Fitch Rates Eagle Mountain-Saginaw ISD, TX's 2015 ULTs 'AAA' PSF/'A+' Und; Outlook Positive

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'A+' underlying rating to the following Eagle Mountain-Saginaw Independent School District, Texas (the district)unlimited tax (ULT) bonds:

--$64.66 million unlimited tax refunding bonds series 2015.

The bonds are expected to sell via negotiation the week of March 2, subject to market conditions. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.

In addition, Fitch affirms the 'A+' rating on the district's $624.5 (pre-refunding, on a non-accreted basis) in outstanding ULT bonds.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further secured by the PSF bond guarantee program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sep. 4, 2014).

KEY RATING DRIVERS

OUTLOOK REVISION: The Outlook revision reflects improved flexibility in the district's debt profile afforded by TAV growth, limited recent issuances and tax rate restructuring. The Outlook also recognizes that the district has maintained a solid financial profile during a period of state-wide funding cuts and growth pressure.

RESUMPTION OF TAV GROWTH: Improving home prices and new construction drove a second consecutive year of strong tax base growth, reversing several years of uncharacteristically flat values. Fitch expects to see further gains in TAV based on development underway and regional growth patterns.

IMPROVED DEBT PROFILE FLEXIBILITY: Tax base growth and interest and sinking fund (I&S) tax rate capacity allow the district to address growth needs. However, Fitch expects debt to remain elevated based on the district's borrowing plans. Carrying costs (debt service, pension and other post-employment benefits (OPEB)) are affordable due to strong state-wide pension funding and slow debt principal amortization.

SOUND FINANCES AND RESERVES: The district has maintained a solid financial profile through a period of state-wide funding cuts. Benefiting from ongoing enrollment growth, the district aligned its cost structure with moderate revenue gains to maintain reserve adequacy.

STRONG DEMOGRAPHICS: Median household income and employment metrics compare favorably to state and national averages, reflecting the district's participation in the diverse greater Fort Worth economy. Top employers represent the airline and defense industries, as well as government, education, and health service sectors.

RATING SENSITIVITIES

ABILITY TO MANAGE GROWTH: The ability of the district's tax base to support the debt generated by continued enrollment growth, coupled with ongoing stability of finances, could result in positive rating action.

CREDIT PROFILE

Eagle Mountain-Saginaw ISD is located approximately seven miles from the center of Fort Worth, with an estimated fiscal 2014 population of 83,827, up 1.5 times since fiscal 2000. The district includes the northernmost portion of Fort Worth as well as the cities of Saginaw and Blue Mound.

GROWING LOCAL ECONOMY WITH STRONG DEMOGRAPHICS

The district's historically solid tax base growth stalled between fiscal years 2011 and 2013 due to the recession and a decline in mineral values. Mineral values represent a modest 3% of the district's fiscal 2015 market value, down from 8.9% in fiscal 2011.

Fiscal 2015 market value per capita of $91,000 is up from $84,000 in fiscal 2011, reflecting the resumption of tax base growth. Strong 7.6% growth in fiscal 2015 TAV follows a gain of 5.7% in the year prior as rising home prices and new construction rose consistent with regional trends. Fitch expects the strengthening residential market trends to provide ongoing TAV growth in the near term. Top taxpayers, represented by oil & gas, utility, financial and commercial concerns, comprise a moderate 10.7% of fiscal 2015 TAV.

The district's median household income is 139% of the Texas and 136% of the U.S. average, with a poverty rate less than half of the state and national levels. The city of Fort Worth unemployment rate of 4.6% as of November 2014 matches that of the state and compares favorably to the U.S. level of 5.5%.

POSITIVE FINANCIAL PERFORMANCE

The district has a history of consistently sound reserves and generally positive operating margins. A fiscal 2014 net surplus of $6.1 million (4.3% of spending) reflects enrollment gains and cost savings associated with a salary freeze and unfilled positions. Fiscal 2014 results also reflect an additional net increase of $650,000 in state funding associated with the 2014 tax ratification election (TRE).

Voters approved the TRE, providing for an increase of $0.13 in the district's fiscal 2014 maintenance and operations (M&O) tax rate to $1.17 per $100 of TAV. The total fiscal 2014 tax rate did not increase as the debt service rate declined by the same amount. The district transferred $8.2 million of fiscal 2014 surplus general fund monies to the debt service fund.

The district's fiscal 2014 unrestricted general fund balance of $31.0 million represents a sound 22.1% of spending. Officials project favorable to budget performance and like reserves in fiscal 2015.

ELEVATED DEBT; ONGOING NEEDS

Fitch expects overall debt, currently at 8.4% of market value, to remain elevated based on the district's ongoing growth-related debt needs. Officials expect to issue $21 million in fiscal 2015 for a new elementary school and $60 million in fiscal 2016 to address these needs.

Proceeds from the series 2015 ULT refunding bonds now offered provide savings without extending principal repayment. Amortization remains slow at 25% in 10 years with maximum annual debt service in fiscal 2026 and a marked decline in debt service beginning in fiscal 2034.

The district projects a flat I&S tax rate, $.37 per $100 of TAV, for the foreseeable future, subsequent to the 2014 tax rate restructuring and assuming continuation of the M&O transfer. Fitch anticipates that the district will maintain adequate capacity in relation to the statutory cap of $.50 for new debt issuance. Positive rating action is premised on a pace of tax base growth equal or in excess to the rate of debt service spending.

LIMITED PENSION/OPEB OBLIGATIONS

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers 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 OPEB contributions, carrying costs were a moderate 19% of fiscal 2014 governmental spending, benefitting from strong state-wide funding of local school district pension contributions. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

TEXAS SCHOOL DISTRICT LITIGATION

For the second time in the past two years 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. 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, 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=980367

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA,CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA,CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com