AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Grand Prairie Independent School District, TX bonds:
--$52.5 million unlimited tax (ULT) refunding bonds, series 2016A.
The 'AAA' rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
Fitch also assigns an 'AA' underlying rating to the series 2016A ULT refunding bonds and to
$40.59 million of unlimited tax refunding bonds, series 2016B.
Both series of bonds are expected to price the week of Oct. 3, series 2016A via negotiation. Series B will be offered for sale at a competitive bid. Proceeds will be used to refund outstanding debt for savings.
Additionally, Fitch has affirmed the district's $519.3 million in outstanding ULTs and Long-Term Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy. The series 2016A bonds 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' Long-Term IDR and ULT ratings are based on the district's strong financial flexibility, informed by a history of solid revenue growth and consistent operation performance and enabled by solid expenditure controls and a moderate long-term liability burden.
Economic Resource Base
Grand Prairie ISD is a mature district serving nearly 30,000 students and a population of roughly 130,000 in a growing residential and industrial area between Dallas and Fort Worth on Interstate 20. The district's open enrollment policy and wide variety of program offerings correlate to its high 7.5% out-of-district student population and ongoing enrollment growth.
Revenue Framework: 'a' factor assessment
Fitch expects the district's revenue growth to be in line with or above the rate of U.S. GDP and inflation, consistent with its 10-year history. Grand Prairie ISD does not have the independent ability to increase operating revenues.
Expenditure Framework: 'aa' factor assessment
Fitch expects district expenditures will generally grow in line with or marginally above its revenues. Expenditure flexibility is provided primarily through discretion over workforce headcount and costs and is not impeded by moderate carrying costs, representing 13.9% of fiscal 2015 spending; these costs are expected to remain moderate.
Long-Term Liability Burden: 'aa' factor assessment
The district's long-term liability burden, driven primarily by debt, is moderate at 12% of estimated personal income. Fitch anticipates that growth in population and income will keep pace with regional debt needs, contributing to a moderate long-term liability through the medium term. The district's net pension liability is modest.
Operating Performance: 'aaa' factor assessment
Fitch expects the district to maintain a financial cushion consistent with its 'aaa' operating assessment in a moderate economic downturn based on its strong reserve position and solid expenditure flexibility.
RATING SENSITIVITIES
Effective Expenditure Controls: The rating is sensitive to the district's ongoing ability to effectively manage its operations within the constraints imposed by the current revenue framework.
CREDIT PROFILE
Access to major air and ground transportation routes has contributed to the local area's strong wholesale distribution presence. Other dominant economic sectors around Grand Prairie include manufacturing, defense and aerospace. Taxpayer concentration is moderate, with the 10 largest accounting for 9.2% of taxable assessed valuation (TAV). Top taxpayers include retail, distribution and manufacturing concerns. Strong 6.6% average annual TAV growth between fiscal 2014 and 2017 follows four years of modest recessionary declines. Resumption of growth was realized across all property classes.
Fitch expects moderate TAV growth over the medium term based on ongoing transportation improvements, the district's favorable location for distribution and warehousing, and the strength of the regional housing market. New near-term development in the district includes a second IKEA store scheduled to open in 2017 and a HelloFresh Distribution Center. The DFW area continues to outpace the nation in employment, income and population gains.
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). In fiscal 2015, the district received 24% of its revenues from the local property tax, with the bulk of the remainder from state sources.
The district's revenues increased by a compound annual average rate (CAGR) of 5.1% for the 10 years ending in fiscal 2014, above the level of U.S. economic performance for the same period as measured by U.S. GDP. Revenue growth is likely to grow in line with or above U.S. GDP, consistent with regional growth and expected enrollment gains.
Grand Prairie ISD does not retain an ability to independently increase its operating revenues through tax rate adjustments. The district's M&O tax rate was at a $1.04 per $100 of TAV cap between fiscal 2008 and 2015. Voters increased the district's rate to the $1.17 statutory ceiling through a tax ratification election on Nov. 13, 2015 to provide additional funds for teacher pay, facilities, technology, transportation, curriculum and instruction, safety and security. The M&O tax rates of 32 percent of Texas school districts were at the $1.17 ceiling in fiscal 2015.
Expenditure Framework
Instructional costs accounted for 59% of fiscal 2015 operating expenditures, which Fitch expects to increase at a pace in line with to marginally above that of the district's revenue growth (along with the district's other operating costs).
The Grand Prairie ISD fiscal 2017 budget includes expenditures in excess of revenues. The 'aa' assessment assumes successful implementation of the district's expenditure controls to realign spending with natural revenue growth, consistent with the historical pattern of the district's operations.
The district's expenditure flexibility is derived largely from its discretion over headcount and workforce costs. The district's carrying costs were a moderate 13.9% of fiscal 2015 spending, driven almost entirely by district debt. Fitch expects the district's carrying costs to remain moderate based on the expected pace of new debt and overall spending trends. The 10-year principal amortization rate is an average 48%.
Long-Term Liability Burden
Grand Prairie ISD's $760 million long-term liability burden is moderate at 12% of estimated personal income and consists primarily of district debt ($701 million). The district retains $20 million of authorization from its November 2015 bond election which it plans to issue within the current fiscal year. Officials report potential plans to seek additional bond authorization in fiscal 2019. Fitch expects the district's long-term liability burden to remain moderate, as population and income growth are likely to be aligned with additional debt needs.
The district participates in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68 reporting, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 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 that state statute requires districts to assume.
Like all Texas school districts, Grand Prairie 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 district's pension contributions are determined by state statute rather than actuarially and, like other Texas school districts, have historically fallen short of the actuarial level. Recent state reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.
The proportionate share of the system's net pension liability paid by the district is minimal, representing about one-half of 1% of personal income. Grand Prairie ISD's contributions are currently limited to the 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $5.7 million in fiscal 2015).
Operating Performance
Fitch expects Grand Prairie ISD to maintain financial resilience during a moderate economic downturn consistent with its historical operating performance and enabled by solid expenditure flexibility. Reserves are sufficient at this assessment level to allow for a fiscal 2016 estimated $5 million draw for capital and a fiscal 2017 draw for expanded program offerings. The 'aaa' assessment assumes the district's successful implementation of expenditure controls to maintain budgetary balance, as well as ongoing reserve sufficiency. The district's budgetary management profile is characterized by a history of rebuilding reserves through periods of revenue growth. Recent internal control weaknesses have been corrected through financial management changes and implementation of an improved control environment.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's 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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