Fitch Upgrades Del Valle ISD (TX)'s ULT Bonds to 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Del Valle Independent School District (the district) ratings to 'AA' from 'AA-':

--$2.5 million unlimited tax (ULT) bonds, series 2007

--Long-Term Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

The upgrade reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The 'AA' IDR is driven by the district's proximity to the broad Austin economic resource base and solid overall financial position. The district's operating profile is characterized by solid expenditure flexibility, expectations for strong revenue growth, and adequate gap-closing capacity. Steadily growing enrollment is expected to require additional capital spending, funded mainly with voter-authorized but unissued debt, in the near term.

Economic Resource Base

The 170-square mile district is located in Travis County, with approximately half of the district's population residing in the city of Austin and the remainder in unincorporated areas southeast of Austin. Affordable land, new transportation routes and very close proximity to downtown Austin and the metro employment base spurred residential development in the district in recent years, which in turn fueled enrollment growth.

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 strong, given historical performance and continued 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 capital needs and current enrollment trends. The district regularly budgets for pay-go capital spending, providing expenditure flexibility. The district's very low carrying costs reflect state support for retiree benefits, bolstering spending flexibility, while moderate debt amortization tempers flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The combined burden of long-term debt and pension liabilities is moderate as a share of local personal income. Fitch expects debt levels to remain stable in the near-term, given the district's modest enrollment growth and associated new money debt plans. Retiree benefit obligations do not represent a significant burden.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's ample reserve funding levels and adequate 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 expenditure flexibility and healthy reserve levels, which have indicated rating stability.

Improving Demographics and Debt: A reduction of long-term liabilities as a share of personal income would be a credit positive. Additionally, the district's ability to grow revenues and keep expenditures in-line during projected enrollment increases would positively impact the rating.

CREDIT PROFILE

Serving a population of roughly 66,000, the district's enrollment of approximately 11,600 is expected to maintain its recent growth rate between 1% and 3% annually in recent years and is expected to maintain that pace in the near- to medium-term. In-progress housing developments will increase enrollment growth rates in the longer-term.

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 57% of fiscal 2015 district revenues came from state aid, with the remainder generated largely by 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 grown steadily recently and is projected to continue at 1-2% annually over the near term.

District revenues have grown at a compounded annual growth rate of 7.3% over the last decade, performing well above both national CPI and GDP growth. Enrollment grew at a compounded annual growth rate of 4.26% over the same period, accounting for much of the growth above the level of GDP growth. Fitch expects the natural pace of district revenue growth in future years to lag historical performance, given that enrollment is expected to grow at a more modest pace and revenues are driven by enrollment.

The district's independent legal ability to raise revenues is limited, as the fiscal 2015 maintenance and operations (M&O) tax rate is at the legal limit of $1.04 per $100 TAV and would need voter authorization to be raised to the statutory limit of $1.17. The district levies a separate unlimited debt service tax rate of $0.43 per $100 TAV, below the statutory cap of $0.50 per $100 TAV for new debt issuances.

Expenditure Framework

The district spends the majority of its operating budget on instruction, consistent with most school districts.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given current expenditure trends, capital needs and the enrollment-based state funding formula.

The district's solid expenditure flexibility reflects a large degree of control over workforce costs and affordable carrying costs for debt service, pension and other post-employment benefits (OPEB) of 13.8% of fiscal 2015 governmental spending. Carrying costs benefit from state support for debt service, district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is moderate at 15.8% of total personal income, and is comprised mainly of the district's moderately amortizing debt. Capital needs are well-identified and are funded mainly through debt. The district possesses more than $60 million of authorized but unissued debt, which they anticipate utilizing in-part in fiscal 2017 for upgrades and renovations to the high school campus.

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's financial cushion remains well above the level Fitch views as necessary for a 'aaa' assessment and is expected to remain strong under a moderate economic stress. Fitch believes the district would use a combination of its solid expenditure flexibility, conservative budgeting and very strong reserves to maintain a healthy reserve safety margin in a moderate economic decline scenario.

District reserves remained high during the most recent economic recession and subsequently increased. The district consistently budgets conservatively on both the revenue and expenditure sides. Fiscal 2016 budget originally contained a $10 million draw on fund balance, but the district expects to add roughly $400,000 to fund balance instead. A combination of favorable revenue figures, along with lower salary and benefit expenditures contributed to the positive results. Fiscal 2017 budgeted expenditures are nearly 3% higher than the year prior, mainly due to a 3% midpoint raise, a practice this district has implemented for five consecutive years.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011469

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011469

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
Jeremy Stull
Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nicole Wood
Director
+1-212-908-0735
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
Jeremy Stull
Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nicole Wood
Director
+1-212-908-0735
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