Fitch Rates Grand Prairie ISD, TX's 2014 ULT Bnds 'AAA' PSF ' / AA' Und; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Grand Prairie Independent School District (ISD), Texas' (the district) general obligation (GO) unlimited tax (ULT) bonds:

--$23.9 million ULT refunding bonds, series 2014.

The rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

In addition, Fitch assigns an 'AA' underlying rating to the 2014 bonds and affirms the 'AA' rating on the district's $463 million (pre-refunding, on a non-accreted basis) in outstanding ULT bonds.

The series 2014 bonds are scheduled to sell via competitive bid as market conditions permit. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are payable and secured by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: The district has generated healthy operating surpluses over the last four fiscal years, which has strengthened reserve levels and liquidity. Given substantial reliance on state funding, Fitch views the district's ability to maintain its solid financial profile as fundamental to the current rating level.

GROWING DFW REGIONAL ECONOMY: The district realized its second year of solid taxable assessed valuation (TAV) growth following moderate recessionary declines. Fitch anticipates continuing tax base expansion based on Dallas Fort Worth (DFW) growth trends and a strengthening housing market.

MIXED ECONOMIC METRICS: The district's low unemployment rate reflects strong employment base gains. Income and educational levels lag state and national averages.

ELEVATED DEBT BURDEN: Fitch anticipates high debt levels over the intermediate term based on planned issuance needs and below-average amortization. Affordable carrying costs reflect state support for the district's debt and pension plan.

RATING SENSITIVITIES

SOUND FINANCIAL PROFILE: Solid reserves are a key credit mitigant to the district's above-average exposure to state funding uncertainties. The Stable Outlook reflects Fitch's near-term expectation that such shifts from the district's current profile are unlikely.

SATISFACTORY DEBT MANAGEMENT: The current rating is premised on the district's ability to satisfactorily manage growth. A significant increase in debt burden or carrying costs would pressure the current high rating.

CREDIT PROFILE

The district's boundaries include roughly 80% of the geographic area of the city of Grand Prairie, a mature city centrally located in the DFW metropolitan area.

PARTICIPATION IN DFW REGIONAL ECONOMY

Access to major air and ground transportation routes has contributed to the region's strong wholesale distribution presence. Other dominant economic sectors include manufacturing, defense, and aerospace. The health of the local economy is evidenced by several years of solid employment base growth contributing to a low unemployment rate of 5.6% as of July 2014, on par with that of the state.

The district's fiscal 2015 tax base is comprised of about 54% residential and 39% commercial/industrial properties. Taxpayer concentration is moderate at 11%; top taxpayers include retail, distribution, and manufacturing concerns. Solid 9.9% TAV growth for the two years ending fiscal 2015 follows four years of modest recessionary declines. Resumption of growth was realized across all property classes.

The addition of new commercial/industrial interests has offset the impact of the Triumph Group's plant closure to date. The district estimates that the plant relocation will occur over a three year period beginning in 2013 and result in a loss of 140 jobs. Triumph contributed a moderate 4% of TAV in fiscal 2012, which declined to a modest 1.4% in fiscal 2015. Fitch will continue to monitor the impact of the Triumph plant closure and property redevelopment plans.

Fitch considers the district's expectation of moderate near term TAV growth reasonable based on development underway, recently completed highway improvements, and the strength of the regional housing market. The district's economic prospects remain favorable given its central location in the DFW metro area, which continues to outpace the nation in employment, income and population.

TEXAS SCHOOL DISTRICT 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. Fitch expects 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.

STRONG FINANCIAL PERFORMANCE DESPITE RELIANCE ON STATE FUNDING

The district's financial profile is characterized by a history of surplus financial performance and healthy reserves. Although 70% of the operating budget is funded from state support, conservative fiscal management and enrollment gains enabled the district to increase reserves during the state-wide funding cuts of the fiscal 2012-2013 biennium. The district completed fiscal 2013 with a $3.6 million surplus, increasing unrestricted reserves to $47.1 million, or a solid 24.5% of spending, with similar reserves estimated for fiscal 2014. The fiscal 2015 balanced budget includes moderate paygo spending.

ELEVATED DEBT RATIOS; ONGOING CAPITAL NEEDS

This refunding issue provides savings through 2024 and an interest and sinking (I&S) tax rate in the range of $.37 to $.38 per $100 of TAV after peaking at $.425 in 2015 and 2016. Fitch anticipates the district's high debt burden, 10.5% of market value, to remain elevated based on plans for a November 2015 bond election and a below-average amortization rate of 42% in ten years. Officials communicated issuance plans of up to $100 million to address capacity and infrastructure needs, which amount equates to the amount of debt rolling off in the next five to six years. Fitch will monitor TAV growth in relation to the district's ongoing capital needs given limited I&S tax rate capacity.

A coincident tax ratification election (TRE) may be undertaken to tap the additional $.13 per $100 of TAV in maintenance and operations (M&O) levy margin. If approved, officials communicated the potential to apply $.04 to $.05 of the M&O tax rate increase to retire debt, including a portion of the district's outstanding capital appreciation bonds. Fitch believes that the district retains adequate flexibility to address capacity needs and balance the budget in the near term in the event of a failed election. Fitch will continue to monitor the outcome of the bond election with respect to its impact on the district's financial and debt profile.

AFFORDABLE CARRYING COSTS REFLECT STATE SUPPORT

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; the vast majority of these contributions are made by the state on behalf of the district. However, districts are vulnerable to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Including debt service, pension and OPEB contributions, carrying costs were an affordable 13.5% of fiscal 2013 governmental spending, reflecting the district's slow amortization rate, CABs, and state support for pension funding, and a low 7.7% considering state support for debt service.

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.

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=886234

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com