Fitch Rates Hays Consolidated ISD, TX's ULTs 'AAA'/'AA-' Underlying; Outlook to Positive

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to Hays Consolidated Independent School District, TX's (CISD; the district) unlimited tax (ULT) bonds:

--$8.6 million ULT refunding bonds series 2015.

The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of 'AA-' to the series 2015 bonds.

The bonds are scheduled for negotiated sale the week of November 30. Proceeds will be used for debt service savings.

Fitch has also affirmed the following ratings:

--$320.6 million in outstanding ULT bonds (pre-refunding) at 'AA-'.

The Rating Outlook is Positive.

SECURITY

The bonds are payable from ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are insured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

OUTLOOK REFLECTS WELL-MANAGED GROWTH: District officials have successfully managed a high-growth environment through long-term capital planning, prudent debt structures, and conservative budgeting. As a result, general fund reserves remain high, debt service affordable, and the district is well-position to handle additional development.

EXPANDING TAX BASE: The district's tax base continues to expand, with future potential growth tied to continued development along the IH-35 corridor and the district's proximity to Austin north of the district and San Marcos to the south. Enrollment growth has mirrored population growth that more than doubled in the past 10 years.

SOLID RESERVES: Financial performance is favorable marked by healthy fund balance levels and good liquidity.

HIGH DEBT LEVELS: Debt levels are high, reflecting the district's rapid infrastructure growth. However, the district retains flexibility within its debt service tax rate to address additional capital needs. The pace of debt retirement is above average at 57% in 10 years.

RATING SENSITIVITIES

ACCELERATED GROWTH: The district's rating is sensitive to enrollment growth pressures that would require additional facilities beyond current plans. The Positive Outlook reflects Fitch's expectation that the district's strong financial and debt practices will continue to provide sufficient flexibility to manage the rapid growth environment.

CREDIT PROFILE

The district comprises over 215 square miles in northern Hays County (LT and ULT bonds rated 'AA'/Stable Outlook by Fitch) along the IH-35 corridor between Austin and San Antonio. According to IHS, Austin continues to be one of the country's top-growing metro areas as measured by payrolls, and was one of the first areas in the country to move from recovery to expansion post-recession.

RAPID RESIDENTIAL DEVELOPMENT

The composition of the district's tax base has quickly transformed from rural to urban. Residential construction continues to develop rapidly as Austin housing prices expand development southward and growth in San Marcos pushes development northward. Housing starts in 2014 were up 31% from the previous year and the median new home price is beginning to level off at around $240,000. Compared to the greater Austin area median new home price of $281,000, the district's affordability appears to be a major driver of new home sales. Fitch expects residential growth to continue at a rapid pace given current demographic projections.

Ongoing residential and commercial development is reflected in taxable assessed value (TAV) that was resilient post-recession and has expanded by an average of 8% each of the past four years. Fiscal 2016 was the most robust year of growth at 15% -- to $4.5 billion -- due to reappraisals and new residential and commercial properties. District enrollment grew by an annual average of 5.5% over the past 10 years and has slowed slightly to about 4% recently to roughly 18,500 students in fiscal 2016, in line with management's projections. Similar growth is expected in the near-term as the district expects to add about 700 students per year for the next five years.

County unemployment indicators are positive, characterized by growth in total employment and improvement in the unemployment rate to a very low 3.4% in Sept. 2015 from 4.1% one year prior (well below state and national averages). Median household income is strong at 137% of the state and 134% of the nation.

POSITIVE FINANCIAL MARGINS YIELD SOLID RESERVES

Hays CISD has reported an annual operating surplus the last 11 fiscal years, reflecting the district's ability to manage expenses in line with revenue growth. Fiscal 2014 ended with a $4 million (3.3% of spending) addition to reserves, bringing the unrestricted fund balance to a strong 33% of spending and comfortably in excess of the 25% formal fund balance policy. Preliminary results for fiscal 2015 indicate another operating surplus of almost $8 million due to an underspending of the budget and strong revenue growth.

The fiscal 2016 budget is balanced and includes a spending increase of $10.9 million due primarily to additional teachers and salary increases. Revenue growth should more than offset the increase in spending due to extra state monies from enrollment gains, as well as additional property tax revenue. Management does not report any year-to-date variances with the budget, and Fitch is confident that the district's history of strong financial management will continue to provide flexibility in a high-growth environment.

DEBT BURDEN REMAINS HIGH

Debt levels have come down slightly due to strong tax base growth but remain high at 10.3% of current market value and 7,261 per capita. Amortization of outstanding debt is fairly rapid at 57% retired in 10 years. Given current enrollment projections the district may seek another bond election in the amount of $250 million for a high school, middle school, and three elementary schools as early as 2017. The district is finalizing a five-year infrastructure plan to address the educational adequacy of current facilities.

The district's debt service tax rate remained stable at $0.4213 per $100 TAV from fiscals 2008 - 2014, but increased in fiscal 2015 to $0.4977 due to a 2014 bond issuance; this rate is just under the statutory new issuance cap of $0.50. Despite recent robust tax base expansion, management plans to maintain the tax rate in order to redeem outstanding callable bonds. In fiscal 2016 the excess tax revenue collected will amount to $4.3 million, or the equivalent of $0.0851 of debt service tax rate. This capacity provides the district notable margin to address near term capital needs and assuages concern over levying near the $0.50 cap.

MANAGEABLE PENSION 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 (OPEB) healthcare plan.

Including debt service, pension and OPEB contributions, carrying costs were affordable at 12% of fiscal 2014 governmental spending, benefitting from the state's strong support for school district pension funding. This calculation includes the 25% of debt service support from the state in fiscal 2014, which further lowered the district's carrying costs. 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 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 consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and the Municipal Advisory Council of Texas.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995360

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995360

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
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
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Sandro Scenga, +1-212-908-0278,
sandro.scenga@fitchratings.com