AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA+' underlying rating to the following Galena Park Independent School District, Texas (the district), unlimited tax bonds (ULTs):
--$8.995 million unlimited tax refunding bonds, series 2015.
The bonds are expected to sell via negotiation the week of June 1, 2015. Proceeds will be used to refund outstanding obligations for savings.
In addition, Fitch affirms the 'AA+' underlying rating on the district's $195.2 million (pre-refunding) unlimited tax debt outstanding.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy 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 Sept. 4, 2014.)
KEY RATING DRIVERS
STRONG FINANCIAL FLEXIBILITY: Prudent financial management supports the district's consistent financial performance, resulting in solid general fund reserves and ample liquidity.
HOUSTON METRO DISTRICT: The district is located in the heart of the Houston Ship Channel and participates in the broad and growing Houston economy, as is reflected in unemployment rates below the national average. Below average wealth is characteristic of the metropolitan area's high incidence of poverty.
TAX-BASE CONCENTRATION: The district's tax base is concentrated in industrial and oil and gas properties. Significant ongoing asset investment helps to mitigate top payer concerns and diversity between upstream and downstream petroleum usage within the base softens the impact of oil price volatility.
HIGH, BUT MANAGEABLE DEBT: Overall debt levels are high, but the burden of long-term liabilities on the budget is low, reflecting the district's maturity, and state support for the district's debt service, pensions and other post-employment benefit (OPEB) obligations.
RATING SENSITIVITIES
STRONG FINANCIAL PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Galena Park ISD is a mature district serving six Houston area communities, including Galena Park, Jacinto City, and a portion of Houston with 2015 enrollment estimated at 22,615.
BROAD OIL AND GAS BASED ECONOMY
Houston's economy is based on energy, petrochemicals, trade, transportation and utilities, tourism, biotechnology, health care, and business services. The district's six-year taxable assessed valuation (TAV) realized six-year compound annual growth of 5.2% through fiscal 2015 reflecting the recent energy boom. Top 10 taxpayers in the industrial and oil and gas sectors comprise a high 21.1% of fiscal 2015 TAV.
Officials report a 0.5% decline in fiscal 2016 TAV attributable to lower oil prices. The impact of low oil prices on TAV was mitigated by diversity between upstream and downstream petroleum usage and residential appreciation. Fitch will continue to monitor the impact of oil prices on the local economy.
SOLID FINANCIAL RESERVES PROVIDE AMPLE FLEXIBILITY
A fiscal 2014 net surplus of $24 million (13.9% of spending) reflects TAV growth, cost savings largely due to unfilled positions, and the district's higher maintenance and operating tax rate based on a voter authorized tax rate shift in fiscal 2013 which provided a net revenue gain due to the level of state funding for the district's operations. The district's fiscal 2014 performance brought unrestricted reserves to $99.7 million, a strong 57% of spending. Officials estimate a fiscal year 2015 net surplus of $14 million to $16 million and report a structurally balanced fiscal year 2016 budget.
The district reports adequate capacity and moderate life cycle infrastructure needs. Board direction pursuant to a review of the district's soon to be completed facility assessment will drive the district's medium term capital spending. At this time the district plans to use reserves to fund annual renewal and replacement and technology requirements, maintaining the fund balance well in excess of the its 10% to 15% of spending policy floor. Fitch considers robust reserve levels a key credit mitigant to help offset volatility related to the district's tax base concentration.
MANAGEABLE DEBT
Overall debt levels are elevated at 5.2% of market value; principal amortization is moderate. Fitch expects debt to moderate over time given the lack of issuance plans. 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 OPEB healthcare plan.
Including debt service, pension and OPEB contributions, carrying costs were a low 10.7% of fiscal 2014 governmental spending, benefitting from the state's strong pension funding system currently in place. Carrying costs were an even lower 9.5% considering state debt service support. The district is susceptible to future pension funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective this year.
TEXAS SCHOOL DISTRICT 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 and was the second such ruling in the past two years, 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.
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 would likely follow with changes intended 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'.
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985327
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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