Fitch Rates New Braunfels ISD, TX ULT Rfdg Bonds 'AAA' PSF; Affirms 'AA' Und; Outlook Positive

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following New Braunfels Independent School District (ISD), Texas' (the district) unlimited tax bonds (ULTs):

--$9.1 million ULT refunding bonds, series 2014.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' with a Stable Outlook by Fitch.

Fitch also assigns an 'AA' underlying rating to the series 2014 refunding bonds.

The bonds are expected to price via negotiated sale as early as the week of June 2, subject to market conditions. Proceeds from the sale will be used to refund outstanding ULTs for savings.

In addition, Fitch affirms its underlying rating on the district's $130 million outstanding ULTs (pre-refunding) at 'AA'.

The underlying Rating Outlook is Positive.

SECURITY

The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district, and are secured further by the PSF guarantee.

KEY RATING DRIVERS

POSITIVE OPERATING TRENDS: The Positive Outlook reflects the district's trend of generating surplus results despite the challenging operating environment posed by state funding cuts, growing general fund reserves to very high levels. Moreover, these results were achieved while prudently maintaining a modest margin of taxing flexibility for operations.

TAX BASE EXPANSION: Residential and commercial development has resulted in moderate tax base growth in the last two fiscal years. Growth prospects remain positive given the district's location, which straddles IH 35 between two major cities, Austin and San Antonio, and ample undeveloped land.

MODERATELY HIGH DEBT BURDEN: The district's above-average debt burden reflects the accelerated enrollment growth prior to the downturn and facility construction of the last five fiscal years, but it is mitigated by prospects for continued growth with manageable debt plans.

ROBUST ECONOMY: The district's economic base benefits from its location in the San Antonio metropolitan area. Income levels remain above average and local unemployment levels compare favorably to state and national averages.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: A continued trend of balanced operations and maintenance of strong reserves, along with a stable to declining trend in the long-term liability burden, could result in positive rating action.

CREDIT PROFILE

ECONOMY SUPPORTED BY PROXIMITY TO SAN ANTONIO

Located 30 miles north of San Antonio, the district encompasses 75 square miles and serves primarily the city of New Braunfels (the city). The local economy centers on tourism, manufacturing, distribution, healthcare, and retail trade. The city's location and access to the extensive economic bases of both San Antonio and Austin offers residents additional employment opportunities, as reflected in the area's historically low unemployment rates.

The city's unemployment rate of 4.1% in March 2014 improved significantly from 6.9% 12 months prior and remains well below the rates of the San Antonio metropolitan statistical area (MSA; 5%), the state (5.3%), and the nation (6.8%). The district's current population is estimated at 45,884, and has shown an average annual increase of nearly 3% since 2000. Median household income levels are above average.

STRONG FINANCIAL FLEXIBILITY

The district continued to maintain a very sound financial profile in the past few years despite operating pressures associated with state funding cuts. A trend of annual operating surpluses has contributed to growing reserve levels, including an unrestricted fund balance that reached $36 million or 71% of spending in fiscal 2013. Liquidity is also favorable, with fiscal 2013 cash and investments representing nearly 90% of general fund spending. The fiscal 2014 budget was adopted with a modest $459,000 drawdown and amended to further draw on its high reserves for certain non-recurring capital projects. However, management reports that interim results are tracking better than budget and now projects ending the year with a modest surplus.

The fiscal 2015 preliminary budget currently projects a $1.3 million deficit. The budget includes a 2.4% midpoint compensation adjustment needed to remain competitive with peer districts and capital outlays to purchase six school buses. The budget assumes maintaining current tax rates and student enrollment growth of 2.2%. Fitch considers planned and managed draws on reserves reasonable given the district's high fund balance levels and historically prudent fiscal management practices.

ENROLLMENT AND TAX BASE GROWTH CONTINUES

Enrollment continues to record steady gains, averaging about 2.3% annually from 2008-2014 with current enrollment at 8,280 students. Taxable assessed value (TAV) increased by an average of more than 5.6% annually during the same period. The area was fairly resilient to the downturn and only experienced a modest 1% dip in TAV in fiscal 2011. The tax base quickly resumed growth in fiscal 2012 due to accelerated commercial and residential development in the area. The district's TAV for fiscal 2014 grew 6.7% from the prior year, reaching $3.4 billion.

Management expects additional moderate growth in student counts and TAV in the near term as the ongoing northern expansion of San Antonio, as well as the availability of affordable land within the district, continues to spur additional development. Fitch considers this expectation reasonable.

ABOVE-AVERAGE DEBT BURDEN

District debt ratios are above average, but have come down from previous levels as a result of ongoing population and tax base expansion. Overall debt ratios stand at $4,480 per capita and 5.7% of market value. Payout has improved due to a slowing down in new money debt issuance and is now slightly above average at 56% in 10 years.

The district has no remaining authorization to issue new money bonds. Given the current enrollment growth trends, the next facility need will be at the elementary school level. The district reports that the earliest anticipated call for a bond election would be in May 2015.

LIMITED PENSION/OPEB OBLIGATIONS

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.

Carrying costs, including debt service, pension and OPEB contributions, were a moderate 17.4% 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, the Underwriter, and the Municipal Advisory Council of Texas.

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=832629

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Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78801
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78801
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com