Fitch Affirms Alvin Community College District, Texas' Ltd Tax Bonds at 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the 'A+' underlying rating on Alvin Community College District, Texas' (the district) approximately $13.4 million in outstanding limited tax bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an annual property tax levy limited to $0.50 per $100 taxable assessed valuation (TAV) on all taxable property within the district.

KEY RATING DRIVERS

ADEQUATE FISCAL POSITION MAINTAINED: Recent fiscal performance reflects break-even-to-modestly positive operations, although the district's financial position remains fairly marginal with narrow liquidity and a modest reserve cushion. A balanced budget and the year's slightly improved enrollment supports management's projections of another modest surplus in fiscal 2016.

STEADY TAX BASE EXPANSION: TAV continues to grow at a moderate annual pace. Various petrochemical, energy, and associated industries make up the top 10 taxpayers and provide moderately high tax base concentration.

ENROLLMENT TRENDS MIXED: There has been some modest yet inconsistent enrollment growth. This is balanced against overall trends that generally reflect an eroding base, which Fitch views with some concern. Nonetheless, Fitch believes it is feasible that the district may realize some enrollment gains in the near term given the counter-cyclicality of matriculation trends to the recent economic softening in the Houston metropolitan statistical area (MSA).

AVERAGE SOCIO-ECONOMIC INDICATORS: Population growth trends and local income/wealth levels are slightly below or at MSA, state, and national averages.

MIXED DEBT PROFILE: High overall debt levels are balanced against the district's rapid principal amortization and low carrying costs.

RATING SENSITIVITIES

OPERATING PERFORMANCE AND FINANCIAL CUSHION: The rating is sensitive to material changes in the district's financial position.

CREDIT PROFILE

Located about 25 miles southeast of downtown Houston, this comprehensive, two-year institution serves a relatively small local enrollment base in and near the towns of Alvin, Manvel, and portions of the city of Pearland. Enrollment totaled 7,211 full-time student equivalents (FTSEs) in fiscal 2015. Population growth and income/wealth levels are generally comparable to the MSA, state and nation.

SLIM OPERATIONS; MODEST RESERVE CUSHION MAINTAINED

Operations benefit from a relatively diverse revenue stream of tuition, property taxes, and state aid available to all Texas community colleges. The district has regained its modestly positive to break-even operating performance in the last two fiscal years (fiscals 2014 and 2015) while preserving a modest reserve cushion despite recent enrollment fluctuations. Growth in the biennium state appropriation ($9.3 million or 22% of total revenue in fiscal 2015, up about $1 million from fiscal 2013), use of the district's revenue-raising options, and some expenditure savings (such as implementation of a one-time, exit incentive) underlie the improved performance.

The district has periodically implemented some tuition/fee increases, but more notably, has more consistently generated additional property tax revenue for operations from a growing tax base coupled with modest increases to the operating tax rate. The increased property tax collections totaled $13 million in fiscal 2015 or 31.6% of total revenues, which was up from $11.6 million or 28.7% in fiscal 2014.

A 1.9% operating margin was generated in fiscal 2014, bolstered by the year's 2% uptick in enrollment headcount, although operating performance quickly slimmed to break-even in fiscal 2015 given pressure from the subsequent enrollment decline.

Available funds-to-expenditures remained persistently low at 19.3% at the close of fiscal 2015. This includes the district's internally designated reserves equal to $2.7 million or about 6% of spending at fiscal 2015 year-end. The district's fiscal 2015 financial statements also reflect the impact of GASB 68 on a historically slim financial profile, as the unrestricted net position declined to a negative $1.6 million from $3.8 million in fiscal 2014 (before restatement).

For fiscal 2016, the balanced $28.2 million adopted maintenance and operations (M&O) budget grew by about 3%, supported by tuition increases and about $1 million in additional operating tax revenue. The district maintained a nominally flat total tax rate of slightly over $0.20 per $100 TAV for the second consecutive fiscal year. Management indicates year-to-date operating performance is generally in line with budgeted expectations. Enrollment above budget should boost the district's fiscal position minimally by $500,000. Conclusion of a pending, one-time sale of property by fiscal year-end could additionally improve results by approximately $1.3 million.

