Fitch Rates Frenship ISD, TX, ULT Refunding Bonds; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the Frenship Independent School District, Texas' (the district) unlimited tax (ULT) refunding bonds as follows:

--$24.8 million ULT refunding bonds, series 2015A;

--$6.2 million ULT refunding bonds, series 2015B.

The 'AA-' rating on the series 2015B bonds is an underlying rating.

In addition, Fitch assigns an 'AAA' rating to the series 2015B bonds based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

The bonds are scheduled for a negotiated sale the week of April 13. Proceeds will be used to refund a portion of the district's debt for interest savings.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and all series (except 2008 and 2015A) carry the Texas PSF bond guarantee (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).

KEY RATING DRIVERS

HIGH DEBT LEVELS: The debt burden is high as a result of recent issuances to address 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.

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 43,924.

HIGH DEBT BURDEN

Debt ratios are high at $9,565 per capita and 12.7% 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 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. Including the projects associated with the most recent bond program, management estimates sufficient classroom capacity through 2020 based on current enrollment trends. The elongated principal amortization schedule associated with this and previous borrowings will likely place some limitations on the district's future borrowing capacity.

Flexibility regarding the timing and size of future new money borrowings will depend upon district tax base performance, which has shown solid growth in recent years. TAV increased 6.6% and 6.7% in fiscals 2013 and 2014, respectively, with certified values in fiscal 2015 showing another year of expansion at 6.4%. Enrollment growth has somewhat lagged TAV growth, averaging almost 5% during the last five years. Recent projections of tax base and enrollment growth have been accurate, inspiring confidence in district forecasts that rapid growth will continue going forward.

CONSISTENT POSITIVE OPERATING RESULTS

Audited results for fiscal 2014 were better than the budgeted $400,000 deficit, ending the year with a $1.4 million operating surplus after transfers. The general fund has recorded positive year-end results each year dating back to at least fiscal 2002. Unrestricted general fund balance at the end of fiscal 2014 of $17.9 million equates to a strong 31% of spending.

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 management reports actual results are on track with budgeted figures. The board recently granted a one-time lump sum payment to district staff which will result in a $1.4 million draw on reserves, equal to the amount of operating surplus in fiscal 2014.

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 3.5% in Jan. 2015 from 4.3% 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 TRS funded position is satisfactory at an estimated 75% using Fitch's more conservative 7% rate of return assumption compared with 83% funded as reported by 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. The district's cost for pension and other postemployment benefits (OPEB) represented 1% of governmental fund expenditures in fiscal 2014, 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 15.7% of governmental fund spending in fiscal 2014.

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 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, 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=982543

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Contacts

Fitch Ratings
Primary Analyst:
Leslie Ann Cook, +1-212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Leslie Ann Cook, +1-212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com