NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Brownsville Independent School District (ISD), Texas' (the district) unlimited tax (ULT) refunding bonds:
--$9.7 million ULT refunding bonds series 2015.
In addition, Fitch Ratings has assigned a 'AA-' rating to the following maintenance tax notes:
--$3.1 million maintenance tax notes series 2015.
The 'AAA' Long-term rating for the ULT bonds is 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 negotiated sale the week of June 2, 2015. Proceeds of the ULT bonds will be used to refund a portion of the district's outstanding ULT debt for interest savings. Proceeds of the maintenance tax notes will be used for maintenance and renovations of various existing district facilities.
Fitch has also assigned a 'AA-' underlying rating to the series 2015 ULT bonds and has affirmed the 'AA-' underlying rating on the following outstanding ULT bonds (pre-refunding):
--$139 million ULT bonds, series 2005, 2006, 2013A and 2013B.
The Rating Outlook is Stable.
SECURITY
The ULT 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.)
The maintenance tax notes are payable from all available funds including, but not limited to, the maintenance and operations (M&O) tax levy limited to $1.17 per $100 taxable assessed valuation (TAV) on all taxable property located within the district.
KEY RATING DRIVERS
FINANCES STABILIZING; ADEQUATE RESERVES: The district has realized modest net surpluses in recent years, benefiting from increased state funding and property taxes. Recent performance is an improvement from the past, when the district was challenged by significant annual deficits. Fiscal 2015 is expected to incur a modest deficit driven primarily by capital and other one-time expenses, and fiscal 2016 operations are expected to be balanced. Even with the projected 2015 drawdown, reserve levels should remain adequate.
ENROLLMENT CHALLENGES: District operations are largely funded by state support that is enrollment-driven. Fitch notes that district enrollment continues to be pressured by charter school competition. Offsetting this stress, the district has no significant capital projects planned for the near term, which frees up general fund monies previously spent down for construction.
MANAGEABLE DEBT BURDEN AND CARRYING COSTS: Overall debt is above average in relation to market value, although the district's direct debt service (net of state support), pension and other post-employment benefits (OPEB) costs are low given substantial state support.
LOW WEALTH/FAVORABLE PROSPECTS: The region's income levels are well below average. Unemployment has improved from a year ago but continues to surpass state and national averages. Growth prospects are strong given ongoing investment and increasing trade flows from Mexico. TAV continued to grow in fiscal years 2014 and 2015.
NO RATING DIFFERENTIAL: Fitch does not distinguish between the unlimited and limited tax ratings due to the district's adequate financial flexibility.
RATING SENSITIVITIES
FINANCIAL STABILITY: The rating is sensitive to maintenance of stable finances, including conservative budgeting to ensure general fund structural budget balance and adequate reserves. The rating is additionally sensitive to balanced debt service fund operations, including appropriate tax rate levy to avoid state aid adjustments.
CREDIT PROFILE
Brownsville ISD serves the City of Brownsville, a portion of the township of Ranch Viejo and some unincorporated areas of Cameron County. The district is located on the north bank of the Rio Grande across from Matamoros, Mexico and is the 19th largest school district in the state with approximately 48,000 students. Enrollment has been declining or flat in recent years. In the near term, enrollment will likely continue to decline given two additional charter schools are opening in fiscal years 2015 and 2016.
STABLE FINANCIAL OPERATIONS
Declines in operating reserves in fiscal years 2009 through 2011 were a consequence of facility construction spending that was exacerbated by construction cost overruns, unplanned capital outlays, and over-budgeting of enrollment-driven state revenues. Recently improved budgeting practices, increases in state revenues and TAV growth have provided financial stability to the district resulting in modest operating surpluses in fiscal years 2012 through 2014.
Fiscal 2014, which also benefited from an increase in the local M&O tax rate, saw a surplus of $3.7 million resulting in an unrestricted fund balance of $68.9 million or 15.9% of spending. While the total fund balance increased, unrestricted fund balance declined modestly by $1.3 million due to vehicle and equipment purchases.
The adopted fiscal 2015 budget assumed a deficit of $10.5 million, largely related to one-time spending for capital, equipment, and other non-recurring items. However, the district currently projects that actual total spending will likely be reduced by $3.2 million due to lower than budgeted staffing costs. Taking into account this savings, the ending deficit for fiscal 2015 is projected to be $6.8 million or 2% of budgeted spending.
Assuming this deficit, and based on the district indicating that much of the reserve spend down will affect restricted balances, the general fund unrestricted ending balance is projected at about $65.9 million, or a still adequate 15% of spending. Results may be better than projected as the district's actual results have outperformed budget estimates in recent years.
