Fitch Affirms Floresville ISD, Texas' ULTs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Floresville Independent School District, Texas (the district) bonds:

--$59.1 million unlimited tax school building bonds, series 2006 and 2007 at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax. Additionally, the series 2006 and 2007 bonds are supported by the Texas Permanent School Fund (PSF) whose bond guaranty program is 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

FLUCTUATING RESERVE LEVELS: Operating reserves have declined in recent years due to prior period adjustments associated with accounting deficiencies and repayment of excess state aid. New finance administrators have addressed reporting and enrollment projection issues, and unaudited results suggest an addition to fund balance in fiscal 2015.

PROXIMITY TO SAN ANTONIO: The district is a bedroom community benefiting from the broad and diverse San Antonio economy. The district's largely residential tax base has recorded solid gains over the past five years and was minimally affected by the recession. Income and employment indicators compare favorably to state and national averages.

MANAGEABLE DEBT: Debt is moderate on a per capita basis but above average as a percentage of market value. The district's carrying costs are low and place only a modest burden on the budget due to state support for debt service and pension costs. The district reports no borrowing plans on the horizon.

RATING SENSITIVITIES

CONTINUED STABILTY IN FINANCIAL MANAGEMENT PRACTICES: Stable management and conservative budgeting practices are imperative given the district's dependence on state revenues, which can fluctuate depending on ADA and state funding shifts. Any further material budgetary issues and decline in operating reserves likely will result in a rating downgrade.

CREDIT PROFILE

The district is located in Wilson County, approximately 30 miles southeast of downtown San Antonio, and benefits from the economic growth of the seventh largest city in the U.S. (San Antonio GO bonds rated 'AAA' with a Stable Outlook by Fitch). Fiscal year 2015 enrollment was nearly 4,000.

STABLIZING FINANCIAL OPERATIONS

The district's reserves have declined since fiscal 2010 due to accounting deficiencies and errors associated with state operational funding. The district wrote off a total of $4.5 million during fiscal 2010, 2011 and 2012 to correct the overstatement of state revenues recorded in the general fund. To help address these budgeting and internal control deficiencies, the district hired a new chief financial officer (CFO) during fiscal year 2014.

The district completed fiscal 2013 with a net surplus of $532,000 and unrestricted operating reserves of $2.9 million (10.1% of spending). A fiscal 2014 deficit of $1 million resulted from lower than anticipated state aid of $.7 million (due to below-budgeted ADA) and above budget expenditures of $.3 million (due to an inaccurate projection of payroll outlays). The fiscal year end 2014 unrestricted general fund balance of $2 million represented a low 6.7% of spending.

The district anticipates a fiscal 2015 operating surplus of $1.7 million and total year-end reserves of $3.9 million, representing 13.5% of spending. Fitch anticipates the district's unrestricted reserves to be similar. The district changed its reporting year end to June from August effective in fiscal 2015 to better align finances with operations. Reduced expenditures due to the change in the fiscal year account for $700,000 of the fiscal 2015 surplus.

The district adopted a balanced budget for fiscal 2016. Management is conservatively budgeting 0.7% ADA growth for the year (26 new students), and actual growth is expected to be stronger as the district continues to see new home construction in at least three developments.

MANAGEABLE DEBT, LOW PENSION COSTS

Overall debt is moderate at $3,941 per capita and slightly elevated at 5.7% of fiscal 2014 market value. The district qualifies for state debt service support, and in fiscal 2014 this support paid roughly 20% of the district's annual debt service requirement of $5 million. The district's current facilities provide adequate capacity and the district reports no significant capital needs presently.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). In fiscal 2015, district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0%. This year the district will also be booking a pro rata share (about $3.5 million) of the underfunded portion of the plan liability to comply with GASB 68. Other postemployment benefits (OPEB) are similarly provided through TRS.

The district's debt, pension, and OPEB carrying costs represent a manageable 12% of fiscal 2014 governmental spending, net of state support, reflecting a slow amortization of outstanding principal (about 33% in 10 years) coupled with state support for these obligations.

STABLE ECONOMY; SOME VULNERABILITY

The district is a bedroom community benefiting from the large and diverse San Antonio economy and nearby Eagle Ford Shale drilling activity. The recent decline in oil prices has affected exploration activity in the area, and the district's top taxpayer, GasFrac (a Canadian oil drilling company), filed for bankruptcy in January 2015. The district reports this development has not had a material effect on district operations to date, as GasFrac has stayed current with its tax payments. Additionally, in April 2015 another energy company reportedly purchased GasFrac's assets and equipment.

The Wilson County unemployment rate of 3.5% as of April 2015 continues to trend below the state and national averages. Likewise, the district's poverty rate and median household income continues to also trend favorably to state and national averages. The district's TAV has continued to increase in fiscal 2014 (5.4%) and fiscal 2015 (8.3%), with additional growth expected in fiscal 2016 due to ongoing to residential development. The fiscal 2015 TAV totaled $1.18 billion.

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 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=988383

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988383

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com