Fitch Rates Northside ISD, TX ULTs 'AAA' PSF/'AA+' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA+' underlying rating to the following Northside Independent School District, Texas (the district) unlimited tax bonds (ULTs):

--$50 million variable-rate unlimited tax school building bonds, series 2015;

--$75 million unlimited tax school building bonds, series 2015;

--$96.5 million unlimited tax school building and refunding bonds, series 2015.

The variable-rate ULTs and ULT school building bonds are expected to price via negotiation the week of June 22, 2015, and the ULT school building and refunding bonds the week of July 13, 2015 subject to market conditions. Proceeds will be used to construct school facilities, purchase sites, and to refund and convert certain outstanding variable-rate obligations to fixed-rate obligations.

Fitch currently rates the district's approximately $2 billion (pre-refunding) outstanding ULTs 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district. The bonds are secured further by the Texas PSF guaranty.

KEY RATING DRIVERS

STRONG FINANCES: The district's financial profile is characterized by consistently strong operating performance and healthy reserves. Establishment of sizable reserves provides a cushion for growth and state funding uncertainties.

HEALTHY GROWTH PROSPECTS: The district's taxable assessed valuation (TAV) continues to realize solid growth in excess of enrollment gains. The tax base has no material concentration.

ABOVE-AVERAGE DEMOGRAPHICS: Solid employment growth reflects the greater San Antonio economy and promotes low regional unemployment. The district's median household income trends above state and national averages.

ELEVATED BUT MANAGEABLE DEBT: Fitch expects the district's debt to remain elevated based on new issuance plans. Moderate carrying costs for annual debt service, pension and other post-employment contributions (OPEB) reflect a slow amortization rate and affordable, state-supported pension and OPEB.

RATING SENSITIVITIES

STRONG FINANCES: 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

The district is located in the larger San Antonio metropolitan area and serves the rapidly growing northwest portion of Bexar County and surrounding areas, with a fiscal 2015 population of about 593,000.

STRONG FINANCIAL PROFILE

The district has maintained strong financial performance despite the pressures associated with sustained enrollment growth and state funding cuts. To prepare for the state's fiscal 2012/2013 funding cuts, the district cut more than $60 million from its budget over fiscal 2011 and 2012, through position cuts and a salary freeze, among other measures.

The district completed fiscal 2014 with a sound $30 million net surplus (4.1% of spending) and $198.7 million of unrestricted reserves (27% of spending). Results were driven largely by enrollment-based revenues. Fitch estimates fiscal 2015 unrestricted reserves at a similarly strong 27% of spending based on Fitch's estimate of district provided year-end estimated results. The district's fiscal 2016 budget will benefit from strong TAV growth; operations are structurally balanced.

Financial flexibility is evidenced by sizable funds committed to technology deployments, new school openings and contingencies. Consistent with current levels, the district anticipates maintaining between $160 million and $165 million in 'funds available for appropriation' over the next four years, defined by the district as the combination of unassigned funds and long-term investments.

GROWING NORTHWEST SAN ANTONIO BEDROOM COMMUNITY

The district's fiscal 2015 TAV of $37.9 billion reflects a solid seven-year average growth rate of 4.8%, and even stronger gains averaging 6.7% over the past two years. Preliminary valuations for fiscal 2016 reflect an additional 12% growth due primarily to appreciation of existing property, and to a lesser extent new residential and commercial development. Given that the district is only about 65% built-out, and much of the major road infrastructure in the district is in place, the prospects for continued growth are favorable.

Job growth continues to support a favorable county unemployment rate of 3.5% as of March 2015, below the state (4.2%) and national (5.6%) averages for the same period. The district's income level trends moderately above state and national averages.

HIGH DEBT; ONGOING CAPITAL NEEDS

District voters authorized $648 million in unlimited tax school building bonds in May of 2014. The series 2015 issues represent the initial installments of this authorization. Fitch anticipates issuance of the remaining $523.3 million over the next four years will contribute to maintenance of the currently high overall debt burden (8% of market value), depending on growth of overlapping debt and the rate of the district's tax base growth.

The district's I&S rate ($0.336 per $100 of TAV) is below the statutory new-issuance test ceiling of $0.50. Fitch considers the district's projections of modest I&S tax rate growth of up to $.397 per $100 of TAV, below the rates initially communicated to voters, as reasonable based on regional growth trends.

The district's debt service burden consumes 11.4% of fiscal 2014 governmental expenditures. The district historically maintains a moderate amount of its debt portfolio in variable-rate unlimited tax bonds, estimated at 24.3% subsequent to the series 2015 issuances, within the district's policy ceiling of 30%. Terms of the variable-rate bonds include a three-to-five-year initial fixed-rate term, a soft put-back to bondholders in lieu of liquidity support, and the option to periodically reset the rate to a long-term fixed basis. Fitch considers the risk of a failed remarketing, which would result in an elevated interest rate of up to 8%, minimal based on the district's rating which indicates strong market access.

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 low 12.3% of fiscal 2014 governmental spending, benefitting from the state's strong pension funding system currently in place. 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 2015.

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'.

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, 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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986704

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986704

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave. Ste 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave. Ste 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com