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

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) guarantee and an 'AA' underlying rating to the following Lubbock-Cooper Independent School District, Texas unlimited tax (ULT) bonds:

--$42.4 million ULT school building bonds, series 2016.

The bonds are expected to be sold via negotiation the week of August 22nd. Proceeds from the bonds will be used for the construction, acquisition, renovation and equipment of school buildings, purchase of necessary sites for school buildings, and the purchase of new school buses.

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 affirmed the underlying rating on $85.7 million in outstanding ULT obligations and the district's Long-Term Issuer Default Rating (IDR) at 'AA.'

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program. 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' Issuer Default Rating (IDR) and ULT rating reflects the district's strong operating performance while successfully managing rapid enrollment growth. Long-term liabilities are moderate and may increase in the near-term to expand facility capacity, although Fitch believes they will remain only a moderate burden on resources. Strong area residential growth is likely to continue in the mid-term, driving revenue growth through enrollment gains.

Economic Resource Base

The district has an estimated population of 32,000 and serves the southern portion of the city of Lubbock (GO bonds rated 'AA+'/Stable Outlook) and the unincorporated community of Woodrow. Enrollment has more than doubled in the last decade, averaging 7.5% annual growth and reaching a total of roughly 5,800 students in the 2016 academic year. The primarily residential tax base grew at a similar rate over the same time period, although taxable assessed value (TAV) growth has outpaced enrollment growth in recent years with fiscal 2017 certified values marking the third consecutive year of double-digit growth.

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. The district's independent legal ability to raise revenues is limited by state law.

Expenditure Framework: 'aa' factor assessment

District spending has kept pace with revenue growth, reflecting operating costs for new schools and additional teachers and staff. State support for pension and OPEB costs helps keep the fixed-cost burden in moderate territory and expenditure flexibility is solid.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are a moderate burden on resources, partly due to elevated wealth metrics and population growth. Additional debt plans to address capital needs may increase the burden on resources somewhat, but levels are expected to remain in Fitch's moderate range due to expected continued growth in the resource base.

Operating Performance: 'aaa' factor assessment

The district has navigated the robust growth environment through management's commitment to conservative budgeting practices. Reserves would provide adequate cushion in the case of an economic downturn.

RATING SENSITIVITIES

Growth Affordability: The current rating is premised on the district's ongoing ability to manage growth as demonstrated by maintenance of moderate carrying costs and a moderate long-term liability burden.

CREDIT PROFILE

The district benefits from its location near Lubbock, where health care, education, and government comprise the area's largest non-agricultural employment sectors. Largest employers include Texas Tech University (TTU), Covenant Health System, and TTU Health Sciences Center. The area unemployment rate has remained consistently lower than the state and nation.

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).

Property taxes are the district's largest revenue stream, comprising over half of general fund monies; state support accounts for about 40%. The compound annual growth rate (CAGR) of district revenues was robust at 7.9%, well in excess of the U.S. GDP over the 10 years through 2014. Fitch anticipates robust enrollment growth will continue to drive revenue growth in excess of national averages.

The district's M&O tax rate of $1.04 per $100 TAV is $0.13 below the legal limit of $1.17. The district would need voter authorization to raise the rate. The district levies a separate, unlimited debt service tax rate that stands at $0.4987 per $100, just below the AG's new money cap. The rate will likely remain at the cap in order to service this issuance and future authorized issuances. The timing and size of future new money borrowings will be contingent upon tax base growth as the state AG will not approve debt that requires a debt service tax rate in excess of $0.50.

Expenditure Framework

The district's main expenditure item is personnel at about 85% of the budget, common for school districts. Adopted budgets typically include salary increases and additional staff to address growth, as well as some use of operating revenues for one-time spending.

District spending has generally kept pace with revenue growth to accommodate student body growth. This trend is likely to continue barring any changes in district policy.

The district's fixed-cost burden is moderate, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling a moderate 15.9% of 2015 governmental expenditures. Fitch expects the fixed-cost burden to rise slightly as the district issues debt to address capital needs, but to remain moderate given the likelihood of similar growth in the district's budget and strong state support for retiree benefits. Areas of flexibility are primarily instruction, including class sizes, staffing patterns, and teacher salaries.

Long-Term Liability Burden

Inclusive of this issuance the district's total debt and net pension liability of $326 million represents 18.9% of personal income, almost entirely in the form of debt. After the sale, the district will remain with $165.8 million in unissued but authorized debt that voters approved this past May. Fitch will continue to monitor the district's ability to address capital pressures in relation to its tax base and budgetary flexibility as it implements its growth-related capital plan, and expects the debt burden will rise but remain a moderate burden on recourses. Amortization is very slow at 18.5% retired in 10 years, reflecting the rapid growth profile of the district and the state's tax rate restrictions, which weaken the district's long-time liability profile.

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 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. Like all Texas school districts, Lubbock-Cooper ISD 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 that became effective in fiscal 2015. The proportionate share of the system's net pension liability paid by the district is minimal, representing just 0.3% of personal income.

Operating Performance

The district drew down fund balance in fiscals 2013 and 2014 as a result of operating expenditures associated with recently opened campuses. Operating balance was achieved in fiscal 2015 with break-even results, and unrestricted reserves at year-end remained satisfactory at 15% of spending; management reports unaudited results for the year that ended June 30 point to a surplus of $1-$1.5 million due to enrollment coming in higher than expectations. Fitch believes reserves at current levels will provide ample cushion in the case of an economic downturn given the district's solid expenditure flexibility and limited revenue exposure to a downturn.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative, and management has been proactive in regaining operational balance despite spending pressure from robust enrollment growth.

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010440

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Contacts

Primary Analyst
Leslie Cook, +1-512-215-3740
Associate Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Primary Analyst
Leslie Cook, +1-512-215-3740
Associate Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com