Fitch Rates Longview ISD, TX's ULTs 'AAA' TX PSF/'AA' Underlying; Outlook Stable

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

--$57.5 million ULT bonds series 2016.

The bonds are scheduled for negotiated sale the week of April 11. Proceeds will be used to refund a portion of the district's outstanding ULT debt for interest cost savings.

Fitch has also assigned an 'AA' underlying rating to the 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. 5, 2015).

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Consistently positive operating margins have yielded significant general fund reserve levels and liquidity, providing the district with a high degree of financial flexibility.

OIL & GAS DRIVEN ECONOMY: The district is located in a large industrial and retail regional economy along major transportation corridors. The tax base is resilient and stable, but local employment indicators have turned negative due to energy sector contraction which may also impact future tax base trends.

SIZABLE DEBT LOAD: Debt levels are elevated and amortization is slow. The debt service tax rate is near the state's tax rate cap for new money debt issuance, but after completion of the 2008 bond program, the district does not remain with capital spending pressure that would necessitate additional leverage in the near term.

RATING SENSITIVITIES

STRONG FINANCIAL OPERATIONS: The rating is sensitive to the district's strong financial management practices, including conservative budgeting and high reserves, which mitigate concern over the elevated debt burden.

CREDIT PROFILE

The district is located roughly 120 miles east of Dallas and 60 miles west of Shreveport, LA and served by major transportation corridors. Enrollment in the district varies slightly from year to year but has not deviated significantly from the 10-year average of about 8,500 students. The district population of 61,331 has been mostly stable in recent years.

ENERGY SECTOR DOMINATES ECONOMY

The district is located in the Longview metropolitan statistical area, which is an industrial, retail, and distribution center in East Texas. The area economy has traditionally served as a center for oil and natural gas operations, but has become increasingly diversified with the growth of education, health care, manufacturing, transportation/distribution, government and retail trade as major employment sectors.

Mining, logging, and construction (including oil and gas) are the MSA's largest employment sector at 16% of total non-farm employment. Contraction within this sector and the manufacturing sector (10% of employment) led to a 2.9% decline in employment over the 12 months ending Jan. 2016, leading to an increase in the MSA's unemployment rate to 5.3% in January 2016 from 4.3% the year prior. Income levels of district residents are below state and national averages.

Taxable assessed value (TAV) showed resiliency post-recession, marking only one year of modest contraction (3.7%) in fiscal 2011. A trend of flat to modest growth has persisted since then and Fitch expects TAV trends to soften in the wake of energy sector contraction.

POSITIVE FINANCIAL OPERATIONS; PLANNED USE OF RESERVES

Several years of positive operating results have significantly increased reserves, with fiscal 2015 fund balance of $55.3 million representing a very high 82% of spending. The fiscal 2015 audit posted break-even results despite having adopted a $2.2 million deficit budget, a practice management typically employs.

The fiscal 2016 budget was adopted with a $4 million operating deficit, a flat tax rate, a 4% increase in expenditures, and a modest decline in average daily attendance. The budget also includes a large $24 million draw down for pay-go capital outlays for its new Montessori campus. The 1,400 student facility, currently under construction, will consolidate the district's pre-K and kindergarten classrooms. The $34 million facility is being funded with a combination of remaining bond proceeds from construction cost savings ($10 million) and general fund reserves ($24 million), and is expected to be completed by summer 2017. Inclusive of this planned drawdown, Fitch expects the district's fiscal 2016 reserve position to remain robust at $30 million (47% of fiscal 2015 spending).

MIXED DEBT PROFILE

Key debt ratios are elevated due to the issuance of all of the district's $267 million bond authorization, issued over four installments since 2008, to support comprehensive rebuilding, renovating, and repurposing of district facilities. Debt is 5.7% of market value (MV) and $4,357 per capita. Amortization is below average at 40% in 10 years.

The district's debt service tax rate is also high at $0.47 per $100 of TAV, which is near the state's statutory cap of $0.50 for new money debt issuance. However, the district does not expect to issue debt in the near term citing a preference for using pay-go for capital projects.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple-employer defined benefit pension plan. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using Fitch's more conservative 7% rate of return assumption. Contributions are determined by state statute, rather than actuarially and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.

The state assumes the majority of TRS' employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts - as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

The district's proportionate share of the system's net pension liability represents a very small less than 1% of fiscal 2016 market value and the district's contributions are limited to $1.3 million. Carrying costs for the district (debt service, pension, and OPEB costs, net of state pension support) totaled a moderate 18.4% of governmental fund spending in fiscal 2015.

TEXAS SCHOOL FINANCE 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. 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 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 second 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 the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

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

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002038

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Leslie Ann Cook, +1-512-215-3740
Associate Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Leslie Ann Cook, +1-512-215-3740
Associate Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com