AUSTIN, Texas--(BUSINESS WIRE)--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.
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.
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.
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.
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.
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.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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