Fitch Affirms Laredo ISD, TX ULT GOs at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Laredo Independent School District, Texas (the district) ratings at 'AA-':

--$241.2 million in series 2014, 2013, 2006 and 2001 Unlimited Tax School Building Bonds and series 2015, 2014, 2010 and 2011 unlimited tax refunding (ULT) bonds.

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

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 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 declining economic resource base and mixed financial profile. The district's strong operating profile is supported by solid expenditure flexibility and extremely strong gap-closing capacity, but compromised by expectations for very modest revenue growth. Declining enrollment negates the necessity of additional capital spending in the near term. As a result, the district's elevated long-term liability burden is expected to decline in future years.

Economic Resource Base

The district encompasses the majority of the city of Laredo, TX (GO debt rated 'AA' by Fitch). Located on the Rio Grande, the border city serves as the principal port of entry into Mexico and the largest inland port in the U.S. The district serves an area over 13 square miles and includes 33 schools.

Revenue Framework: 'bbb' factor assessment

Revenue growth has been stagnant, averaging at a level below that of the national rate of inflation and GDP for the 10 years through 2014. Given the state funding framework, future revenue growth will likely be minimal as the district experiences enrollment declines. The district's independent legal ability to raise revenues is limited by state law.

Expenditure Framework: 'aa' factor assessment

Spending growth is expected to be above revenue growth, given decreasing enrollment and stagnant local tax growth. The low fixed-cost burden for debt service and retiree benefits reflects state support for long-term liabilities. There are no contractual obligations.

Long-Term Liability Burden: 'aa' factor assessment

The district's long-term liability burden is elevated but still in the moderate range in relation to the local resource base. This liability is expected to decrease slightly in the intermediate term, given rapid debt amortization and the absence of additional capital needs.

Operating Performance: 'aaa' factor assessment

The district has a strong history of operating surpluses; reserves are robust and provide ample cushion in the case of an economic downturn.

RATING SENSITIVITIES

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

Revenue Stability: The current rating incorporates Fitch's expectation that revenues will grow in-line with inflation, even if the district realizes currently projected enrollment declines or a notable weakening of its profile due to risks posed by the limited economy.

CREDIT PROFILE

Over the past decade, Laredo has experienced substantial growth in population. However, this is not reflected in the enrollment statistics; the district's current enrollment has steadily decreased over the past two years.

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 78% of district revenues come from state aid, with the remainder generated by property tax revenues. The high level of state support is a function of the district's lower property wealth levels. State aid is provided on a per-pupil basis tied to enrollment, which has decreased in recent years. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments.

District revenues have grown at a compounded annual growth rate of 1.9% over the last decade, performing below national CPI and GDP growth. Fitch expects the natural pace of district revenue growth in future years to mirror historical performance, given expectations for declining enrollment in future years.

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 raised to the statutory limit of $1.17. The district levies a separate, unlimited debt service tax rate of $0.37 per $100 TAV, following an increase from $0.23 the previous year. The debt service tax rate remains well below the cap of $0.50 per $100 TAV. The district currently has no plans to increase tax rates.

Expenditure Framework

The district spends just over half 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 out-pace revenue growth, given decreased enrollment and stagnant tax base growth in the area.

The district's solid expenditure flexibility reflects control over workforce costs and solid carrying costs for debt service, pension and other post-employment benefits (OPEB), at about 4.1% of fiscal 2015 governmental spending, net state support. Carrying costs benefit from state-wide support for school district pension and OPEB.

Long-Term Liability Burden

The district's long-term liability burden is elevated but still in the moderate range at approximately 21% of personal income, and is made up predominantly by the district's quickly-amortizing outstanding debt load. The district's debt levels will likely decline in future years, due to rapid amortization and a lack of capital needs. The proportionate share of the system's net pension liability paid by the district is minimal.

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 fiscal year 2015 for certain districts.

Operating Performance

Despite recessionary pressures and state funding cuts, the district has built its financial cushion to robust levels, well above the district's $40 million policy. With the ability to maintain superior reserves throughout an economic cycle, the district has garnered an 'aaa' assessment for this key rating factor. Fitch believes the district would use a combination of its solid expenditure flexibility and strong reserves to maintain a satisfactory reserve safety margin in a moderate economic downturn scenario.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles.

Fiscal 2015 revenues outpaced expenditures by approximately $7.5 million or 3.9% of general fund spending. The year ended with an unrestricted fund balance of approximately $79 million equal to just below 37% of general fund expenditures.

Fiscal 2016 unaudited results indicate revenues outpaced expenditures an estimated $5 million dollars. However, following transfers out for the construction of a new administrative building, fund balance decreased to $66.3 million dollars. The fund balance remains well above the district's $40 million reserve policy.

The proposed budget for fiscal 2016-2017 is balanced. The district does not anticipate any change in fund balance.

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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011487

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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
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
Natalie Smith
Analyst
+1-212-908-0500
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