CONTINUED TAV GAINS IN MODERATELY CONCENTRATED TAX BASE

The district's tax base continues to grow at a steady, moderate pace with gains realized from some new home starts as well as expansion by local industry, the health care sector, and supporting businesses. About half of the district's tax base is residential. Totaling $8.5 billion in market value as of fiscal 2015, the tax base has moderately high concentration with the 10 largest taxpayers representing 16% and the largest taxpayer (INEOS USA) 6.6%. Top taxpayers include a number of large petrochemical plants and other associated industries.

The Houston MSA economy made a robust post-recessionary recovery due in part to the strength of the energy sector. However, Fitch believes low oil prices may dampen the pace of growth over the near term. As it is one of the state's petrochemical centers, the positive impact of lower energy prices on that activity may partially offset any economic softening (see Fitch's report, 'How Will Local Oil Patch Governments Fare? (Financial and Economic Impacts of Fluctuating Energy Prices)' dated August 2015).

As a complement to the strong metro economy, activity in Brazoria County centers on chemical manufacturing and petroleum processing. The county benefits from the Port of Freeport, the 16th largest port in the U.S. in terms of foreign tonnage, which provides critical shipping access for the region's industries. Dow Chemical Co is the largest employer in the county with 4,300 employees. Sizeable expansion plans were recently announced for its Freeport chemical complex, in addition to the construction of a research and development center in Lake Jackson.

While the area economy is dominated by the chemical and energy sector, the essentiality of these industries and the ongoing diversification of the regional economy somewhat offsets concerns regarding economic concentration. The county's economic momentum has slowed modestly year-over-year due to the stability of its other employment sectors and those of the larger Houston MSA. Unemployment levels are up slightly to 4.8% in November 2015 from 4.5% a year ago due to faster erosion of employment (2%) than labor force (1.5%). The county's unemployment rate remained generally in line with the MSA (4.9%) and nation (4.8%) while rising slightly above the state (4.5%).

OVERALL DEBT LEVELS HIGH BUT CARRYING COSTS LOW

The overall debt burden is high at approximately 10% of market value, but a more moderate $2,580 on a per capita basis. This contrasts with the college's relatively modest direct debt profile. The college has been an infrequent borrower and amortization of its debt is rapid, with 100% of principal retired in 10 years. Recent TAV gains have allowed the college to taper its already low debt service tax rate, which remains under $0.03 per $100 TAV and well within the $0.50 debt service levy limit.

A GO bond election for $88.5 million was recently approved by the college's board of regents for the May 2016 ballot. Capital needs to be funded by the proposed authorization include a new educational facility on the west side of the college's taxing jurisdiction, with which management anticipates the college can generate additional student enrollment from the growing Alvin ISD school district as a result of reduced commuting time. A debt service tax rate increase of under $0.07 per $100 TAV is currently projected under what Fitch believes to be reasonable TAV growth assumptions of no more than 5% in the near term.

The college participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer defined benefit plan. As the non-employer contributing entity, the state contributes an amount roughly equal to the current employer contribution rate.

However, like all Texas community colleges and K-12 public schools, the college is vulnerable to future policy changes by the state. 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 $5.1 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate of return assumption (approximately 75% based on a more conservative 7% investment rate of return). The NPL represents less than 1% of the district's fiscal 2016 market value. Other post-employment benefit (OPEB) contributions paid by the college are nominal, as the state and employees also pay the bulk of these costs.

Carrying costs for debt service, pensions and OPEB are presently low at 5.5% of total operating/non-operating spending in fiscal 2015 and may rise to a more midrange level if the proposed GO bond authorization is approved, although Fitch recognizes this remains contingent on future issuance and debt structure plans.

Additional information is available at www.fitchratings.com

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 in 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 Tax-Supported Rating Criteria, this action was additionally informed by information from Lumesis, CreditScope, the Texas Municipal Advisory Council, and IHS Global Insight.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000418

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Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Tipper Austin, +1-212-908-9199
Associate Director
or
Committee Chairperson:
Barbara Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Tipper Austin, +1-212-908-9199
Associate Director
or
Committee Chairperson:
Barbara Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com