Fitch Affirms Calallen ISD, TX ULT Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the rating on Calallen Independent School District, TX's (the district) outstanding $49.7 million unlimited tax (ULT) bonds at 'AA-'.

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, and are further backed by the Texas Permanent School Fund (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 sound overall financial profile and concentrated economic base. The district's strong operating profile is supported by solid expenditure flexibility and strong gap-closing capacity. Flat enrollment performance is mitigated by continued taxable assessed value (TAV) growth and supports Fitch's expectation for solid revenue growth going forward.

Economic Resource Base

Calallen ISD (the district) is a small, 30-square mile district located within the northwestern portion of Corpus Christi (IDR rated 'AA'/Stable Outlook), the eighth largest city in Texas. The district serves a population of just over 21,200 people with 2015-2016 enrollment at about 4,000 students.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. Fitch expects that modest enrollment projections will temper revenue growth going forward. The district's legal ability to raise revenues is limited, as the current operating tax rate is at the legal limit.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line to marginally above that of revenues, given limited near-term borrowing needs. The district's low carrying costs reflect state support for retiree benefits, bolstering spending flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The combined burden of long-term debt and pension liabilities absorbs a moderate share of local personal income. Fitch expects debt levels to remain manageable, given the district's minimal borrowing needs. Retiree benefit obligations do not represent a significant burden on the district.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's strong reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a significant 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 currently strong expenditure flexibility and sound reserve levels, which Fitch expects it to maintain through a typical economic cycle.

CREDIT PROFILE

The district's tax base is notably concentrated in the oil and petrochemical industry. This concentration is somewhat mitigated by a more diversified employment base anchored by military, education, government and health services. Unemployment is low, with above-average measures of income and wealth.

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 52% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments. Enrollment has nominally decreased over the last decade and the district anticipates minimal growth in the next few years.

District revenues have grown at a compounded annual growth rate of 3.1% over the last decade, modestly above national CPI and below GDP growth. Fitch anticipates the natural pace of district revenue growth to be modest in future years, given projections for flat enrollment. Fitch's expectations for strong state revenue growth somewhat offset concerns related to potentially flat changes in intermediate term district enrollment figures, as state aid is tied to overall state revenue performance and not just to matriculation.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is at the statutory cap of $1.17 per $100 TAV. The district levied a separate, unlimited debt service tax rate of $0.1885 per $100 TAV for fiscal 2015, well below the statutory cap of $0.50 per $100 TAV, allowing for ample flexibility in regards to new debt issuances.

Expenditure Framework

The district spends the vast majority of its operating budget on instruction. The district also funds some annual capital outlay from general fund revenues for maintenance and repairs on facilities.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given continued tax base growth and modest capital needs.

The district's ample expenditure flexibility reflects control over workforce costs and low carrying costs for debt service, pension and other post-employment benefits (OPEB) of 9.1% of fiscal 2015 governmental spending (net of state support for debt service). Carrying costs also benefit from state-wide support for school district pension and OPEB obligations.

Long-Term Liability Burden

The district's long-term liability burden is moderate at about 10.6% of personal income. The debt is comprised of about equal parts overlapping debt and the district's slow-amortizing outstanding debt load. The district's upcoming capital needs suggest that debt levels may increase but will remain manageable in future years, barring any major new borrowing by overlapping entities.

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 TRS 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 fiscal year 2015 for certain districts. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has maintained a financial cushion at robust levels despite recessionary pressures and state funding cuts, garnering an 'aaa' assessment. 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 supporting financial flexibility. Budgeting is conservative and management has been proactive in using excess revenues to limit debt issuance and boost reserves.

Fiscal 2015 concluded with a $1.4 million surplus, equal to 4.4% of spending. Conservative budgeting produced positive budgetary variances, with revenues exceeding budgeted amounts by approximately $1.2 million and expenditures coming in at approximately $72,000 below budget. Unrestricted fund balance for the year was approximately $9.5 million or about 29% of spending.

Fiscal 2016 revenues preliminarily exceed expenditures. Nevertheless, the district projects a slight drawdown in fund balance attributable to a $1.2 million appropriation for capital improvements.

The fiscal 2017 budget includes an appropriation of approximately $1 million in reserves for capital improvements. A budgeted deficit assumes a fund balance drawdown that also reflects salary increases of approximately 4%.

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
Natalie Smith
Analyst
+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
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+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
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com