For fiscal 2016, the district is projecting no draws on fund balance and balanced operations. Fitch expects that debt service associated with the series 2015 notes should be relatively modest on the district's budget and should not materially add to expenditures as the notes have been structured around existing notes with interest only payments on these notes through fiscal 2018.
The district has not met its general fund reserve policy of 75-days of operations (approximately 20% of spending) for several years because of prior year draws for construction. Given major construction is now complete and enrollment trends are mitigating the need for new facilities and staffing, management hopes to rebuild fund balance. However, continued or more severe enrollment declines could present a challenge. The district reports residential construction activity and area economic development projects currently in process could stabilize enrollment trends.
In fiscal 2014, the district's M&O tax rate was raised to the statutory cap of $1.04 per $100 of TAV, with an increase up to $1.17 only possible with voter approval. The district is not currently considering proposing a rate increase.
DEBT SERVICE FUND DEFICIT
For fiscal 2014, the district's debt service fund ran a deficit balance of $4.2 million. The deficit was due to an adjustment to correct a $10.5 million, Texas Education Agency (TEA) overfunding of aid to the district's debt service fund over multiple years. The TEA calculations had assumed a higher than actual amount of district debt service tax rate revenue. District general fund transfers and loans were required in fiscal years 2014 and 2015 to cover the deficit, which was resolved in fiscal 2015. The fiscal 2015 budget reflects a general fund transfer of $3 million to the debt service fund as part of this resolution.
The district has been increasing its debt service tax rate to ensure full coverage of annual debt service needs. Fiscal 2015 revenues and transfers in are projected to cover annual debt service and provide for a positive year-end balance. The current rate ($0.105) is well below the $0.50 statutory cap for debt issuance.
MANAGEABLE DEBT BURDEN AND CARRYING COSTS
With the current issuance, overall debt remains average on a per capita basis ($2,025) and above average as a percent of market value (6.0%), driven by city and municipal district overlapping debt. The state currently supports about 68.8% of the district's debt service. As a result of the generous state support and pay-go capital spending practices, the debt burden on the budget is very low at only 1.2% of fiscal governmental expenditures in fiscal 2014. Additionally, principal amortization is above average (80% retired in 10 years).
The district has no remaining ULT authorization and no current plans to issue any additional ULT debt in the near term. The current note issuance represents a very recent decision to go forward with debt funding for the maintenance of heating, ventilating and air conditioning (HVAC) as well as roof replacements. The district does not have any near-term additional note issuance plans.
The district participates in the Teacher Retirement System of Texas (TRS), a cost sharing multiple-employer pension plan, and the TRS-run post-employment healthcare plan. As of Aug. 31, 2014, the assets of TRS cover 73% of liabilities using Fitch's more conservative 7% rate of return assumption, compared with the 81% actuarial funded ratio as reported by TRS. Pension contributions are statutorily determined and paid primarily by the state, with a smaller district component. Despite phased contribution increases enacted by the state in 2013, total contributions remain below the actuarially-calculated level.
Total carrying costs for the district (debt service, pension, and OPEB costs net of state support) comprised a low 1.8% of total government spending for fiscal 2014. In fiscal 2015, district pension contributions statewide increased from 0% to 1.5% on the statutory minimum portion of payroll. Although the state covered this payment for fiscal 2015, state funding levels could change in the future.
ECONOMIC HUB OF THE RIO GRANDE VALLEY
Brownsville is the population and economic center of the expanding lower Rio Grande Valley. The cost of living is low for the city and it has continued to show economic growth, with a growing healthcare and education sector, and a new medical school at the recently opened University of Texas, Rio Grande.
The city also serves as a trade and distribution center for maquiladora assembled and other products, leveraging the city's deep-water port, and extensive highway, air, and rail transportation network. Space Exploration Technologies (SpaceX) has announced plans to build the first, fully-private launch facility in Brownsville. Although not directly within district boundaries, SpaceX's Brownsville port is anticipated to bring new aeronautical and engineering firms to the area that will improve employment prospects and expand the district tax base.
The district's TAV has continued to increase in fiscal 2014 (3.3%) and fiscal 2015 (1.8%), with additional growth expected in fiscal 2016. Typical for the border area, the city's unemployment rate is above average (7% as of March 2015) and income levels are very low. Although Fitch recognizes the shortcomings of a manufacturing-based economy, the area's diverse tax base and economic expansion bode well for its future growth.
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 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'.
In addition to the sources of information identified in Fitch's Master Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985345
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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