AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying rating for the following Weslaco Independent School District, Texas (Weslaco ISD, or the district) bonds at 'AA-':
--$61.89 million unlimited tax (ULT) bonds series 2005, 2006, and 2008.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy and are further secured by the Texas Permanent School Fund (PSF) bond guarantee program.
KEY RATING DRIVERS
SATISFACTORY FISCAL CUSHION: The district retains a satisfactory level of operating reserves and liquidity. Additional flexibility is evidenced by the district's significant general fund transfers for capital outlays.
STABLE TAX BASE: The district is part of the broad and growing Rio Grande Valley economy and continues to register modest taxable assessed value (TAV) gains; the area housing market has remained fairly stable.
BELOW-AVERAGE SOCIO-ECONOMIC PROFILE: Income levels and tax base wealth are low while unemployment and poverty rates are elevated.
AFFORDABLE DEBT BURDEN: Debt ratios are moderate and carrying costs for long-term liabilities are affordable as a result of significant state subsidies.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: The district's currently sound reserves are an important offset to the below-average resource base. Deterioration of this financial flexibility would be a negative credit consideration.
CREDIT PROFILE
Weslaco ISD is located in Hidalgo County near the U.S.-Mexico border and between the cities of McAllen and Harlingen. The city of Weslaco is the district's major commercial center and had an estimated 2013 population of 37,093.
FISCAL CUSHION MAINTAINED
The district's current level of financial flexibility is the key credit characteristic supporting the 'AA-' rating. The district has maintained an unreserved/unrestricted general fund balance at 11%-16% of spending in the past five fiscal years while making significant general fund contributions for capital projects. In fiscal 2014, the federal government removed spending requirements for remediation, freeing up approximately $2 million in the budget (1.4% of spending). Strong property tax collections and savings from a conservative payroll budget also contributed to a net general fund operating surplus after transfers of $3 million (1.8% of spending) despite paygo capital spending of $1.6 million. The unrestricted general fund balance for fiscal 2014 was $27.1 million or 16.2% of expenditures.
SOLID RESERVES CRITICAL TO RATING STABILITY
Fitch views maintenance of the district's fiscal cushion as critical to rating stability. Year-to-date enrollment is slightly lower than budgeted and will impact state aid which is calculated on a per-pupil basis, but officials expect to outperform conservative expenditure assumptions to meet budgeted results for fiscal 2015.
The district's $156.1 million fiscal 2015 operating budget reflects a $2.7 million payroll increase for a district-wide pay hike. The budget also includes $4.6 million in one-time expenditures and transfers out for capital, resulting in a planned drawdown of $5.2 million for an ending general fund balance of $22 million or 14.1% of expenditures. To cover the shortfall, the district has appropriated funds held in excess of the informal $16 million fund balance target at the end of fiscal 2014 (roughly 10% of the fiscal 2015 operating budget).
UNCONVENTIONAL TAX RATE STRUCTURE
Weslaco ISD voters approved a tax rate restructuring in fiscal 2012 that maintained the total tax rate of $1.14 per $100 of TAV while shifting the entire debt service tax rate to the general fund. The net effect was to generate additional total revenues (roughly $1 million annually) under provisions in the state's funding formula that more heavily subsidizes general fund taxing effort.
Annual ULT debt service of $6.3 million is now repaid via annual transfers from the general fund. Fitch recognizes the slight revenue advantage to the district but notes this unconventional taxing structure could be subject to legislative or statutory changes. However, credit concerns are mitigated by the district's retained unlimited taxing power for debt service that does not require voter approval, management's ability to reverse the tax rates if necessary, and a sound liquidity position.
LIMITED LOCAL ECONOMY PART OF BROADER MCALLEN MSA
The district is part of the growing McAllen-Edinburg-Mission metropolitan statistical area (MSA) that is located just seven miles north of the Mexican border and the Mexican city of Reynosa, Tamaulipas. Agribusiness is a major economic component of the region as is international trade given the proximity to Mexico, especially the maquiladora program where manufacturing and assembly occurs in plants located in Reynosa and warehouse and distribution are handled in the U.S. In addition, the stable government, education, and health service sectors make up a combined 50% of the MSA's non-farm labor force; top employers in the city of Weslaco include the school district and a local hospital.
The non-farm unemployment rate in the city is elevated relative to the state and nation. The September 2014 unemployment rate dropped to 7.3% from the 11.2% recorded a year prior, reflecting the combined effect of employment growth and declines in the labor force. District wealth and income levels are well below average, the poverty rate is 1.7 times that of the state, and educational attainment rates are very low.
MODEST TAX BASE GROWTH; FLAT ENROLLMENT
The mostly residential tax base continues to appreciate in value due to positive reappraisal and modest residential and commercial development underway. Fiscal 2015 TAV climbed 2% to $1.9 billion, and continued stability in the tax base is likely based on trends of modest economic growth.
Enrollment growth has flattened due to competition from a nearby charter school system. A historical growth trend was replaced by a modest decline in fiscal 2014 and year-to-date enrollment for fiscal 2015 is down by 2.4% from the prior year. Management projects that this stagnant trend of flat to modest declines will continue in the near term.
LONG-TERM LIABILITIES REMAIN AFFORDABLE
The district is heavily funded by the state, but the aid that was previously restricted for debt service now flows to the district as discretionary funding (as a result of the tax rate change). Overall debt is moderate at 4.4% of the market value but lower when compared to the district's population at $1,804 per capita. The pace of amortization is above average at 64% retired in 10 years, and the district has no remaining ULT debt authorization and no near-term borrowing plans.
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 postemployment benefit healthcare plan. Including debt service, pension, and OPEB contributions, carrying costs were a modest 5.1% of fiscal 2014 governmental fund spending, benefitting from the state's strong subsidy for pensions currently in place. However, school districts are susceptible to future funding changes by the state as evidenced by a new, relatively modest employer contribution requirement of 1.5% of salary effective fiscal 2015.
TEXAS SCHOOL FUNDING LITIGATION
A Texas district judge ruled in August 2014 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.
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:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958655
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