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

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

--$9.4 million ULT school building and refunding bonds, series 2016.

The 'AAA' long-term rating for the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

The bonds are scheduled for negotiated sale the week of Feb. 8th. Proceeds will be used to acquire, design, renovate, construct, and equip school facilities, and to refund a portion of the district's outstanding debt for interest cost savings.

Fitch has also assigned an 'AA' underlying rating to the bonds and affirmed the 'AA' underlying rating on the following outstanding bonds (pre-refunding):

--$71 million ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy of the district, 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

SOLID FINANCIAL PROFILE: The district's financial profile remains strong and is characterized by solid general fund reserve levels and sound management practices.

STABLE TAX BASE: The district benefits from its proximity to the larger Amarillo MSA employment base and economy. The area's economy is stable and the city serves as the regional commercial hub for the Texas panhandle.

GROWTH POTENTIAL: The district's tax base appears poised for manageable, steady growth in the near term due to residential development in southern Amarillo which lies within district boundaries.

MODERATE DEBT BURDEN: Fitch expects debt levels to remain moderate as the district addresses capital needs as a result of enrollment growth.

RATING SENSITIVITIES

STRONG OPERATING PERFORMANCE: The rating is sensitive to the district's ability to maintain strong operating performance while implementing its upcoming capital improvement plans.

CREDIT PROFILE

The district is located along the southern border of Amarillo in Randall County, serving a 720-square mile area that is largely rural with roughly 54,000 residents. The city of Amarillo is a regional hub that serves as the banking, distribution, and commercial center for the Texas panhandle. The district's economic base is benefiting from its proximity to Amarillo, and shifting away from its rural, agricultural roots toward that of a suburban, bedroom community.

GROWING ENROLLMENT AND TAX BASE

Growth in district enrollment and tax base has resulted from the area's available land which spurred predominately residential development pushing south from Amarillo. While moderating slightly in fiscal 2010 and 2011, the district did not mark any tax base contraction during or post-recession and has averaged about 6% growth annually since 2008. Growth is a function of both new residential property and increasing valuations of existing properties.

District enrollment totals 9,617 students and has grown at an average annual pace of just over 2% during the past five years. Management reports the possibility of an uptick in enrollment given current trends in residential development.

STABLE ECONOMY

Amarillo area unemployment levels are typically below state and national levels and although they rose, they remained below 6% during the national recession. At 3.2% in November 2015, the unemployment rate remains well below the state's 4.5% and nation's 5% rates. Income metrics are generally in line with state and national figures.

STRONG FINANCIAL PROFILE

The district's financial profile is characterized by its conservative management, consistent positive operating results, and solid financial reserves. The district has a history of posting positive or break-even results that have boosted reserves over the years.

At the close of fiscal 2015, the district's unrestricted general fund balance totaled a solid $30.7 million, or 46% of spending; well in excess of the district's informal target of three months or 25% of expenditures. The fiscal 2016 adopted budget included a 1% increase in average daily attendance and a tax rate increase to $0.22 per $100 taxable assessed value (TAV) from $0.175 to service the debt on the recently approved bond program. Management reports year-to-date enrollment is up 2% over the prior year and there are no material variances from the budget.

MODERATE DEBT LEVELS WITH MANAGEABLE FACILITIES NEEDS

Debt levels are moderate at $2,500 per capita or 2.8% of market value. Principal amortization is also moderate at a rate of 55% within 10 years. Debt levels are expected to remain level as management incrementally issues the $34.8 million bond program that will address capacity pressures at the intermediate level (grades 5 and 6), as well as an addition at an elementary school. Given the manageable growth needs and the relatively low debt service tax rate, Fitch believes the debt burden will remain affordable upon implementation of the long-term capital plan.

LIMITED PENSION/OPEB OBLIGATIONS

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $7.7 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 3/10ths of 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions and other post-employment benefits (OPEB) are a low 9.7% of fiscal year 2015 governmental spending.

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 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 less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 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 Fitch's applicable criteria specified below, this action was informed by information from Lumesis 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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998836

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998836

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, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com