Fitch Rates $54MM Hays Consolidated ISD, TX's ULT Rfdg Bonds 'AAA'/'AA' Underlying; Stable Outlook

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to Hays Consolidated Independent School District, TX's (CISD; the district) unlimited tax (ULT) refunding bonds:

--$54.3 million ULT refunding bonds, series 2016.

The bonds are scheduled for negotiated sale the week of June 20th. Proceeds will be used for debt service savings.

The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. In addition, Fitch has assigned an underlying rating of 'AA' to the bonds, and upgraded the district's $322 million in outstanding unlimited tax obligations (pre-refunding) and the district's Long-Term Issuer Default Rating (IDR) to 'AA' from 'AA-.'

The Rating Outlook is Stable.

SECURITY

The bonds are payable from ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are insured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

The upgrade to 'AA' reflects the district's strong operating performance, with steady operating surpluses and strong cost controls, while successfully managing rapid enrollment growth. Long-term liabilities are moderate and will likely increase in the near term to expand facility capacity, although Fitch believes they will remain manageable. Strong area residential growth is likely to continue in the mid-term, driving revenue growth through enrollment gains.

Economic Resource Base

The district comprises over 215 square miles in northern Hays County (LT and ULT bonds rated 'AA'/Stable Outlook by Fitch) along the IH-35 corridor between Austin and San Antonio. According to IHS, Austin continues to be one of the country's top-growing metro areas, and was one of the first areas in the country to move from recovery to expansion post-recession.

Revenue Framework: 'a' factor assessment

Revenue growth has been robust, averaging at a level well in excess of the national GDP in the last 10 years. Future growth will likely mirror this trend through enrollment growth as the district's independent legal ability to raise revenues is limited by state law.

Expenditure Framework: 'aaa' factor assessment

Strong management oversight and cost controls have resulted in growth in district spending that has been balanced with revenues in order to accommodate student body growth through new schools and additional teachers and staff.

Long-Term Liability Burden: 'a' factor assessment

The long-term liability burden is moderate, reflecting strong state support for retiree benefits and debt issuances for school construction. Additional debt plans in the pipeline may elevate the burden on resources; however, levels are expected to remain in Fitch's moderate range.

Operating Performance: 'aaa' factor assessment

The district has deftly navigated the strong growth environment through management's commitment to conservative budgeting practices; adopted deficit budgets haven't been realized in the past 15 years. Reserves are robust and provide ample cushion in the case of an economic downturn.

RATING SENSITIVITIES

Manageable Long-Term Liabilities: A material increase in long-term liabilities beyond current plans could pressure the rating.

CREDIT PROFILE

The composition of the district's tax base has quickly transformed from rural to residential as housing construction continues to develop rapidly. Fiscal 2016 showed gains in taxable assessed value (TAV) of 15% and Fitch expects residential growth to continue at a rapid pace given current demographic projections. Median household income is strong at 135% of the nation and unemployment is low at 3.2% as of March 2016.

Revenue Framework

State sources remain the largest revenue stream, comprising almost two-thirds of general fund monies; property taxes account for the other third. Revenue growth is primarily a function of enrollment as the state seeks to ensure a certain level of per pupil spending for all state school districts and the district's revenue raising ability is limited. Enrollment has grown at roughly 4% per annum in recent years, and the district expects similar growth in the near term.

The district's general fund revenues have grown at a compound annual growth rate of five percentage points in excess of the U.S. GDP over the last 10 years. Fitch anticipates robust enrollment growth will continue to drive vigorous revenue growth in excess of national averages.

The district's debt service tax rate remained stable at $0.4213 per $100 TAV from fiscals 2008 - 2014, but increased in fiscal 2015 to $0.4977 due to the 2014 bond issuance; this rate is just under the statutory new issuance cap of $0.50. Despite recent robust tax base expansion, management plans to maintain the tax rate in order to redeem outstanding callable bonds. In fiscal 2016, the excess tax revenue collected will amount to $4.3 million, or the equivalent of $0.0851 of the debt service tax rate. This capacity provides the district notable margin to address near term capital needs and assuages concern over levying near the $0.50 cap. Management reports plans to approach voters as early as May 2017 for additional authorization.

The district's M&O tax rate of $1.04 per $100 TAV is below the legal limit of $1.17. The district would need voter authorization to raise the rate.

Expenditure Framework

The district's main expenditure item is salaries, common for local governments. Adopted budgets typically include raises for teachers and staff, and management reports the need to add around 50 new positions in the upcoming academic year to accommodate growth.

Fitch expects expenditure growth at a similar rate to revenue growth absent policy actions, and notes that the district maintains tight control over its spending within each budget cycle based on available resources.

The district's fixed cost burden is moderate, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling 16% of 2015 governmental expenditures. Taking into account state support for debt service, carrying costs decrease to 12.5%. Fitch expects the fixed-cost burden to remain moderate given the strong state support for retiree benefits and the current debt structure. All teachers are on one-year contracts with the district, providing flexibility in the district's main expenditure item.

Long-Term Liability Burden

Long-term liabilities are moderate as measured as a portion of personal income. Given current enrollment projections, the district may seek another bond election in the amount of $250 million for a high school, middle school, and three elementary schools as early as May 2017. In this case, the long-term liabilities would increase but remain a moderate burden on district resources.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover a reported 83% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% 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 proportionate share of the system's net pension liability paid by the district is minimal, representing less than 1% of personal income. The district's contributions currently are limited to 1.5% of salaries (total contribution of $1.3 million in fiscal 2015 compared to a general fund budget of $135 million).

Operating Performance

The district has grown their financial cushion to robust levels despite enrollment pressures and state funding cuts. Moreover, the district retains solid expenditure flexibility to manage well through economic downturns. General fund balances have increased to a high $46.3 million as of fiscal 2015, equaling 36% of spending and comfortably in excess of the 25% formal policy. Management reports fiscal 2016 will have another surplus, marking at least the 15th straight year of the district adding to reserves.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis, the Municipal Advisory of Texas, and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005578

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005578

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relation
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relation
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com