AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Dallas Independent School District, TX (ISD, the district) bonds:
--$222.6 million unlimited tax (ULT) refunding bonds, series 2014B.
The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
Fitch also assigns an 'AA+' underlying rating to the series 2014B bonds and upgrades the district's outstanding ULT bonds and limited tax notes as follows:
--$2.1 billion ULT bonds (pre-refunding) to 'AA+' from 'AA' (excluding series 2014A);
--$143.3 million maintenance tax notes, taxable series 2013 to 'AA+' from 'AA'.
The bonds are tentatively scheduled for negotiated sale Dec. 4th. Proceeds will be used to refund certain outstanding maturities for economic savings.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are payable by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment by the PSF guaranty.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION MAINTAINED: Fitch's upgrade to 'AA+' reflects the district's strong financial position and ample flexibility characterized by very sound fund balance and liquidity levels. Management's conservative budgeting and tighter spending controls have contributed to consistent, sizeable operating surpluses over the last five fiscal years. Positive budget performance is again projected by fiscal 2015 year-end.
SOUND ECONOMIC PERFORMANCE: Dallas benefits from its status as a regional economic and cultural hub. Steady job and income growth, recent tax base and housing market growth, and labor market diversity underpin the city's strong economy.
BELOW-AVERAGE DEMOGRAPHICS: Wealth levels remain somewhat below average and the poverty rate is elevated, reflecting a sizable low-income populace concentrated in the city.
LONG-TERM LIABILITIES WILL GROW: Debt ratios are above average and will likely increase over the near- to medium-term given the size of outstanding capital needs, debt issuance plans, and the slow rate of amortization. Mitigating factors include a good tax rate and budget capacity to support the additional debt and affordable carrying costs for debt and retiree benefits.
NO RATING DIFFERENTIAL: Fitch does not distinguish between the unlimited and limited tax ratings due to the district's significant financial flexibility.
RATING SENSITIVITIES
STABILITY IN FISCAL TREND: Fitch views maintenance of fiscal balance and stability in the district's reserve cushion as key mitigants to debt levels that are poised to increase and the district's slightly below-average socio-economic profile.
CREDIT PROFILE
Dallas ISD serves a student population of roughly 160,400 making it the second-largest school district in the state and 14th largest in the nation. Enrollment growth is modest. The district serves the majority of the city of Dallas, as well as all or portions of 11 area cities and towns, with a total estimated population of approximately 1.3 million.
STEADY SURPLUSES BUILD STRONG FISCAL POSITION
General fund results in fiscal years 2010-2013 featured positive annual operating margins after transfers in the 3%-7% range (between $32 million and $80 million) and corresponding increases in fund balance. This steady improvement in the district's financial performance (which was notably achieved in the face of state funding cuts) was largely attributable to staffing-related expenditure reductions and conservative budgeting practices. Maintenance of vacant positions and tighter departmental spending controls allowed operations to outperform the balanced budgets.
The fiscal 2013 unrestricted general fund balance climbed to $269.6 million or 24% of spending, surpassing pre-crisis levels. The strong financial performance contrasted with the financial missteps and internal control issues uncovered in 2008, which produced severe budget stress and deficits in 2008 and 2009.
Fiscal 2014 general fund results maintained this positive trend. The district benefitted from increased state per pupil funding levels in the current biennium (fiscals 2014-2015). The additional revenue provided the bulk of support for the year's 4% growth in spending that was largely directed to additional staffing and a 2% pay increase. A roughly $62 million net surplus brought the unrestricted general fund balance up to approximately $335 million or 25% of spending; district officials set aside another $25 million from the year's surplus operations towards future technology and deferred maintenance needs.
The district's liquidity position was also robust. General fund cash and investments totaled $406.6 million or about 3 1/2 months of fiscal 2014 operating expenditures. Management continues to make progress in resolving prior years' material weaknesses and deficiencies in reporting, bolstering its internal control systems.
BALANCED OPERATIONS EXPECTED TO PRODUCE MODEST SURPLUS IN FISCAL 2015
The $1.3 billion fiscal 2015 general operating budget was adopted as balanced with about 8% growth in spending. Additional staffing and the funding of various board priorities, inclusive of a 3%, across-the-board pay raise that provided some catch-up in maintaining competitive salaries, drove much of the year's increase. Management indicates operating performance is tracking budget to date and a 1%-2% surplus (up to $26 million) is minimally expected at year-end. Fitch considers this projection reasonable based on the district's use of similar budgeting practices that produced large surpluses over the last five fiscal years.
