Fitch Rates Grand Prairie ISD, TX's 2015 ULT Bonds '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 Grand Prairie Independent School District, Texas' (the district) general obligation (GO) unlimited tax (ULT) bonds:

--$71 million ULT school building bonds series 2016;

--$98.895 million ULT refunding bonds series 2016.

The refunding bonds are expected to sell via competitive bid on Jan. 6, 2016, and the school building bonds via negotiation on Jan. 21, 2016. Refunding bonds proceeds will be used to refund certain outstanding obligations for savings and school building bonds for renovations and improvements.

In addition, Fitch has affirmed the 'AA' rating on the district's $441.6 million (pre-refunding, on a non-accreted basis) in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further secured by the PSF bond guarantee program rated 'AAA' by Fitch. (For more information on the Texas PSF, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: A history of operating surpluses has strengthened the district's reserve levels and liquidity. Given substantial reliance on state funding, Fitch views the district's ability to maintain its solid financial profile as fundamental to the current rating level.

GROWING DFW REGIONAL ECONOMY: The district realized its third year of solid taxable assessed valuation (TAV) growth following moderate recessionary declines. Fitch anticipates continuing tax base expansion based on Dallas Fort Worth (DFW) growth trends and a strengthening housing market.

MIXED ECONOMIC METRICS: The district's low unemployment rate reflects strong employment base gains. Income and educational levels lag state and national averages.

ELEVATED DEBT BURDEN: Fitch anticipates debt levels to remain elevated over the intermediate term based on the potential for increasing overlapping debt and an average amortization rate. Affordable carrying costs reflect state support for the district's debt and Teachers Retirement System of Texas (TRS) pension contributions.

RATING SENSITIVITIES

SOUND FINANCIAL PROFILE: The current rating reflects Fitch's expectations that the district will maintain solid reserves, a key credit mitigant to the district's above-average exposure to state funding uncertainties.

SATISFACTORY DEBT MANAGEMENT: The current rating is premised on the district's ability to satisfactorily manage growth. A significant increase in debt burden or carrying costs would pressure the current rating.

CREDIT PROFILE

The district's boundaries include roughly 80% of the geographic area of the city of Grand Prairie, a mature city centrally located in the DFW metropolitan area.

PARTICIPATION IN DFW REGIONAL ECONOMY

Access to major air and ground transportation routes has contributed to the region's strong wholesale distribution presence. Other dominant economic sectors include manufacturing, defense, and aerospace. The health of the local economy is evidenced by several years of solid employment base growth contributing to a low unemployment rate of 4.0% as of October 2015, modestly below that of the state.

The district's fiscal 2015 tax base is comprised of about 54% residential and 39% commercial/industrial properties. Taxpayer concentration is moderate with the ten largest accounting for 9.2 of TAV%; top taxpayers include retail, distribution, and manufacturing concerns. Solid 3.7% average annual TAV growth for the three years ending fiscal 2016 follows four years of modest recessionary declines. Resumption of growth was realized across all property classes.

Fitch expects moderate near term TAV growth based on highway improvements, the district's favorable location for distribution and warehousing, and the strength of the regional housing market. New near term development includes a second IKEA store scheduled to open in 2017 and an additional Walmart. The DFW area continues to outpace the nation in employment, income and population.

STRONG FINANCIAL PERFORMANCE DESPITE VOLATILITY OF STATE FUNDING

The district's financial profile is characterized by a history of surplus financial performance and healthy reserves. Although 70% of the operating budget is funded from state support, conservative fiscal management and enrollment gains enabled the district to increase reserves during the state-wide funding cuts of the fiscal 2012 - 2013 biennium. The district completed fiscal 2014 with an $8.4 million surplus, increasing unrestricted reserves to $54.8 million, or a solid 26.7% of spending, largely reflecting enrollment growth and conservative budgeting. Unaudited fiscal 2015 results reflect an application of $4.2 million in reserves for capital projects and sound reserves approximating 22% of spending, approximating the district's three-month reserve target.

ELEVATED DEBT RATIOS REFLECT REGIONAL GROWTH

The series 2016 school building bonds represent the first issuance against the $91 million bond project overwhelmingly approved by voters in November. The remaining $21 million issuance is anticipated in fiscal 2017. The series 2016 refunding issue refunds the district's series 2009 capital appreciation bonds for savings.

Additionally, a coincident tax ratification election (TRE) was successful in Nov. 2015, allowing the district to tap an additional $0.13 per $100 of TAV in maintenance and operations (M&O) levy margin. The district's refunding plan of finance assumes use of up to $0.05 of the M&O tax rate to refund the outstanding capital appreciation bonds. A portion of the additional TRE funds will be used to fund technology, buses, renovation and incentive pay.

The district's interest and sinking fund (I&S) projected maximum tax rate of $0.425 per $100 of TAV remains below the statutory cap of $0.50 for new issuance, although the district does not have intermediate term issuance plans subsequent to the 2015 bond project. Fitch anticipates the district's high debt burden, 9.4% of market value, to remain elevated based on the potential for overlapping debt and an average 10-year principal amortization rate of 49.3%.

AFFORDABLE CARRYING COSTS REFLECT STATE SUPPORT

The district's pension liabilities are limited to its participation in the state pension plan administered by the 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; the vast majority of these contributions are made by the state on behalf of the district. However, districts are vulnerable to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Including debt service, pension and OPEB contributions, carrying costs were an affordable 14.5% of fiscal 2014 governmental spending, reflecting state support for pension funding, and a low 8.1% considering state support for debt service.

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, Zillow Group, and The Texas Municipal 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/gws/en/disclosure/solicitation?pr_id=997414

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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., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com