Fitch Rates Laredo ISD, Texas' ULT Bonds 'AAA' PSF / 'AA-' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings takes the following rating action on Laredo Independent School District, Texas' unlimited tax (ULT) bonds:

--$77.8 million ULT school building bonds, series 2014 assigned 'AAA' PSF / 'AA-' underlying;

--$35 million ULT refunding bonds, series 2014 'AA-' underlying.

The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The district has applied for the PSF guaranty for the series 2014 refunding bonds. Fitch will assign the 'AAA' PSF guaranty once the district's application has been approved by the Texas Education Agency.

The school building bonds and refunding bonds are scheduled to price during the week of June 16 and June 30, respectively. Proceeds of the school building bonds will be used to improve various school facilities. The refunding bonds will be used to refund outstanding debt for interest cost savings.

Fitch also affirms its rating on the following district obligations:

--$212 million ULT bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The unlimited tax bonds are secured by an annual property tax levy imposed on all taxable property within the district. The bonds are further secured by the Texas Permanent School

KEY RATING DRIVERS

PRUDENT FINANCIAL MANAGEMENT: Management's implementation of budget cuts and stringent procurement requirements has enabled the district to grow fund balance reserves to solid levels providing financial flexibility.

MATURE TAX BASE: After a long period of healthy growth, taxable valuations have remained sluggish in recent years. Prospects for future growth are limited as the district's tax base is relatively mature and built out.

STATE AID REVENUES DOMINANT: The district is considered property poor, thus it receives a substantial amount of state aid for operations and maintenance. Prudent budget adjustments allowed the district to absorb recent cuts in state aid.

HIGH DEBT; LARGE OFFSETS: The district's overall debt relative to its market value is high, but substantial debt service offsets from the state keep carrying costs modest.

FLAT ENROLLMENT TRENDS: The district has experienced nearly flat enrollment trends due to its maturity. Such trends relieve the district of growth pressures, allowing it to address the extensive renovation or replacement of its aging facilities.

RATING SENSITIVITIES

STRUCTURAL IMBALANCES: SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the districts healthy financial profile.

CREDIT PROFILE

POSITIVE FINANCIAL PERFORMANCE

The district has posted annual operating surpluses ranging from 3.6% to 8.5% of spending for six out of the last seven years. Such performance positioned the district well for the recent budgetary challenges faced by all school districts in the state. State funding cuts in the last biennium led the district to eliminate additional positions by adjusting its student to teacher ratio, moving to a traditional school schedule, and offering an early retirement incentive. As a result, the district maintained structural balance in its annual budget.

Increased state aid for the fiscal 2013-2014 biennium enabled management to provide salary increases and a one-time bonus to teachers, as well as contribute more to the district's health insurance program. The additional revenue and overall positive financial position also enabled the district to supplement its capital program with general fund outlays averaging 2% of spending.

Fiscal 2013 posted a planned large $15.3 million net operating deficit (equal to 6.9% of spending), due to $33.5 million in pay-go outlays and transfers to the capital projects fund, equaling a large 15% of spending. As a result, the unrestricted fund balance declined to a still strong $71.6 million or 32.5% of spending.

The district's liquidity is ample, totaling more than four months of operating expenses in fiscal 2013. Due to its low wealth per student, the district receives a high 77% of its general fund revenues as state aid. Given the district's maturity, management prudently budgets flat enrollment annually.

The fiscal 2014 budget is balanced at level tax rates and flat enrollment. Due partly to greater than budgeted enrollment, the district projects a net operating surplus of $3 million or 1% of spending. The proposed fiscal 2015 budget will be balanced, aided by the availability of $0.04 for O&M that was previously used for debt service on the now refunded lease revenue bonds. The district projects level enrollment going forward due to the maturity of the district.

MATURE TAX BASE

The tax base has remained flat or declined modestly since fiscal 2010 due partly to an increase in exempt properties and disabled veteran exemptions. Future prospects for growth are limited, as the district is relatively mature and mostly built-out. The top 10 taxpayers account for a moderate 9.9% of total taxable assessed value (TAV) for fiscal 2014. Property tax collection rates are below average on a current basis and typical for the border region, but adequate on a total collections basis.

LARGE STATE DEBT SERVICE OFFSET

In Nov. 2013, a high 72% of voters approved a $125 million GO bond authorization comprised of $47 million to refund outstanding lease revenue bonds and $77 million for school facility improvements. This authorization was not anticipated by Fitch for several years. The district accelerated its debt plans as additional capital needs were identified. The current new money offering will exhaust the 2013 authorization and is projected to require a notable 67% increase in the debt service tax rate to $0.39 per $100 TAV, up from the current $0.23, but still well below the $0.50 threshold required by the Attorney General for new bond issuance. The district's projection is based on flat TAV growth.

Based on current law, the new money bonds will start receiving state support for debt service in fiscal 2016, leading the district to contribute $1.4 million and $1 million in cash from its debt service fund in fiscal 2014 and 2015, respectively, in order to keep the tax rate from exceeding $0.39. Principal payout for direct debt is moderately rapid at 64% in 10 years which Fitch views favorably.

Including the current offering, the district's overall debt levels are moderate on a debt per capita basis at $3,871 but very high relative to market value at 16.3%. However, debt service carrying costs are moderate at 11% of governmental spending. Due to the district's very low property wealth per student, the state currently supports a substantial 62% of the district's debt service for its unlimited tax bonds. State support will rise to 72% once the current new money offering becomes eligible for such assistance in fiscal 2016. Adjusting for this substantial offset to debt service, carrying costs are modest at 3.1% of governmental spending.

AFFORDABLE PENSION BENEFITS

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan; other-post employment benefits (TRS-Care) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled a modest 1.2% of fiscal 2013 governmental spending.

INTERNATIONAL TRADE BASED ECONOMY

Located on the Rio Grande, the border city of Laredo (GO debt rated 'AA' by Fitch) serves as the principal port of entry into Mexico and the largest inland port in the U.S. Over the past decade, Laredo has experienced substantial growth in population. However, the district's enrollment of approximately 23,000 has remained stagnant due to central Laredo's nearly complete development. The district's population is equal to about 41% of Laredo's total population.

Laredo's proximity to Mexico and the city's trade based economy closely link its economic health to that of its southern neighbor. Fluctuations in the value of the peso and dependence on international policies create some economic uncertainty for the area. Integration of the U.S. and Mexican economies through free trade agreements and Laredo's essential transportation network add a measure of stability, partially offsetting these vulnerabilities.

In recent years, economic activity has been further boosted by substantial oil and natural gas exploration and production in the nearby Eagle Ford formation. Aided by growing sectors in higher education, healthcare, and government, the city's unemployment rate declined to 5.5% as of March 2014; this rate compares favorably with state and national averages.

Despite surging economic activity, the city's market value per capita remains very low at $25,000. Income levels are also low but are growing faster than state or national averages.

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 re-opened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began in January 2014. 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 Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and Texas Municipal Advisory Council.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated 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=832622

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1-512-215-3741
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
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1-512-215-3741
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