Fitch Rates Mansfield ISD, TX's $34.7MM ULT Bonds 'AAA' PSF/'AA+' Underlying; 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 unlimited tax (ULT) bonds for the Mansfield Independent School District, TX:

--$34.715 million ULT refunding bonds, series 2016.

The bonds are expected to price via negotiated sale the week of Oct. 24, 2016 subject to market conditions. Proceeds will be used to refund outstanding obligations for savings.

Additionally, Fitch has affirmed the underlying rating on the district's $764 million in outstanding ULTs and the district's Long-Term Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee 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 underlying ULT bond rating are based on Mansfield ISD's exceptional financial resilience, solid expenditure flexibility and strong growth prospects. The rating incorporates the district's moderate long-term liability burden.

Economic Resource Base

Mansfield ISD is located in the southeastern portion of Tarrant County and is directly connected to nearby Dallas and Fort Worth, the DFW International Airport, and surrounding communities by a robust and expanding transportation network. The city of Mansfield is located for the most part within the district boundaries. A small portion of the district extends into Johnson County and Arlington. The 2015 population is estimated at about 150,000, reflecting continued solid growth. Enrollment has been steady at about 33,000. The district's economic profile is characterized by high income and wealth levels.

Revenue Framework: 'a' factor assessment

Revenue growth prospects are strong, consistent with 10-year trends well in excess of U.S. GDP. Increases in the district's maintenance and operations (M&O) tax rate require voter approval.

Expenditure Framework: 'aa' factor assessment

The district's expenditures are likely to grow at a pace generally in line with revenue growth. The district's solid expenditure flexibility is derived from management of its workforce costs and is not impeded by moderate carrying costs. The majority of employer pension and other post-employment benefit contributions are borne by the state of Texas.

Long-Term Liability Burden: 'aa' factor assessment

Mansfield ISD's long-term liability burden is a moderate 15% of estimated personal income. The district's long-term liability is likely to remain moderate based on expected growth of regional debt at a pace consistent with population and income growth. The district's net pension liability represents a modest portion of its long-term liability burden.

Operating Performance: 'aaa' factor assessment

Fitch expects the district to demonstrate a high level of financial resilience in a moderate economic downturn based on its solid expenditure flexibility supplemented by reserves. The district's healthy financial cushion reflects a history of strong operating performance enabled by conservative budgeting practices.

RATING SENSITIVITIES

Growth Management: The rating is sensitive to the district's ability to continue to successfully manage growth as demonstrated by alignment of its recurring operating spending with revenues, and affordability of debt as reflected in the district's carrying costs and long-term liability burden.

CREDIT PROFILE

Mansfield ISD's taxable assessed valuation (TAV) realized strong 7.5% compound annual average growth (CAGR) for the 10 years ended in fiscal 2014, during which time enrollment grew an average of 4.6% per annum. The district's TAV growth continued at a strong 6.6% annual average clip for fiscal 2014 through 2017, during which time enrollment growth has decelerated due in part to lower enrollment yield per household and higher new home prices. New construction contributed 36% to the 7.7% increase in the district's fiscal 2017 TAV. Comprising most of the district's economic resource base, the city of Mansfield reports over 5,000 single family lots in various stages of development. These, along with multi-family developments are expected to contribute to the district's tax base expansion and enrollment growth over the next five years.

Mansfield's economy is diversified across manufacturing, health and medical services, utility services, distribution, retail, property management, and leisure services. Large employers include Mouser Electronics, Methodist Mansfield Medical Center, SJ Louis Construction of TX, Wal-Mart Super Center and Klein Tools. Significant near term commercial, industrial and medical development and additional transportation improvements bode well for the city's ongoing economic growth.

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). Property taxes contributed 43% of the district's fiscal 2015 general fund revenues and state funding 56%.

Mansfield ISD's revenues realized a 7% CAGR for the 10 years ending fiscal 2014, above the pace of U.S. economic performance for the same period. The growth reflected enrollment trends as well as the district's above-average TAV growth. The district has the ability to capture year-over-year tax base gains due to a one-year lag in state aid adjustments. Fitch anticipates the continuation of strong revenue growth based on local economic expansion and anticipated enrollment growth based on single-family construction plans.

Similar to 93% of Texas school districts, Mansfield ISD's $1.04 per $100 of TAV M&O tax rate is at the statutory ceiling and as such has no independent legal ability to raise revenues. The district has the ability to seek an additional $0.13 M&O rate increase through a tax ratification election, although no immediate plans are in place.

Expenditure Framework

Instructional costs comprise 65% of the district's fiscal 2015 general fund operating expenditures, consistent with spending patterns of other districts in the state.

Fitch expects the natural pace of the district's recurring operational expenditures to grow in line with to marginally above its revenues. The district general fund also includes pay-as-you go spending for selective capital projects and for its fleet and technology expenditures.

The district maintains discretion over its labor costs, contributing to strong expenditure flexibility. Moderate carrying costs, representing 13% of governmental spending, do not pressure the district's operating budget. Fitch expects these to remain moderate based on proportional growth in the district's operations and debt service. The district's 10-year principal amortization is considered somewhat below average at about 40%. The assessment assumes ongoing state funding for the majority of employer pension and OPEB contributions. Mansfield ISD's pension contributions are currently limited to 1.5% of salaries and include pension contributions on the portion of salaries above the statutory maximum (total fiscal 2015 pension contribution of $5.7 million).

Long-Term Liability Burden

Mansfield ISD's $1 billion long-term liability burden is moderate at 15% of estimated personal income and is comprised primarily of debt ($970 million). The district has no debt authorization remaining. Depending on the outcome of facility planning committee underway, the district may seek additional authorization in May 2017. The district retains the independent legal ability to raise its interest and sinking (I&S) tax rate for payment of debt. The district's I&S rate of $0.47 per $100 of TAV and its expanding tax base provide capacity below the state's threshold of $0.50 for capital needs. Fitch expects the district's long-term liability burden to remain moderate, because 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, Mansfield 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.

Operating Performance

Fitch expects Mansfield ISD to demonstrate exceptional financial resilience during a moderate economic downturn given its healthy financial cushion and solid expenditure flexibility.

Mansfield ISD targets a four-month reserve in excess of its three-month minimum policy reserve level through economic cycles and generally maintains structural balance of its recurring operations. To better align financial reporting with its operating cycle, the district changed its fiscal 2016 year end from August to June. This change contributes to an estimated $22 million net surplus as the fiscal year captured only 10 months of expenditures. The district is considering applying up to $15 million of its fiscal 2016 net surplus in fiscal 2017 for projects including a STEM academy and early childhood development center, as well as fleet purchases.

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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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com