Fitch Rates Longview ISD, TX ULT Bonds 'AAA' TX PSF/Underlying 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'AA' underlying rating to the following Longview Independent School District, Texas unlimited tax bonds (ULTs):

--$45.4 million unlimited tax refunding bonds, series 2016A.

Additionally, Fitch has affirmed the district's $219.5 million in outstanding ULTs and Long-Term Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

The bonds are expected to price via negotiation the week of Oct. 10. Proceeds will be used to refund debt for savings.

SECURITY

The bonds are payable from an unlimited annual property tax levy 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 and unlimited tax bond rating reflects the district's modest long-term liability burden and superior operating performance, aided by ample expenditure flexibility and prudent revenue budgeting.

Economic Resource Base

The district is located roughly 120 miles east of Dallas and 60 miles west of Shreveport, LA and served by major transportation corridors. The city of Longview (IDR rated 'AA' by Fitch) serves as the population center of the district and the county seat of Gregg County. Population and enrollment in the district have grown modestly, totaling 61,331 and 8,672, respectively.

Revenue Framework: 'a' factor assessment

The district has realized moderate revenue growth over the past 10 years at a rate in excess of inflation. It does not have the ability to independently raise revenues, but Fitch believes revenue growth prospects remain solid based on enrollment and demographic trends.

Expenditure Framework: 'aa' factor assessment

Fitch expects the pace of spending growth to be generally in line with revenue gains. Expenditure flexibility is derived from management's control over workforce costs and moderate carrying costs.

Long-Term Liability Burden: 'aaa' factor assessment

The liability burden is modest, comprised primarily of direct debt, and should remain low given the district's reliance on pay-go for its limited capital needs.

Operating Performance: 'aaa' factor assessment

Fitch expects the district's financial flexibility to remain solid through a moderate economic downturn based on its ample financial reserves and solid expenditure flexibility and given low expected revenue volatility.

RATING SENSITIVITIES

Shift in Fundamentals: The IDR and ULT bond ratings are sensitive to material change in the district's strong expenditure flexibility and prudent budgeting, which Fitch expects the district to maintain throughout economic cycles.

CREDIT PROFILE

The district is located in the Longview metropolitan statistical area, which is an industrial, retail, and distribution center in East Texas. The area economy has traditionally served as a center for oil and natural gas operations, but has become increasingly diversified with the growth of education, health care, manufacturing, transportation/distribution, government and retail trade as major employment sectors. Income levels of district residents are below state and national averages.

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 that varies from district to district. In fiscal 2016, the district received 66% of its total general fund revenues from property taxes, followed by state aid (32%).The district conservatively budgets average daily attendance (ADA) at a level equal to 97.5% of the previous year's ADA.

The district's general fund revenues grew by a 10-year CAGR of 2.6%, above the pace of inflation but below the growth rate of U.S. GDP. The pace of growth, which is driven in part by enrollment, may flatten or decline modestly in the near term due to contraction of the district's energy sector but Fitch expects medium term revenue growth will rebound to historical levels. An open enrollment policy draws students from smaller districts in the area and there is limited competition for enrollment in the form of one small charter school.

Longview ISD's maintenance and operations (M&O) tax rate of $1.04 per $100 of taxable assessed valuation (TAV) is at the statutory cap above which voter approval is required, leaving it with no independent revenue-raising flexibility. The district does not have plans to seek voter approval of an increase in its M&O tax rate.

Expenditure Framework

Instructional costs account for 56% of fiscal 2015 operating expenditures, which Fitch expects to grow in line with revenues, along with the district's other operations costs.

The district's pace of expenditure growth is expected to be generally in line with revenue growth given its modestly growing enrollment base and associated lack of growth pressures.

The district's expenditure flexibility is derived from discretion over its workforce costs and moderate carrying costs. The district's carrying costs are elevated but still within the moderate range at 18.4% of fiscal 2015 spending, comprised primarily of debt service. Fitch expects carrying costs to remain moderate based on the district's limited debt plans and the assumed ongoing state funding for the vast majority of employer pension and OPEB contributions. The district's 10-year principal amortization is below average at 36%.

Long-Term Liability Burden

The district's long-term liability burden is modest at 9.1% of personal income and is comprised mostly of direct debt. The district's remaining capital needs are modest and will be funded on a pay-as-you-go basis, leading Fitch to expect the liability burden to remain modest.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68 reporting, TRS's 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.

Operating Performance

Fitch expects Longview ISD to retain ample financial flexibility in a moderate economic downturn based on its strong expenditure flexibility and robust financial cushion. Fitch's analytical sensitivity tool (FAST) suggests that the district's operating revenues would be impacted only modestly, resulting in manageable net losses in an unaddressed scenario. Including the planned use of $25 million in fiscal 2017 for the district's new pre-K & kindergarten school would still result in financial reserves, estimated at around 29% of spending, well above that required for a 'aaa' financial resiliency assessment.

The district accumulated large reserves during the most recent economic recovery despite cuts in state aid revenues. The fiscal 2015 audit posted a modest $873,000 net general fund operating surplus (1.3% of spending) despite pay-go capital outlays of $3.1 million or 4.6% of spending. The resulting unrestricted general fund balance increased to $55.3 million, equal to a high 82.3% of spending. A modest net operating deficit of $500,000 (1% of spending) is projected for fiscal 2016. The fiscal 2017 budget includes a net operating deficit of $4.6 million (5.2% of spending) based on a projected 2.5% decline in ADA. Current ADA reflects a more modest decline of 1.6%, leading Fitch to expect better than budgeted results.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012705

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012705

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: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Leslie Cook, +1-512-215-3740
Associate Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Leslie Cook, +1-512-215-3740
Associate Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com