NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Schertz-Cibolo-Universal City Independent School District, Texas (the district) outstanding bonds to 'AA' from 'AA-':
-- $292 million unlimited tax bonds (non-accreted basis).
Fitch has also upgraded the district's Issuer Default Rating (IDR) to 'AA' from 'AA-'.
The Rating Outlook is Stable.
The 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 to 'AA' is based on an application of Fitch's revised criteria for U.S. state and local governments, released April 18, 2016. The rating reflects the district's strong operating performance, with built-in cost controls and strong reserve levels. The rating incorporates the expectation of increased long-term liabilities in the near term as the district constructs necessary facilities, but Fitch expects the combined burden of debt and pensions to remain moderate. Residential development will continue to drive robust enrollment growth.
Economic Resource Base
Serving a population of roughly 76,000, the district's enrollment of approximately 15,400 experienced rapid growth over the past decade, having more than doubled since 2005. The district continues to see new home construction as a result of its relatively affordable land and close proximity to San Antonio.
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. The district regularly budgets for pay-go capital spending, providing expenditure flexibility. The district's average carrying costs reflect state support for retiree benefits and bolster spending flexibility, while slow debt amortization tempers this 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 increase in the near term, given the district's enrollment projections and associated 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.
Managing growth: The rating is sensitive to the district's ability to adequately manage ongoing strong enrollment growth and the borrowing associated with new facility construction. A major increase in debt coupled with expenses greatly outpacing revenue growth could pressure the rating.
The district, 25 miles northeast of downtown San Antonio, serves the cities of Schertz, Cibolo, Universal City and a small portion of Marion. The district benefits from its proximity to the broad economic base of the San Antonio metropolitan area. Within the district, manufacturing, retail and distribution are key employers. Randolph Air Force Base is located adjacent to the district, and the military remains an important area employer. Recent strong taxable assessed value (TAV) growth has been aided by the addition of an Amazon distribution center, which is now the largest taxpayer (2% of fiscal 2016 TAV). There is no concentration among the top 10 taxpayers, together totaling roughly 8.8% of TAV.
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 55% 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. The district reports current enrollment at roughly 15,400, which is a greater than 4% increase from the year prior. Enrollment projections for the next five years estimate growth between 3% and 4% each year.
District revenues have grown at a compounded annual growth rate of greater than 8% over the last decade, performing well above both national CPI and GDP growth. Fitch expects continued enrollment growth to continue to drive healthy revenue gains above these national economic metrics.
The district's independent legal ability to raise revenues is limited. An increase to the fiscal 2017 maintenance and operations (M&O) tax rate of $1.04 per $100 TAV to the statutory ceiling of $1.17 would require voter authorization, which the district is contemplating. The district levies a separate debt service tax rate of $0.43 per $100 TAV, below the statutory cap of $0.50 per $100 TAV for new debt issuances.
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 12.1% of fiscal 2015 governmental spending. Carrying costs benefit from state support for debt service, district pension and OPEB costs. District budgets include a number of "fast-growth" teaching positions which are funded but remain unfilled until enrollment growth requires the hiring of additional teachers.
Long-Term Liability Burden
The district's long-term liability burden is moderate at roughly 13.1% of total personal income, and is comprised mainly of the district's slowly amortizing debt. Capital needs driven by enrollment are substantial but well-defined in the district's 10-year capital plan. The district is holding a November 2016 bond election for $137 million in authorization for elementary school and high school expansion and replacement as well as technology and bus upgrades. If authorized, the district will issue these bonds in fiscal 2017 and fiscal 2018. With the possible addition of this debt, coupled with slow amortization and expected growth in personal income totals, Fitch expects the district's combined long-term liability to remain moderate. Additional bond elections will be held in 2019 and 2022 for authorization to issue more than $300 million of bonds related to construction and renovation of schools at every grade level.
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 that took effect in fiscal 2015. The proportionate share of the system's net pension liability paid by the district is minimal.
The district's financial cushion remains well above the level Fitch views as necessary for a 'aaa' assessment. 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.
The district consistently budgets conservatively on both the revenue and expenditure sides and expects to add to fund balance to end fiscal 2016. The fiscal 2017 budget is nearly 3% higher than the year prior and is balanced without the use of reserves. The budget includes a 3% midpoint raise for all employees and modest pay-go capital expenditures for technology and other improvements.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
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