NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on approximately $63.7 million of outstanding Laredo Community College District (LCCD) combined fee revenue bonds.
The Rating Outlook is revised to Negative from Stable.
Combined fee revenue bonds are payable from and secured by a pledge of certain student fees, up to 25% of gross tuition revenues, and any interest earnings thereon.
KEY RATING DRIVERS
OUTLOOK REFLECTS PRESSURED ENROLLMENT: Enrollment has trended downward due to an improving local labor market, similar to many other community colleges nationwide. However, the declines have been particularly pronounced at LCCD, a significant credit concern given the security pledge on the revenue bonds. Management expects enrollment to show signs of stabilization by fall 2016, which remains an area of uncertainty.
MARGIN COMPRESSION A CREDIT CONCERN: Fiscal 2013 GAAP-based operating performance was well below historical levels, primarily reflecting a combination of optimistic enrollment assumptions, a one-time retirement incentive payout, and management's historical practice of not fully budgeting for the annual depreciation expense.
ADEQUATE FINANCIAL CUSHION: LCCD has continued to register positive operating cash flows, which has allowed balance sheet strength relative to expenses to remain sufficient. Since annual operating surpluses have been the primary means for LCCD to grow its financial reserves, Fitch believes that LCCD's ability to enhance its financial cushion will likely be challenged should narrower operating surpluses become the norm.
ELEVATED DEBT BURDEN: LCCD's annual debt charges (tax-supported and revenue bonds) regularly account for a high portion of unrestricted operating revenues. Importantly, tax-supported debt typically represents around three quarters of annual debt service and is separately secured by an ad valorem tax levied on all taxable property within the district (limited tax general obligation (GO) bonds are rated 'AA-'/Stable Outlook by Fitch).
PROLONGED ENROLLMENT PRESSURES: Since student fees and charges constitute the primary source of funds to pay debt service on the revenue bonds, a prolonged period of enrollment declines could negatively impact the amount of pledged revenues available for debt repayment, particularly if management is unable or unwilling to increase tuition and/or fees.
MARGIN EROSION: An inability to maintain GAAP-based operating performance at or near break-even levels could yield negative rating pressure.
ADDITIONAL DEBT: The issuance of additional revenue bonds without a commensurate increase in financial resources available to support the repayment of debt would yield downward rating pressure.
Founded in 1946, LCCD serves primarily Webb County; its taxing boundaries are coterminous with the city of Laredo, Texas (GO bonds rated 'AA'). The city of Laredo continues to see growth, with an estimated 2014 population of 267,000 that reflects an average annual increase of nearly 3% since the 2000 census, slightly higher than the state's 2% growth rate. The overwhelming majority of district students come from within its taxing jurisdiction; more than half are enrolled in workforce training programs.
As anticipated during Fitch's previous credit review, LCCD was able to fully resolve its accreditation-related issues with the Southern Association of Colleges and Schools - Commission on Colleges (SACS-COC). LCCD's next accreditation review with SACS-COC is scheduled for 2020.
OUTLOOK REVISION REFLECTS ENROLLMENT PRESSURES
Similar to many other community colleges nationwide, enrollment began to trend downward due to an improving local labor market. However, the declines have been particularly pronounced at LCCD, with the district realizing a greater enrollment decline on a percentage basis in fall 2013 than many other community colleges in Texas. On a full-time equivalent (FTE) enrollment basis, LCCD realized declines of 6.8% and 7.2% in fall 2012 (fiscal 2013) and fall 2013 (fiscal 2014), respectively. Based on preliminary statistics, management is observing a 7% decrease in fall 2014 FTE enrollment (fiscal 2015), above the 4% that was anticipated in the preliminary budget, and projects enrollment declines will bottom out in fiscal 2016.
Increased participation in the district's relatively new oil & gas training programs is anticipated by management to offset some of the recent enrollment losses in the near term. Fitch recognizes the importance of these programs to the local economy, particularly in the context of the oil and natural gas exploration and production in the nearby Eagle Ford formation. Nevertheless, Fitch believes there remains significant uncertainty regarding future overall enrollment trends at LCCD, particularly given the likelihood of the Laredo MSA maintaining a strong job market over the near term coupled with the countercyclical nature of student demand at community colleges.
