NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to Frenship Independent School District, Texas' (the district) unlimited tax (ULT) school building bonds as follows:
--$37 million ULT school building bonds, series 2014A.
The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of 'AA-' to the series 2014A bonds.
The bonds are scheduled for a negotiated sale the week of Dec. 1. Proceeds will be used to acquire, construct and equip school buildings in the district and purchase school sites.
In addition, Fitch affirms the following ratings:
-$73 million ULT refunding bonds, series 2006, 2009, and 2014 at 'AA-';
-$83.6 million ULT school building bonds, series 2007, 2008, 2010, and 2014 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, all series except for the 2008 bonds are insured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.
KEY RATING DRIVERS
HIGH DEBT LEVELS INCREASE: Already high debt ratios will increase with this issuance, which will address school capacity related pressures and facility upgrades. The extended repayment structure of the proposed debt raises questions about future borrowing flexibility.
POSITIVE FINANCIAL PERFORMANCE: The district has consistently posted positive operating results and maintained solid reserve levels, despite reductions in state aid and cost pressures from enrollment growth.
STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014 and 2015 have re-established growth in a significant source of operating revenue for the district after several years of reductions.
STRONG TAX BASE & AREA ECONOMY: The district tax base is growing at an increased rate after a moderate post-recession slowdown, while the area unemployment rate continues to trend below state and national averages.
RATING SENSITIVITIES
HIGH DEBT CAPS RATING: Very high debt levels likely preclude positive rating action over the near term. However, Fitch's expectations for continued tax base growth, combined with the district's history of sound financial management, positive operating performance, and strong reserve levels are important credit strengths that moderate this risk.
CREDIT PROFILE
The 128-square mile district is located immediately to the west and southwest of Lubbock (GO bonds rated 'AA+' by Fitch, Stable Outlook), a regional economic hub in west Texas. A portion of the district lies within Lubbock's city limits, which has a population of 289,324. The district has a population of 43,383.
HIGH DEBT BURDEN
Debt ratios with this issuance will climb to $9,495 per capita and 12.6% of full value, and amortization is slow with 30% retired within 10 years. The district currently levies a high $0.48 per $100 of taxable assessed value (TAV), approaching the $0.50 statutorily permitted maximum debt service tax rate for new money issuance.
The series 2014A bonds are the second and final component of a bond authorization that voters approved in May 2014. This issuance will continue and complete the work from the previous issuance, which includes an elementary campus, 9th grade center, and other facility upgrades in athletics and technology. The district did not expect to issue the second piece of the bond authorization until early 2016, but management states it wanted to take advantage of favorable market conditions; the schedule acceleration does not reflect increased capital/facility pressures.
The district plans to draw on large reserves in the debt service fund as needed to maintain the debt service tax rate below the statutory cap for new issuance. Inclusive of the projects associated with the recent bond referendum, management estimates sufficient classroom capacity through 2020 based on current enrollment trends. The elongated principal amortization schedule associated with this and previous borrowings likely will place some limitations on the district's future borrowing capacity.
Affordability of current and planned debt is dependent upon district tax base performance, which has shown solid growth in recent years. TAV increased 6.0% and 6.2% in fiscals 2013 and 2014, respectively, with certified values in fiscal 2015 showing another year of growth at 7.6%. Recent projections of tax base growth provided by the district have been accurate, inspiring confidence in district projections that moderate growth will continue going forward.
CONSISTENT POSITIVE OPERATING RESULTS
Audited results for fiscal 2013 included a modest $61,449 general fund operating surplus after transfers. The general fund has recorded positive year-end results each year dating back to at least fiscal 2002. Unaudited fiscal 2014 results continue that trend, marking another year of revenues exceeding projections and operating results beating a budgeted deficit of $400,000. An estimated unrestricted general fund balance at the end of fiscal 2014 of $16.4 million equates to a strong 29% of spending.
GROWTH IN FISCAL 2015 BUDGET
The $61.4 million fiscal 2015 adopted budget includes a 7% increase in revenues over prior year totals, driven by tax-base growth and additional enrollment driven state aid. The fiscal 2015 budget is structurally balanced, and Fitch expects the district to maintain its strong reserve position going forward based on historical results.
STABLE AREA ECONOMY
The district benefits from its location near Lubbock, where health care, education, and government comprise the area's largest non-agricultural employment sectors. Largest area employers include Texas Tech University (TTU), Covenant Health System, and TTU Health Sciences Center. The MSA unemployment rate has remained consistently lower than the state and national rates and improved to a favorable 3.8% in September 2014 from 4.9% 12 months prior. Income levels for the district are above state averages and slightly below national averages.
OTHER LONG-TERM LIABILITIES MANAGEABLE
The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run postemployment benefit healthcare plan. The district's cost for pension and other postemployment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2013, as plan contribution amounts are principally paid by the state and district employees.
The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of an elevated and growing debt burden. Carrying costs for the district (debt service, pension, and OPEB costs net of state support) remain manageable, consuming 15.6% of governmental fund spending in fiscal 2013.
Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015.
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 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=931535
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