Fitch Rates Mansfield ISD, TX's ULT Bonds 'AAA', 'AA+' Underlying; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following unlimited tax (ULT) bonds for the Mansfield Independent School District, Texas (the district):

--$50 million ULT school building bonds, series 2014;

--$59.785 million ULT refunding bonds, series 2014.

The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. The bonds are expected to price via negotiated sale as early as the week of Nov. 3. Proceeds of the school building bonds will be used to finance school facility construction and renovation. Proceeds of the refunding bonds will be used to refund a portion of the district's outstanding ULT bonds for interest cost savings.

Fitch also assigns an underlying rating of 'AA+' to the series 2014 bonds and affirms the following ratings:

--$719.5 million outstanding ULT bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The bonds are also insured by the PSF guarantee.

KEY RATING DRIVERS

ROBUST FINANCIAL CUSHION: The district's financial profile is characterized by stout operating reserves, ample liquidity, and sound management practices, and is the key mitigant to the district's high debt burden.

SHRINKING DEBT FLEXIBILITY: The district's debt burden has grown to high levels due to regular borrowings to accommodate a doubling of the district's population over the past decade. The borrowings have driven the district's debt service tax rate close to the maximum allowed by the state for new bond issuances. This concern is somewhat alleviated by the more recent trend of tax base growth in excess of enrollment and flexibility in the pace of debt issuance.

SOUND TAX BASE GROWTH: The district's largely residential tax base reflects solid historical growth, albeit at an uneven post-recession pace. Reduced fiscal 2013 mineral values were mitigated by a growing commercial property sector which continues to drive growth in fiscal 2015. The tax base is not concentrated.

FAVORABLE ECONOMIC METRICS: The district's profile is characterized by high income and wealth levels, and unemployment is low.

RATING SENSITIVITIES

DEBT SERVICE TAX RATE IMPACT: The district plans to continue its recent practice of pledging operating funds to meet the Attorney General's $0.50 debt service tax rate sufficiency test for new debt issuance. According to statute, the inability to maintain a debt service tax rate at or below $0.50 would require the district to transfer pledged operating funds to service the debt prior to raising the debt service tax rate. Debt service pressure on operations or frequent and recurring debt restructuring could result in negative rating action.

CREDIT PROFILE

STRONG FINANCIAL FLEXIBILITY

Fitch views the district's solid financial position as a credit strength. Management budgets conservatively, with actual results typically outperforming the budget. Strong financial flexibility allows the district to fund capital and nonrecurring expenditures from its ample reserves.

The district outperformed its fiscal 2013 deficit budget due largely to cost savings from unfilled positions. A planned $4.5 million (2% of spending) application of reserves included expenditures for one-time program spending, buses and technology. The district ended the year with a very strong $94 million (42% of spending) in unrestricted general fund reserves. Officials estimate a similar draw for fiscal 2014 and a strong ending fund balance approximating 40% of budgeted spending. Management projects balanced operations for fiscal 2015, with a modest use of general fund balance for capital spending. The district's fiscal year ends Aug. 31.

POSITIVE ECONOMIC PROSPECTS

The district is part of the sizable Dallas-Fort Worth-Arlington economy. Affordable land spurred residential development throughout the district over the past two decades, fueling rapid population and enrollment growth. The district projects more modest annual enrollment growth of less than 1% over the next several years, which Fitch considers reasonable based on recent trends.

The fiscal 2015 taxable assessed value (TAV) of $10.3 billion reflects solid 8% growth over the prior year. A robust and expanding transportation network, combined with the district's recent population gains, continue to attract commercial development. Fitch anticipates ongoing tax base growth in the near term based on reported residential and commercial development activity underway.

Wealth levels in the city of Mansfield trend above state and national averages. The city's unemployment rate of 4.6% as of August 2014 remains below the regional, state, and national rates. Recent declines in unemployment have been driven by employment growth as the local economy continues to expand.

HIGH DEBT OFFSET BY AFFORDABLE BENEFIT COSTS

Debt ratios are high, with overall debt of 8.2% of market value (about $6,419 per capita). Scheduled principal amortization remains below average with about 35% of principal retired in 10 years.

District voters continue to show public support for the district's capital program, as evidenced by the successful authorization in November 2011 of $198.5 million in ULT bonds to fund the rebuilding of five elementary schools and various campus improvements and upgrades. The current offering of school building bonds will be the third installment in the 2011 bond project, and officials are monitoring TAV in connection with the timing of the final issuance from this authorization ($48.5 million).

The district anticipates issuance of this final installment in 2016 or 2017, based on flexibility afforded by moderating enrollment growth and existing facility capacity. The district's fiscal 2016 debt service tax rate is expected to decline to $0.485 per $100 of TAV, from $0.50 in fiscal 2013, based on solid TAV growth and refunding savings.

Fitch views the debt service tax rate (just below the statutory cap for new debt issuance) and below-average principal repayment as credit concerns. District employees participate in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer pension system. The bulk of contributions are made by individual plan members and the state of Texas on behalf of the district, thus minimizing liability for the district. The system also offers other postemployment benefits (OPEB) to retirees. Fitch views the district's limited pension and OPEB obligations as an offset to the high debt levels. Combined debt service, pension, and OPEB contributions represented an affordable 14.5% of fiscal 2013 governmental fund expenditures.

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. The Texas attorney general has appealed the judge's 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, the Municipal Advisory Council of Texas, 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=914476

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com