Despite the 6.8% decline in fall 2012 FTE enrollment, gross pledged revenues available to repay debt service on the revenue bonds grew by a sizeable 26% in fiscal 2013 (to $12.4 million), driven by an $8 increase in both the tuition rate per hour and the general use fee per credit hour for fall 2012. Management did not pursue a tuition increase for fall 2013 (fiscal 2014), although a $15 increase in the general use fee was implemented effective spring 2014 which will help to partially offset the impact of enrollment declines on pledged revenues (projections for fiscal 2014 were not available for review). Management did not implement any tuition or fee increases for fiscal 2015.
MARGIN COMPRESSION A CREDIT CONCERN
LCCD generated a GAAP-based operating margin of -0.5% in fiscal 2013, well below the five-year (fiscals 2008-2012) average of 4.4%. The negative margin was influenced by a one-time payout of voluntary retirement incentives (about $650,000 relative to a Fitch-calculated operating deficit of $382,000) previously offered to reduce staffing costs, and was exacerbated by above-budget enrollment declines and management's historical practice of not budgeting for the full depreciation expense. The bulk of faculty at LCCD is part-time, which provides significant expense flexibility to respond to changing enrollment patterns.
The structurally balanced $49.8 million fiscal 2014 adopted general operating budget included modest salary increases, no increase in the tuition rate, and assumed the prior year's actual enrollment level. Increased spending in fiscal 2014 was somewhat offset by additional state aid and property tax revenue, the latter of which was supported by a 2% increase in the taxable assessed value (TAV), to around $11 billion. Management reported that fiscal year-end operating performance (August 31) will be comparable to fiscal 2013. The budget for fiscal 2015 is also structurally balanced, supported by assumptions of stable state revenue, continued growth in the TAV and an increase in the O&M tax rate to around 23 cents per $100 TAV (well below the 40-cent limit).
ADEQUATE FINANCIAL CUSHION
LCCD has continued to register positive cash flows, which has allowed balance sheet strength relative to expenses to remain sufficient. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled approximately $50.9 million in fiscal year-end 2013. LCCD's fiscal 2013 cash position, as reported in the balance sheet, included approximately $25.2 million of unspent bond proceeds. Net of unspent bond proceeds, available funds totaled around $25.8 million, which covered fiscal 2013 annual operating expenses by an adequate 30.8%, and total revenue and tax-supported bonds outstanding as of Aug. 31, 2013(including the recent issuance of $87 million in maintenance tax notes) by 40.5% and 15.2%, respectively.
ELEVATED DEBT BURDEN
LCCD's annual debt charges (tax-supported and revenue bonds) regularly account for a high portion of Fitch-adjusted unrestricted operating revenues (14.2% in fiscal 2013). Importantly, tax-supported debt typically represents around three quarters of annual debt service and is separately secured by an ad valorem tax levied on all taxable property within the district. The revenue bonds follow a level debt schedule, with approximately $4.7 million due on an annual basis.
Management reported that phase two of the district's six-year capital improvement plan (CIP; fiscals 2010-2015) is nearly complete and on schedule with some construction savings realized. Capital projects in the first and second phases were funded with about $89.5 million in revenue bonds and maintenance tax notes.
All three phases of the CIP were previously estimated at $119.2 million. Subsequently, management decided to expand its final phase three priority list of capital projects and include additional modernization/renovation projects, furniture and equipment needs, as well as a new Oil & Gas Institute facility. This expanded CIP now totals an elevated $212.5 million once the prior phases are considered.
The recent issuance of maintenance tax notes in support of the third phase will be covered by already approved increases in the interest and sinking fund tax rate. Management indicates that additional debt (around $20 million) may be issued in the next few years in order to complete all of the modernization projects. In its entirety, the CIP is expected to meet the district's deferred maintenance and facility expansion needs throughout both campuses over the next 10-15 years.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria', May 12, 2014
--'Fitch Affirms Laredo Community College District, TX Combined Fee Rev Bonds 'A+' Outlook stable,' Sept. 21, 2012
--'Fitch Rates Laredo Community College District, TXas' Series 2014 LTGOs 'AA-'; Outlook Stable (July 10, 2014)
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria