Fitch Affirms Hurst-Euless-Bedford ISD, TX ULT GO Bonds at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA+' rating on $274 million Hurst-Euless-Bedford Independent School District, Texas (the district) unlimited tax bonds.

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 property tax levied against all taxable property within the district and are further backed by the Texas Permanent School Fund bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA+' IDR reflects the district's diverse economic resource base and healthy overall financial profile. The district's strong operating profile is supported by a sound level of expenditure flexibility, expectations for solid revenue growth, and exceptionally strong gap-closing capacity. Stable enrollment performance is expected to require manageable levels of capital spending in the near term. As a result, Fitch expects the district's modest long-term liability burden to remain low.

Economic Resource Base

The district is located along a key transit corridor in the heart of the broad, diverse, and fundamentally strong Dallas-Fort Worth (DFW) metro economy. Area job growth continues to outpace the nation. The district's residential base is complemented by industrial and commercial sectors that include aviation (the corporate headquarters of American Airlines and helicopter manufacturer Bell Helicopter), healthcare, and retail (Northeast Mall). Taxable assessed valuation (TAV) grew by a moderate 7.3% for fiscal 2015, reflecting a strengthening real estate market.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. The natural pace of revenue growth is expected to remain solid, given historical performance and ongoing enrollment growth. The district's legal ability to raise revenues is limited.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given limited enrollment-driven capital needs. The district retains solid spending flexibility with manageable carrying costs, reflecting state support for retiree benefits.

Long-Term Liability Burden: 'aaa' factor assessment

The combined burden of long-term debt and pension liabilities represents a modest share of resident personal income. Fitch expects debt levels to remain low, given the district's minimal immediate debt plans. Retiree benefit obligations do not represent a significant burden on resident income.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's ample reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a solid level of spending flexibility in the event of revenue declines.

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.

CREDIT PROFILE

The district is located between Fort Worth and Dallas in Tarrant County and includes the primarily residential cities of Hurst, Euless, and Bedford within its 47-square mile boundaries, totaling approximately 147,800 residents. District enrollment of approximately 22,000 students has registered consistently modest growth over the last decade. District campuses, including 20 elementary schools, five middle schools, two high schools, are adequate to meet near-term growth expectations.

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 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 41% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. Enrollment, which is a key component of state funding, has grown over the last decade, generating solid revenue growth. The district's demographer projects further enrollment gains in the intermediate term, driving expectations for additional state aid. Fitch's expectations for revenue growth are based on the anticipated additional enrollment, given the district's minimal revenue-raising ability.

District revenues have grown at a compounded annual growth rate of 2.8% over the last decade, exceeding national CPI but below GDP. Fitch expects the natural pace of district revenue growth in future years to remain in line with historical performance, given current enrollment expectations.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is $1.04 per $100 TAV and would need voter authorization to be increased to the statutory limit of $1.17. Management reports no plans currently to do so. The district levies a separate, unlimited debt service tax rate of $0.34 per $100 TAV, 67% of the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

The district spends the majority of its operating budget on instruction, and also funds a considerable share of capital needs through a separate capital projects fund to which it transfers surplus general fund revenues annually.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given that the district is relatively mature and has no major enrollment pressure and related capital needs.

The district's solid expenditure flexibility reflects substantial control over workforce costs and manageable carrying costs for debt service, pension and other post-employment benefits (OPEB) of 15.6% of fiscal 2015 governmental spending. Carrying costs benefit from state support for all but a small percentage of district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is low at 7.8% of resident personal income and is comprised almost entirely of the district's outstanding debt, which amortizes at a moderate pace of nearly 60% in 10 years. The district's manageable capital needs suggest debt levels will likely remain modest in future 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 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 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 in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has maintained their financial cushion at robust levels despite recessionary pressures and state funding cuts, garnering an 'aaa' assessment. Fiscal 2015 available reserves were $79.4 million, or a high 48.7% of spending. Fitch believes the district would use its considerable expenditure flexibility to maintain a satisfactory level of financial flexibility in a moderate economic decline scenario.

The district has demonstrated a strong commitment to maintaining financial flexibility. Budgeting is conservative, and management has been proactive in using excess revenues to limit debt issuance and boost reserves. Fund balances have increased significantly in years of recovery despite state funding volatility. The district projects a surplus of $8.6 million for fiscal 2016, further bolstering reserves, and has no plans to materially reduce fund balance in the near term.

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/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst
George Stimola
Associate Director
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
George Stimola
Associate Director
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com