AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed its underlying 'A+' rating on Midlothian Independent School District, Texas' (Midlothian ISD) outstanding unlimited tax (ULT) bonds as follows:
--Approximately $67.2 million in ULT bonds series 2004, 2005, 2006, 2008, and 2010.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited ad valorem tax pledge of the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA', Stable Outlook by Fitch).
KEY RATING DRIVERS
FINANCIAL PROFILE PRESERVES FLEXIBILITY: Consistently strong financial performance is a stabilizing credit factor. The district has posted positive financial results in each of the past five fiscal years. Management has maintained strong reserves despite state funding cuts, which provides added financial flexibility.
HIGH DEBT BURDEN AND MINIMAL CAPACITY: The district's weak debt profile includes high overall debt levels, which is not atypical for Texas school districts in rapid growth areas, and slow principal amortization. The current debt structure and debt service tax rate (although unlimited) leave little room for issuance of new money debt for additional facilities. Concerns are mitigated by the district's relatively level debt service schedule, which alleviates upward pressure on the tax rate, and the present facility capacity.
STABLE ECONOMY: The district's economy is anchored by large industrial manufacturers and distribution concerns. Taxpayer and sector concentration remain high while county unemployment fell to 5.5% as of June 2014, reflective of solid employment trends. Modest tax base declines followed the recession, but recent housing construction produced moderate taxable assessed valuation (TAV) gains in fiscals 2013-2015. Near-term TAV projections anticipate continued modest growth.
BETTER THAN AVERAGE SOCIOECONOMIC INDICATORS: Income and wealth levels in the district typically exceed those of the county, state, and U.S.
RATING SENSITIVITIES
UNREALIZED GROWTH PROJECTIONS: The district's current forecast anticipates a debt service tax rate at or slightly below the $0.50 cap for new issuance, assuming modest near-term TAV growth. If this projected growth does not materialize, the district will either have to levy a tax exceeding $0.50 (which will preclude the district from new money borrowings) or will have to regularly restructure the existing debt to remain below the cap. Either scenario would represent a weakening in the district's debt profile and would be inconsistent with the current rating level. Negative rating action could also result from materially lowered reserves.
CREDIT PROFILE
This suburban district is located 25 miles southwest of downtown Dallas and serves an estimated population of 34,000. The district is located within the city of Midlothian, and also includes portions of the cities of Cedar Hill, Grand Prairie, Mansfield, and Ovilla. Current enrollment of about 7,800 is up about 3.6% from last year.
STRONG RESERVES MAINTAINED
The district's financial performance is a positive credit factor. Since fiscal 2007, the district has generated a healthy operating surplus, strengthening its reserves moderately each year. Unreserved/unrestricted balanced have been no less than 23% over fiscal years 2007-2013. State funding cuts implemented for the 2012-2013 biennium totaled nearly $8 million and were addressed by district management with spending cuts that included a reduction of workforce and other departmental and administrative cost saving measures.
For fiscal 2013, management increased the year's unrestricted general fund balance by approximately $1.6 million, bringing the total to $26.9 million or 47.8% of spending. Liquidity improved over the past two fiscal years with a total of $29.6 million in cash/investments ending fiscal 2013 (over six months of general operational spending). Higher than expected enrollment growth is favorably projected to produce an additional operating surplus of $1.5 million for fiscal 2014. The district budgets for a $1.5 million drawdown for one-time capital spending in fiscal 2015, but officials project that strong enrollment growth will produce break-even results favorable to the conservative budget.
HIGH DEBT BURDEN; STRAINED DEBT PROFILE
Not unlike other, previously fast-growth Texas school districts, overall debt levels are high, particularly on a per capita basis, at 9% of market value or $10,000 per capita. In an effort to further mitigate the near-term tax rate impact and stay at or below the statutory $0.50 per $100 TAV test for new money debt, the district extended its amortization schedule from 25 to 40 years in fiscal 2012 and issued $50 million as variable rate debt (not rated by Fitch). The variable rate bonds were refunded in fiscal 2014 for principal reduction, and are now in initial rate mode through July 31, 2019; at the remarketing date of Aug. 1, the bonds are subject to mandatory tender. An external liquidity provider is not required as the option to tender is not available to bondholders. In total, this variable rate issuance totals about 20% of total debt outstanding, which is within the district's debt management guidelines of no more than 30%.
Increased enrollment in fiscal 2013 led the district to accelerate issuance of nearly $20 million for a new elementary school in June 2014. However, the additional debt was offset by tax base and population growth. Amortization remains slow at 18% of principal retired in 10 years, reflecting the use of capital appreciation bonds to minimize tax rate impact.
Fitch views the district's current debt profile as weak and pressured, although still fitting within the rating category. The debt service burden on the budget is above average at 13% of fiscal 2013 governmental fund spending, but is mitigated by the district's overall financial flexibility reflected in ample reserves. The plan of finance anticipates maintaining a debt service tax rate at or slightly below $0.50 per $100 TAV tax rate under modest near-term TAV growth assumptions in order to support debt outstanding. Any excess debt service funds generated from higher than projected TAV gains would likely be used to retire variable rate debt early rather than buy down the debt service tax rate, according to management. Fitch takes some comfort from the relatively minimal increase in annual debt service necessary to reach maximum annual debt service at $15.5 million in 2031; annual debt service in fiscal 2015 totals $14.9 million. Management reports no plans to seek new bond authorization over the next three to five years given capacity in facilities existing and under construction to accommodate projected near-term growth.
TAX BASE GROWTH RETURNS AFTER MODERATE CUMULATIVE DECLINE
Affordable land and accessibility to the larger Dallas-Fort Worth metro area employment base drove a fast pace of tax base and enrollment expansion in the district from residential development prior to the recession. District income and wealth metrics are above average, exceeding the county, state, and U.S. The area's unemployment rate of 5.5% in June 2014 reflected a solid year-over-year decline due to solid employment gains while remaining on par with the state and below the national rate (6.3%).
Strong, annual enrollment gains tapered to a flat trend in fiscals 2012 and 2013, in line with the housing market downturn. However, metro area expansion produced healthy 3.6% enrollment growth in fiscal 2013. Demographic studies anticipate continued modest growth over the near term.
The district's tax base has historically included a large and stable industrial component, comprising cement, steel, and electric power producers, as well as various distribution centers. Subsequently, sector and taxpayer concentration remains high. In fiscal 2014, the top 10 taxpayers, including their values within the tax increment reinvestment zone (TIRZ) that the district participates in, represented about 40% of the district's tax base. While forgoing operating tax revenue from property within the TIRZ (which is offset by additional state aid), the district utilizes the full value of property both in and outside of the TIRZ for its debt service tax levy. Typically solid TAV gains that averaged over 7% annually halted in 2010, resulting in a moderate, cumulative decline through fiscal 2013. Strong home construction and sales resulted in TAV growth of 4% and 5% for fiscals 2014 and 2015. TAV is projected to grow moderately as residential development continues.
TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.
Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. The expectation is that the state will appeal the latest ruling to the state supreme court. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates.
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, and the National Association of Realtors.
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=868554
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