NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA-' rating for the following Valley View Independent School District, Texas (the district) bonds:
--$49.1 million unlimited tax (ULT) bonds outstanding.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district, and are also insured by the Texas Permanent School Fund guarantee.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: The district's financial profile is characterized by healthy operating reserve as well as conservative budgeting and financial management practices. The district has managed this performance despite recent state funding cutbacks.
MINIMAL GROWTH PRESSURES: The district is largely residential and maintains manageable student enrollment growth with minimal growth pressures and ample capacity in existing facilities. Capital needs are modest, as district facilities are relatively new; ongoing repair and replacement of plant components will be done using available resources.
WEAK SOCIOECONOMIC INDICATORS: While improving from last year, county unemployment levels are stubbornly high and wealth indicators are well below state and national averages.
MIXED DEBT PROFILE: Debt levels are moderately high and the pace of repayment is slow. Carrying costs for debt service and post-employment benefits are very affordable.
RATING SENSITIVITIES
DECLINE IN RESERVES: Sustained draw down of general fund reserve levels would apply negative pressure to the rating.
CREDIT PROFILE
The district is located in Hidalgo County near the Mexican border and within the large and growing McAllen-Edinburg-Mission metropolitan area. The district serves portions of the cities of Pharr and Hidalgo. District enrollment has slowed to flat growth in recent years following average enrollment gains of 9% in the previous decade. The slowed enrollment growth provides a measure of relief for capital needs. District enrollment in fiscal 2014 was approximately 4,600. Facilities include five elementary schools, one junior high school, and two senior high schools.
SOUND FINANCIAL POSITION A MITIGATING FACTOR
The district continues to maintain a sound financial profile despite operating pressures associated with flat state funding over the past five years. Balanced operations were achieved in fiscals 2012 and 2013 with cost savings from staffing reductions. The district drew on $1.9 million of general fund reserves to build a new career and technology facility in fiscal 2013, resulting in an unrestricted fund balance of $12.2 million or 27% of spending. Liquidity is also favorable, with fiscal 2013 cash and investments representing nearly four months of operating expenditures. State support for district operations is significant, accounting for 77% of general fund revenues in fiscal 2013.
Unaudited results for fiscal 2014 point to a surplus of $1 million. Officials project that an audit adjustment of $2.3 million will offset a modest operating deficit resulting from a 4% pay increase and a one-time employee payout. An additional pay increase of 4% was adopted for fiscal 2015, with planned staff reductions balancing the general fund budget.
STABLE TAX BASE, LOW WEALTH
Tax base growth has benefitted from moderate retail and other commercial investments in recent years. Fiscal 2014 taxable assessed value (TAV) registered a 5% increase to $450 million. Tax base and sector concentration is low, with the top 10 taxpayers at about 8% of TAV in fiscal 2014. The district anticipates modest TAV growth over the near term, which Fitch views as reasonable given recent trends and announcements for future warehouse construction.
Area wealth levels are well below state and national averages with county median household income at only 62% of the national level. County unemployment is high at 9.9% as of July 2014, but was above 10% for the five years prior. The individual poverty rate is also high, with approximately 31% of district residents below the poverty line.
AFFORDABLE TAX AND DEBT BURDEN
The operating tax rate is currently at the statutory cap of $1.04 per $100 of TAV, which can be increased by an additional $0.13 only with voter approval. District officials are considering such a referendum to increase revenue flexibility. The total tax rate for fiscal 2014 is $1.28, which compares favorably with many other south Texas school districts.
Overall debt per capita is moderate at $3,251 per capita and debt to market value is high at 9%. The pace of debt retirement is slow at 36% repaid in 10 years. Annual debt service is level until maturity in 2038. Management reports no large capital needs in the near or medium term, given existing facility capacity and limited enrollment pressure. Management notes that available funds will be used to repair and upkeep at district campuses.
The district's pension liabilities are limited to its participation in the state pension plan administered by the Teacher 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. Including debt service, pension, and other post-employment benefit (OPEB) contributions, annual carrying costs were a modest 2.5% of fiscal 2013 governmental fund spending, benefiting from the state's strong pension funding system. However, districts are susceptible to future funding changes by the state.
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=915335
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