Fitch Rates Aledo ISD, TX's ULT Bonds 'AAA' TX PSF/'AA' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Aledo Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--$48.8 million ULT school building bonds, series 2015.

The bonds are scheduled for a negotiated sale the week of Aug. 3. Proceeds from the bonds will be used for the construction, acquisition and equipment of school buildings and the purchase of new school buses.

In addition, Fitch assigns an 'AA' underlying rating to the series 2015 bonds, and affirms the 'AA' underlying rating on the following obligations:

-$49.8 million ULT refunding bonds, series 2007, 2012, 2013-A, 2013-B, 2014 and 2015;

-$57.4 million ULT school building bonds, series 2008;

-$14.9 million variable rate ULT school building bonds, series 2006-A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and also 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

STRONG FINANCIAL POSITION: The district's general fund balance position remains healthy, aided by recent enrollment growth and conservative budgeting practices.

TAX BASE IMPROVEMENT: The district's tax base has returned to growth after a period of contraction due to exposure to the Barnett Shale natural gas formation. Oil and gas industry concentration remains with the top 10 largest taxpayers, but mineral values now make up a smaller portion of total taxable assessed valuation (TAV).

WEALTHY SUBURB OF DALLAS-FORT WORTH: The primarily residential district benefits from its proximity to the broad Dallas-Fort Worth employment base and socioeconomic indicators are well in excess of state and national metrics.

WEAK DEBT PROFILE: The already high debt ratios rise with this issuance with potential for additional debt to fund new school capacity in the next several years. Amortization is slow, in part due to the use of capital appreciation bonds (CABs).

RATING SENSITIVITIES

MATERIAL DECLINE IN FISCAL CUSHION: Reserves remain strong but in decline due to management's decision to avoid a higher debt service tax rate. A decline in reserves beyond current plans could lead to negative rating action.

CREDIT PROFILE

Aledo Independent School District is located primarily in Parker County and includes the city of Aledo, a small, historically agricultural center. Aledo is located 19 miles west of Fort Worth (GOs rated 'AA+' by Fitch) near Interstate Highway 20.

AFFLUENT DISTRICT

Aledo has transitioned from an agriculture-based economy to an upscale suburb of Fort Worth. Numerous high-end residential developments have been completed in recent years. As a result, market value per capita is high at $160,000 in fiscal 2015. Residents are well-educated and affluent; the median household income in the district is twice that of the state and nation.

The district benefits from its proximity to the broad Dallas-Fort Worth metroplex employment base, and area employment and wealth levels are a credit positive. Employment growth has exceeded labor force growth in the county, bringing the unemployment rate down to 3.9% as of March 2015, lower than the MSA, state, and national averages.

RESIDENTIAL TAX BASE GROWTH

Half of the district's tax base is residential with some oil and gas exposure due to its location over parts of the Barnett Shale natural gas field. Recent declines in TAV were due to weakness in mineral values, which made up 19% of fiscal 2011 TAV but fell to less than 10% of fiscal 2015 certified values due to decreased drilling activity and lower natural gas prices. The tax base contraction was limited to fiscal years 2012 and 2013, with a cumulative decline a manageable 6.2%. Reappraisal gains and new construction have more than made up the losses with growth of 3.3% and 3.9% in fiscal years 2014 and 2015, respectively. Preliminary values for fiscal 2016 point to more robust growth due both to reappraisals and new residential development.

Several consecutive years of low gas prices have reduced the top taxpayers' share of the tax base, but industry concentration remains a concern. The top 10 taxpayers comprised 12.3% of fiscal 2015 TAV, and seven of the top 10 are directly engaged in the oil and gas industry. Offsetting this concern are the prospects for continuing residential development given the district's proximity to Fort Worth.

Enrollment gains averaged just over 4% annually leading up to the recession and stagnated somewhat in the years after. Growth regained momentum in fiscal years 2014 and 2015, posting increases of 3% and 3.8%, respectively, mirroring tax base growth. Management projects enrollment growth to speed up in the next five years as a result of renewed home building activity. The district has ample land for development.

STRONG FISCAL CUSHION DESPITE DRAWDOWNS

Fiscal 2014 audited results were largely on budget, including an almost $3 million transfer out (7% of spending) to the debt service fund. The unrestricted fund balance at year-end declined by $3.2 million to approximately $17 million, equal to a still robust 42% of spending. The fiscal 2015 year-to-date results show a $2.8 million draw on reserves - equal to the amount of a debt service fund transfer. The fiscal 2016 budget is expected to include a 3% salary increase and additional staff due to enrollment growth and may include a draw on reserves to fund annual debt service costs. Local property taxes account for 80% of general fund revenues reflecting the relatively high property tax wealth per student.

TAX RATE SWAP FOR ADDITIONAL REVENUE

In 2011 district voters approved an increase of $0.13 per $100 TAV in the operation and maintenance (O&M) tax rate, resulting in an O&M tax rate equal to the $1.17 state cap. In exchange, the district agreed to lower the debt service tax rate by $0.13 resulting in an annual debt service fund shortfall of about $3 million. The shortfalls were cured by use of debt service fund balance in fiscal years 2011-2013 and in fiscals 2014 and 2015 by transfers from the general fund to the debt service fund.

The tax rate structure is unconventional but not unique among Texas school districts. Importantly, the rate swap could be reversed or the debt service tax rate could be raised without voter authorization. Going forward, the district plans to increase the debt service tax rate to service its annual payments in order to remain compliant with the newly adopted minimum general fund balance policy of 35% of spending.

RISING DEBT TO ADDRESS CAPITAL NEEDS

Debt levels rise with this issuance to 6.9% of market value. Annual debt service is somewhat frontloaded given the shorter duration of some of the projects in the bond package, including technology and transportation. However, the pace of amortization remains slow, which reflects the district's use of CABs. Approximately 10% of the district's debt is variable rate, with no associated swaps. Liquidity support is provided by a standby bond purchase agreement with JP Morgan renewed in May 2014 for a five-year period.

The district's current $0.25 per $100 TAV debt service tax rate is well below the $0.50 statutory cap for new issuance approval, providing the district ample flexibility to address capital needs. Limiting this flexibility, however, will be the gradual increase in the debt service tax rate necessary to make payments on existing debt.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other post-employment benefits (OPEB) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled less than $500,000 or 0.75% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a moderate 18% of governmental spending.

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. Any changes that include additional funding for schools and more local discretion over tax rates would be positive credit factors.

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, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, U.S. Federal Government (non-public information), and the Municipal Advisory Council of Texas.

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988570

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988570

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Meyer, CPA, CFA
Director
+1-512-215-3733
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Meyer, CPA, CFA
Director
+1-512-215-3733
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com