Fitch Affirms College Station ISD, TX ULT's at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed College Station Independent School District, Texas (the district) unlimited tax (ULT) debt at 'AA+' as follows:

--$273 million outstanding ULT bonds, series 2007, series 2009, series 2010, series 2011, series 2014 and series 2016.

In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2007, 2010, 2011, 2014 and 2016 bonds are further backed by the PSF bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA+' IDR reflects the district's strong operating profile, supported by solid expenditure flexibility, expectations for robust revenue growth, and exceptionally strong gap-closing capacity. Fitch expects the long-term liability burden to climb given plans for additional debt issuance, but remain within the moderate range in the medium term.

Economic Resource Base

The district is located in east-central Texas approximately 90 miles equidistant from Houston and Austin, serving a 2014 population of approximately 109,000. District enrollment of approximately 12,970 in fiscal 2016 has steadily increased over the past four years, with growth rates ranging from approximately 4% to 7%. The primarily residential tax base has reflected similarly steady growth, increasing 6% and 7% in fiscal years 2016 and 2015, respectively. The district serves the city of College Station, which is home to Texas A&M University, the flagship campus of the Texas A&M University System (system revenue bonds rated 'AAA', Stable Outlook).

Revenue Framework: 'a' factor assessment

Fitch expects the district to realize strong revenue growth going forward, consistent with trends of the past five years. The district's legal ability to raise revenues is limited.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to exceed revenue gains over the immediate term given the district's current mode of fast growth. Solid expenditure flexibility incorporates management's control over headcount and salaries within the annual budget cycle, as well as moderate carrying costs.

Long-Term Liability Burden: 'aa' factor assessment

Currently 16% of personal income, Fitch expects the district's long-term liability burden to increase slightly based on future debt issuance plans to accommodate enrollment growth and related capital needs.

Operating Performance: 'aaa' factor assessment

Fitch expects the district's financial profile to remain strong through an economic downturn based on sizeable reserves and sound expenditure flexibility.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility and ample reserve levels, which Fitch expects it to maintain through a typical economic cycle.

Long-Term Liabilities: A material increase in the long-term liability burden could pressure the rating.

CREDIT PROFILE

The area economy benefits significantly from the presence of Texas A&M University, whose fall 2015 enrollment surpassed 58,900. The university's growth continues to drive area economic expansion and housing development. The district's tax base has exhibited strong growth over the past four years, increasing by approximately 23% from fiscal 2013 through fiscal 2016 to reach $7.8 billion. Management has indicated that preliminary values for fiscal 2017 continue this positive trajectory and projections for annual enrollment growth over the next four years average a solid 3.7%.

Revenue Framework

Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).

Approximately 82% of district revenues come from property taxes, with the remainder made up of state aid. The small level of state support is a function of the district's high property wealth levels.

District revenues have grown at a compound annual growth rate of 4% over the last decade, performing just above U.S. GDP growth. Fitch expects the natural pace of district revenue growth in future years to be similar to historical performance, given current enrollment trends and expectations for continued enrollment growth in future years.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate of $1.04 per $100 taxable assessed value (TAV) would need voter authorization to be increased to the statutory limit of $1.17. Management reports no current plans to do so. The district levies a separate, unlimited debt service tax rate of $0.3229 per $100 TAV, well below the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

Similar to other school districts, instructional costs are the district's largest spending responsibility.

Fitch expects the natural pace of spending growth will likely exceed revenue gains over the near to medium term, as the district brings on new facilities and personnel to meet projected student growth.

The district's workforce costs are quite manageable given the lack of group/collective bargaining and short employment contracts. Additionally, carrying costs for debt service, pension and other post-employment benefits (OPEB) are a moderate 17% of fiscal 2015 governmental spending. Carrying costs benefit from state support for the vast majority of school district pension and OPEB costs. Fitch expects carrying costs to increase slightly with anticipated new debt issuance in the coming years.

Long-Term Liability Burden

The district's long-term liability burden is moderate at 16% of personal income, with about 56% comprised of the district's outstanding debt load. Capital needs to accommodate future student growth indicate that debt levels will likely climb in future years; the pace of amortization is average at 42% in 10 years.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 83.3% of liabilities (using an 8% return assumption) as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. 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 district's, 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% salary contribution requirement, effective in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

Fitch expects the district to retain a high level of financial flexibility during an economic downturn given its sound expenditure flexibility and healthy reserves.

The district's fiscal cushion has remained very strong over a period of several years of somewhat uneven operating performance. Unrestricted general fund reserves oscillated between 33% and 50% of spending from fiscal years 2009 to 2015. During this period, budgets were pressured by increased operating costs associated with the opening of new schools, as well as state funding cuts. Management anticipates a modest general fund operating loss for fiscal 2016 (about $1 million or 1% of spending) reflecting start-up costs for new schools, including additional staff, and a 2% pay increase. Fitch expects the district's reserves will remain well above its 20% minimum fund balance policy.

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 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=1010276

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010276

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
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
George Stimola
Associate Director
+1-212-908-0500
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
George Stimola
Associate Director
+1-212-908-0500
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com