Fitch Rates El Paso County Community College District, TX's Revs 'A+'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the $120 million of El Paso County Community College District (EPCC) combined fee revenue improvement bonds, series 2016. In addition, Fitch has affirmed the 'A+' rating on $43.3 million of EPCC combined fee revenue building and refunding bonds, series 2007.

The Rating Outlook is revised to Stable from Positive.

Proceeds will fund capital improvements and pay costs of issuance. The bonds are expected to sell via negotiation the week of Oct. 24.

SECURITY

The combined fee revenue bonds are secured by a pledge of and lien on pledged tuition fees (up to 25% under state law), a mandatory general use fee charged per semester credit hour, and interest earnings.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: The 'A+' rating is based on EPCC's consistently positive operating results, healthy reserves and demonstrated ability to manage expenses through periods of countercyclical enrollment pressure or pressured state funding. Additionally, EPCC's taxing capacity to fund O&M provides some additional financial flexibility.

NEW DEBT DRIVES STABLE OUTLOOK: New money borrowing exceeds Fitch's near-term debt expectations at prior review; the higher revenue-supported debt level is more consistent with the current rating. EPCC is expanding and renovating projects across its campuses to accommodate expected population and enrollment growth.

MARKET POSITION REMAINS SOUND: EPCC serves El Paso County (certificates of obligation rated 'AA') and Hudspeth County. Quality and student outcomes are solid. Enrollment has stabilized at manageable levels, despite good local economic performance, and is expected to grow over the near term.

MANAGEABLE DEBT BURDEN: EPCC maintains a moderate pro forma debt burden and a conservative pro forma debt structure. Legal coverage from pledged revenues is also sound, expected to remain at least 2x or better. The district has only revenue-supported debt, and there are no plans for additional revenue bonds.

RATING SENSITIVITIES

ENROLLMENT: Material declines in enrollment at El Paso County Community College District (EPCC) could pressure pledged revenues if not offset by tuition and fee adjustments.

BALANCED OPERATIONS: The Stable Outlook assumes that EPCC's operating results remain strong, and that it will manage effectively through enrollment and state funding cycles. A trend of deficit operating results could lead to negative rating action.

CREDIT PROFILE

Established in 1969, EPCC is governed by an elected seven-member board of trustees and currently has five campuses located throughout El Paso County. The district offers over 160 associate degree programs and various certificate and non-credit/workforce training programs. EPCC is fully accredited by the Southern Association of Colleges and Schools - Commission on Colleges.

PLAN OF FINANCE AND MASTER PLAN

Series 2016 improvement bond proceeds will fund approximately $105 million of capital projects focused on renovation and expansion of EPCC's five campuses in anticipation of enrollment growth over the next five to 10 years. At the same time, EPCC intends to refinance its outstanding revenue bonds with a bank placement. In that transaction, EPCC will also pay down $10 million of debt from excess reserves.

The series 2016 improvement bonds will cover two of three phases in EPCC's 2025 master plan, which was approved by its board in December 2015. EPCC expects to fund the remaining phase of the master plan around 2020 with general obligation debt, subject to voter approval. Projects will focus on renovation, deferred maintenance, workforce training facilities, and expansion of EPCC's presence at nearby Fort Bliss, one of the U.S. Army's largest installations.

SOUND FINANCIAL POSITION

EPCC has a track record of consistent positive operating results, with operating margins averaging 4.6% over the past five fiscal years. These results demonstrate strong financial management through a period of countercyclical enrollment decline and pressured state funding. Good revenue diversity and expenditure flexibility help the district maintain positive operations despite stress in an individual revenue stream.

Grants and contracts (37%) are EPCC's largest revenue source, largely reflecting federal student aid. Net tuition and fees account for about 11% of operating revenue. EPCC has rate-setting authority; it has demonstrated its ability and willingness to raise rates in response to enrollment declines and to fund capital needs. Local property taxes account for 27% of operating revenues. Revenues are supported by a growing and diversified economy with market value over $42 billion. Flexibility to raise additional tax revenues for operations and maintenance is limited by a local cap of $0.15 per $100 of taxable assessed value, versus EPCC's current rate of $0.1349. EPCC has no tax-supported debt.

Consistently positive operations have helped the district to build its financial resources. Available funds (cash and investments less certain restricted net assets) have grown 38% from $57.1 million as of Aug. 31, 2011 to $78.7 million as of Aug. 31, 2015, equal to an adequate 46% of expenses and a strong 154% of debt. Including the series 2016 improvement bonds and refunding, available funds equal approximately 50% of pro forma debt, which is acceptable for the current rating level.

SOUND MARKET POSITION

EPCC is the sole junior college provider in its service area of El Paso and Hudspeth County. The district is among the 10 largest in the state, with unduplicated headcount enrollment of approximately 30,000 in fall 2016. Enrollment has stabilized after several years of countercyclical enrollment declines driven by good economic performance. The district expects to see material enrollment growth over the next five to 10 years based on regional population growth, dual-credit expansion and initiatives to improve college-going rates. Quality and student outcomes are solid. Despite regular tuition and fee increases, EPCC remains affordable relative to federal financial aid grant levels and to local four-year alternatives.

MANAGEABLE DEBT BURDEN

EPCC's pro forma debt burden remains manageable due to substantial savings from the partial pay-down and refinancing of outstanding debt. Pro forma maximum annual debt service (MADS) will increase to about $9.3 million from about $7 million previously, offset by an increase in pledged revenue from the general use fee assessed per credit hour to every student. The debt structure will remain conservative, with all fixed-rate debt amortizing over 25 years with level debt service. Pro forma MADS as a percentage of operating revenues is moderate at 5.1%.

Pledged revenues totaled $20.4 million in fiscal 2016 (unaudited), sufficient to cover pro forma MADS by a solid 2x. In practice, the district treats one component of pledged revenues, the general use fee charged per credit hour, like a dedicated fee set aside for debt service. This fee alone generated $8 million in fiscal 2016 (unaudited); it would generate about $10.7 million per year at current enrollment levels due to a recent fee increase, enough to cover pro forma MADS by about 1.2x before including other pledged revenues. Fitch considers EPCC's ability to cover the additional debt service from existing pledged revenues a credit positive, as the district does not need enrollment growth to meet its debt service obligations. EPCC has no plans for additional revenue-supported debt.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

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Fitch Ratings
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Associate Director
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
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Director
+1-512-215-3739
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com