Fitch Affirms Del Valle ISD, TX ULT Bonds at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the 'AA-' rating for the following Del Valle Independent School District, TX bonds:

--$6.6 million unlimited tax (ULT) school building bonds series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: General fund reserves have been consistently healthy. Prudent fiscal management resulted in surplus operations for the last four fiscal years despite state funding cuts.

LARGE DEBT BURDEN: Debt levels are high and are expected to remain so due to demands of growing enrollment. The district's debt service tax rate is near the state's threshold for approval of new money issuance. Combined carrying costs for debt service and benefits are modest.

ROBUST REGIONAL ECONOMY: The district benefits from its location in the Austin metro area. Residents have easy access to a large employment market that continues to outperform the U.S. in terms of population, employment, and income growth. District income metrics are below average.

TAX BASE CONCENTRATION: The top two taxpayers comprise 12% of the district's taxable assessed valuation (TAV), but prospects for continued development are very favorable, mitigating concerns somewhat. The district's robust reserves would provide a short-term financial cushion in the event of a major taxpayer loss.

RATING SENSITIVITIES

MAINTENANCE OF STRUCTURAL BALANCE: The preservation of structurally balanced operations is key to credit quality given the district's high debt levels and growth pressures.

FUTURE ENROLLMENT GROWTH PRESSURES: The district may experience capital pressures if enrollment growth substantially outpaces tax base growth, since projections include a tax rate that is near the maximum allowed for new debt issuance.

CREDIT PROFILE

The district is located approximately six miles southeast of downtown Austin, serving a large 170 square mile area that is mostly unincorporated. With rapid growth at a compound annual rate of 4.2% over the past five years, current enrollment is now roughly 11,700.

SOLID GENERAL FUND RESERVES

The district's financial position remains a credit positive. The district reported a stout unrestricted general fund balance of $49 million or 54% of spending in fiscal 2014. Despite legislative budget cuts that reduced school funding statewide, the district produced surplus operations in both fiscals 2013 and 2014 through unfilled positions, utility savings, and deferred capital maintenance. For fiscal 2015 the district adopted a $12 million deficit budget, but unaudited results point to a much smaller drawdown of $5 million.

The fiscal 2016 budget was adopted with a $15.4 million deficit. However, management expects that increased state revenue and strong preliminary TAV projections will allow the district to close the year with more favorable results. Fitch views this forecast as reasonable given the district's history of conservative budgeting. Given the robust general fund balance reserves, even if the district performed according to budget its ending reserves would remain strong at 32% of budgeted spending. However, recurring operating imbalances would pose a credit concern.

HEALTHY ECONOMY AND GROWING TAX BASE

Affordable land, new transportation routes, and very close proximity to downtown Austin and the metro employment base spurred residential development in the district in recent years, which in turn fueled rapid enrollment growth. The area employment picture is positive, with the Austin metropolitan statistical area (MSA) adding jobs at a rate faster than the U.S. The MSA unemployment rate fell to 3.3% in March 2015 from 4.4% in the prior year, and is historically lower than the state and national rates.

The district's tax base experienced some volatility during the economic downturn with moderate declines in fiscal years 2010 and 2011. Subsequent growth has restored all losses, boosted by the recent construction of Circuit of the Americas (COTA, home of the Formula One U.S. Grand Prix), which hosts international races and regional music events.

Taxpayer concentration is high with COTA and Cypress Semiconductor leading the top taxpayer list at 8.3% and 3.5% of fiscal 2015 TAV, respectively. COTA has filed a lawsuit disputing the appraisal on a portion of its property, for which the district does not currently budget any tax revenue. Concentration concerns are offset by the positive prospects for additional commercial development within the district.

MODERATE DEBT, GROWTH RELATED CAPITAL NEEDS

Overall debt levels are high at 6.6% of fiscal 2015 market value and $4,364 per capita. Amortization is moderate with 45% of principal retiring in 10 years.

In November 2014 district voters approved bond authorization of $134 million for two elementary schools, expansion of the high school, and other facility improvements. The district issued the first portion in January 2015 (not rated by Fitch) and plans to issue the remainder over the next 6-7 years. This authorization meets all identified facility needs to accommodate forecast growth, and will require a projected tax rate of $0.49 per $100 of TAV, based on tax base growth assumptions considered reasonable by Fitch. This rate is just below the state's statutory test cap of $0.50 for new debt issuance.

MANAGEABLE CARRYING COST BURDEN

District employees participate in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer pension system. The bulk of contributions are made by individual plan members and the state of Texas on behalf of the district, thus minimizing liability for the district. The system also offers other postemployment benefits (OPEB) to retirees.

Fitch views the district's limited pension and OPEB obligations as an offset to the high debt levels. Carrying costs for debt service, pensions, and OPEBs are affordable at 12.1% of fiscal 2014 governmental fund spending, benefiting from state support for 14% of debt service.

The state's funding of school districts' payments to TRS helps keep these fixed costs low. However, like all Texas school districts, the district is vulnerable to future funding changes by the state--as evidenced by a relatively modest 1.5% of salary pension contribution initiated in fiscal 2015.

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. 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, Municipal Advisory Council of Texas, and 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=988954

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988954

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com