continuation of flat to slightly declining enrollment trends (with some offset possible from strong online class enrollment) in fiscal 2015 and over the near term due to the counter-cyclicality against the expectation of favorable economic conditions.

REVENUE DIVERSITY SUPPORTS STRONG FINANCIAL PROFILE AND RESERVES

The district benefits from experienced, conservative financial management as well as a diverse revenue stream comparable to most community colleges in the state that provides a measure of financial flexibility. This includes property taxes for operations and debt service (the largest revenue source at about 40% of total revenues or $191 million in fiscal 2013), followed by relatively comparable percentages of funding from federal (largely Pell grant) revenue, state appropriations, and tuition.

Federal revenue due to Pell grants for low-income students held steady in fiscal 2013 at about $91 million as compared to the prior year. State aid as a percentage of total revenues and per student funding has trended downward given cuts to state appropriations that have occurred over the last four fiscal years (fiscals 2010-2013). About 23% or $109 million of total revenues came from state funding in fiscal 2013, which was down from nearly 29% in fiscal 2009. The district's overall tax rate remains one of the lowest in the state and the approximately $0.10 per $100 TAV operating tax levy in fiscal 2014 maintains additional headroom under the local levy limit of $0.16 per $100 TAV for operations. This is despite a $0.02 increase to the operating tax levy in fiscal 2013 which has been dedicated by management as funding for various pay-as-you-go renewal and replacement capital projects.

A history of solid, positive operating margins stemming from revenue growth and expenditure control underpins the district's strong financial position. The district's GAAP-based operating margin has averaged 3.4% between fiscal years 2008-2012. Fitch views this level of operating performance as impressive given state funding pressures. The district continued this trend and generated a stronger 4.5% operating margin in fiscal 2013. Liquidity as measured by available funds (cash/investments not permanently restricted) to expenses has risen modestly since fiscal 2011 to about $242 million or 53% in fiscal 2013 from $215.2 million or 45.4% in fiscal 2011.

The approved $515.7 million fiscal 2014 operating budget was held flat as compared to the fiscal 2013 budget, similar to management's enrollment growth assumptions. State funding increased modestly in the current biennium (fiscals 2014-2015) given a stronger state economy and associated state revenues. Despite the year's somewhat weaker actual enrollment, management reports year-to-date revenue trends generally compare favorably to budget. Fitch expects balance sheet resources to remain solid as the district anticipates closing fiscal 2014 with the addition of $7.5 million or about 1.5% of operational spending to unrestricted reserves for a total of approximately $165 million or slightly under six months of spending. Unrestricted reserves have historically been maintained well above the minimum four months of spending, consistent with the board's established policy and reflective of DCCCD's financial strength and stability. Preliminary budget plans for fiscal 2015 anticipate management's development of a structurally balanced operating budget using a revenue neutral tax rate as well as the consideration of a tuition increase that adheres to an established two-year, tuition increase cycle.

MODERATE DEBT AND OTHER LONG-TERM LIABILITIES

Overall debt levels are moderately high at approximately $4,150 per capita or 5.2% of market value. Given the size of the district's tax base and infrequent borrowing (voters had not been approached in roughly 30 years when the $450 million GO authorization in 2004 was presented and strongly approved), GO and maintenance tax bond programs have a relatively minor impact on the district's tax rate and debt ratios. Principal amortization of the district's tax-supported debt is favorably rapid with 66% repaid in 10 years. In addition to its tax-supported debt, the district has approximately $19.4 million in outstanding self-supporting revenue bonds (rated 'AA', Stable Outlook by Fitch). The district's lack of future borrowing plans is supported by manageable capital needs that include largely renewal and replacement projects to be funded by tax revenues set aside for annual pay-go capital spending.

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 historically provided 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. Beginning with the 2012-2013 biennium, the state did not fully fund its statutory pension obligation for community college districts, which required the districts to contribute more (roughly 60%) to the pension program. The employer's pension contribution is now shared at a marginally lower 50% with the state as of the 2014-2015 biennium. Carrying costs (debt service, pension, OPEB costs, net of state support) totaled a moderate 13.7% of total expenses in fiscal 2013 which is due largely to annual debt service for tax-supported debt and despite factoring in the increased payment for employee pension benefits passed on to the college by the state.

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, Texas Municipal Advisory Council, and LoanPerformance, Inc.

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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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Alex Vaisman, +1-212-908-0721
Associate Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Alex Vaisman, +1-212-908-0721
Associate Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com