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

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

--$25 million ULT 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 April 11. Proceeds will be used to redeem portions of the district's outstanding debt for interest 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 PERFORMANCE: The district consistently records operating surpluses, resulting in the steady growth of unrestricted general fund reserves that are in excess of 30% of spending.

STABLE TAX BASE: The primarily residential district has experienced modest population and tax base growth in recent years. The area economy includes international trade, manufacturing and distribution; Fort Bliss, the U.S. Army's second largest installation; and the stabilizing presence of medical, education, and government sectors.

BELOW-AVERAGE ECONOMIC PROFILE: District income levels are below average and the pace of growth has stagnated in the past five years compared to state and national income metrics.

HIGH DEBT RATIOS: The district's debt is very high relative to market value, although fixed costs are low relative to governmental spending due to state assistance. The district retains good flexibility under the state cap for new debt issuance to meet future needs.

RATING SENSITIVITIES

DECLINE IN STATE SUPPORT: Material decline in state support for operations and debt service or a weakening of the district's strong fund balance position could pressure the rating.

CREDIT PROFILE

The district is located approximately 18 miles southeast of the city of El Paso (general obligation bonds rated 'AA' with a Stable Outlook by Fitch). The district serves Horizon City, the town of Clint, and the unincorporated area of East Montana within a large 380-square mile boundary. The population was estimated at 52,176 for 2016.

STABLE ECONOMY NEAR EL PASO

The district continues to record positive, albeit uneven, growth in its primarily residential tax base. The district's taxable assessed valuation (TAV) has grown by a compound annual average of 4% since fiscal 2008. Fiscal 2016 showed growth in market value (3%) but contraction in TAV due to additional exemptions. Management expects a very modest annual growth rate of (1%) for planning purposes.

Ease of access to the city of El Paso and the Fort Bliss Air Defense Training Center make the district's affordable housing a primary growth driver. The Department of Defense has invested over $7 billion in Fort Bliss in the last seven years; however, the base is not protected from across-the-board cuts at the federal level and Fitch will continue to monitor the potential for a reduction in force and associated impact on the local community. The top 10 taxpayers include a utility, real estate, manufacturing, and construction interests with no taxpayer or industry concentration. Tax collections have averaged close to 100% over the past five fiscal years.

IHS points to the El Paso region's younger-than-average population as a key strength, supporting strong service sector growth. However, relatively low skill levels limit high-paying job growth. The city's latest unemployment rate of 4.5% for January 2016 is improved from one year prior, aided by growth in total employment. Wealth as measured by median household income is about three-quarters of state and national averages.

Enrollment growth averaged 4.4% annually from fiscal 2005 to 2011 but has since been relatively flat at 11,750 students. The district projects flat enrollment for planning purposes and monitors daily attendance closely to make timely budget adjustments if needed. Longer term, outward expansion of El Paso will likely generate additional enrollment gains at the district.

STRONG FINANCIAL PERFORMANCE

Management budgets conservatively and maintains a healthy level of reserves. State funding contributed about 75% of the district's operating revenues over the past five years, followed by ad valorem tax revenues and federal monies.

The district's financial profile is characterized by positive operating results and strong reserves. Fiscal 2015 audited results showed an addition of $5.4 million to fund balance due to added program revenues and an underspending of the budget. At the close of fiscal 2015, the district's unrestricted fund balance stood at $32.3 million, or a healthy 33.6% of spending.

Management reports year-to-date fiscal 2016 operations are largely in line with the balanced budget. Additionally, the board has approved the use of $4.5 million in fund balance for technology and athletic upgrades, among other one-time projects. Given current reserve levels, use of fund balance for one-time projects of this magnitude is not a concern.

DEBT BURDEN GROWTH

Metrics for overall debt outstanding spiked recently to an elevated $5,802 per capita and a very high 19.5% of market value due to the issuance of $80 million in new money last year. The district's debt service payments were a very low 3% of government spending after adjusting for 67% state debt service assistance received in fiscal 2015. The fiscal 2015 debt service payment makes up a higher 9.3% of government spending without the state adjustment. The district receives debt service support from the state through the facilities funding component of the funding formula, which has proved consistent even in times of economic downturn at the state level.

Amortization is slow with 36% retired in 10 years, and management reports minimal capital needs after having issued the 2015 authorization last year. The debt service tax rate is projected to remain at an affordable $0.295 per $100 of TAV, comfortably below the statutory new money issuance cap of $0.50.

LIMITED PENSION/OPEB OBLIGATIONS

Fitch's concern about the elevated level of the district's debt is lessened by the moderate overall long-term liability burden when considering pension and other post-employment benefits (OPEB). 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, it is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS's ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $14.8 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 2% of the district's fiscal 2015 market value. The district's total carrying costs for debt service and retirement benefits comprised a low 4.5% of governmental spending, net of state aid for debt.

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 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 beginning of 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 Fitch's applicable criteria specified below, this action was informed by information from Lumesis and the Municipal Advisory Council of Texas.

Applicable Criteria

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=1002235

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
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com