The district does not practice formal out-year budget forecasting, but generally expects spending to increase and margins to narrow as service levels are enhanced to address academic performance goals. Fitch views these projections in conjunction with the district's lack of a formal fund balance policy with some concern given the varied spending pressures and heightened political environment in which the district operates as a large urban school district. However, Fitch believes the district will continue to preserve its presently strong financial position under the assumption management will continue its fiscal practices to date that have contributed to a much-improved financial track record despite various budgetary pressures.
HOME-RULE SCHOOL DISTRICT CHARTER PETITION
A recently successful petition initiative (signed by at least 5% of district's voters in May 2014) requires the district to put before voters a proposed change to its operating structure, from that of an independent school district to a home-rule charter district. There are no school districts in Texas that presently operate under this structure, although added flexibility in educational offerings and testing requirements are considered to be some of its key benefits. The Board of Trustees is charged with appointing a charter commission in order to subsequently present voters with a newly developed charter for approval. The district is presently underway with this process; the election is planned for June 2015. Adoption of a proposed home-rule charter also requires a high bar of at least 25% turn-out of the district's registered voters according to state statute.
Fitch will continue to monitor this situation as it evolves, but does not believe the possibility of change to the district's operating status rises to the level of a material credit factor. State law indicates adoption of a home-rule charter does not affect the district's boundaries, taxes or bonds authorized before the date of the charter. A home-rule district remains subject to federal and state laws and rules governing school districts. Management does not anticipate any material change to the district's financial, operating, or capital flexibility in the event of a change to home-rule charter, which Fitch believes is reasonable given the aforementioned parameters.
DALLAS ECONOMY IN EXPANSION MODE
Dallas, together with its sister-city Fort Worth, is an economic and cultural hub for the southwestern U.S. Dallas is a center for technology, trade, finance and major medical centers; it also ranks as a top visitor and leisure destination in the state. The area is home to 18 Fortune 500 companies as of 2014. The city exhibited good resiliency during the national recession and shifted into economic expansion earlier than many other parts of the country. DFW has seen cumulative job growth of about 12% since the 2009 recessionary trough, led by gains in the professional/business services and health and education sectors.
District socioeconomic indicators are mixed with relatively low unemployment, sound tax base wealth per capita, but slightly below-average income levels and a high occurrence of poverty. As of September 2014, the city's unemployment rate was 5.4%, a decrease from 6.7% a year ago. Employment gains during this period were solid at 3%. The district's fiscal 2015 taxable assessed value increased 6% from last year to $85.6 billion and Fitch believes prospects for continued economic growth for the area are favorable.
MANAGEABLE DEBT BURDEN, LARGE CAPITAL NEEDS
Fitch considers the district's direct and overlapping debt burden to be slightly above average relative to full market value at 5.1%, but expects this to rise given future borrowing plans. The district's debt load has increased in the past several years due to borrowings associated with a $1.35 billion bond program initiated in 2008. The district has exhausted this authorization and is wrapping up the associated building program. The pace of debt retirement slowed considerably as a result of recent offerings and remains well below average at roughly 35% of principal repaid in 10 years, inclusive of this issuance.
Issuance of roughly $190 million in maintenance tax notes in early 2015 is presently being considered by management to meet the district's most immediate near-term capital needs. Future capital needs are large, estimated at about $1.5 billion. District officials expect to approach voters with this bond authorization in either late calendar 2015 or early 2016. Estimated future capital needs are up by $500 million from Fitch's last review a year ago largely due to incorporating the cost of converting or adding various charter-like school facilities. However, the district does have budget capacity for additional debt: the fixed debt service burden on the budget is presently affordable at 11.5% of total governmental expenditures in fiscal 2014 and the current 24-cent debt service tax rate provides ample headroom under the state's statutory 50-cent tax rate limitation for new debt issuance.
AFFORDABLE RETIREE COSTS
Fitch's concern about the district's overall long-term liabilities is lessened by its low retiree cost burden. Pension and healthcare benefits are provided through the Teacher 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 post-employment benefit healthcare plan; the district consistently funds its annual required contributions. District employees contribute to TRS for pensions at 6.4% of annual payroll, and the state pays all but a small percentage of the local district's contributions (6.4% of payroll in fiscal 2013). Other post-employment benefit (OPEB) contributions paid by the district are nominal, as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2014 totaled less than 2% of governmental fund expenditures.
TRS is adequately funded at 81.9% as of Aug. 31, 2012, although Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of a high and growing debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a moderate 13% of governmental fund spending in fiscal 2014 due in part to slow principal amortization, and they are expected to remain manageable. Starting in fiscal 2015, pension contributions for all districts in the state increased to 1.5% from zero on the statutory minimum portion of payroll, although pass-through state aid largely offset the year's increase. Increases in district pension funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.
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'.
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=934476
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