Fitch Rates Pearland ISD, (TX)'s $40.1 MM Ser. 2016A ULT Rfdg Bonds 'AAA' PSF; 'AA' Underlying

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following Pearland Independent School District, Texas (ISD; the district) bonds:

--$40.055 million unlimited tax (ULT) refunding bonds, series 2016A.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas PSF is available from Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

In addition, Fitch has assigned an underlying rating of 'AA' to the series 2016A bonds.

The Rating Outlook is Stable.

The bonds are expected to be sold on a negotiated basis on or about October 24. Proceeds will be used to refinance a portion of the district's outstanding ULT debt for interest savings.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district.

KEY RATING DRIVERS

The 'AA' Issuer Default Rating (IDR) reflects the district's expanding economic resource base and strong overall financial profile. The district's sound operating profile reflects solid expenditure flexibility, expectations for steady revenue growth, and exceptionally strong gap-closing capacity. Continued increasing enrollment and facility improvements are expected to require additional capital spending in the near term. As a result, the district's long-term liability burden is expected to grow but remain in the moderate range.

Economic Resource Base

The district is located in Brazoria County, serving a 2014 population of approximately 100,340. Enrollment of approximately 21,600 students has increased steadily in recent years, due largely to the growing population in the Houston Metropolitan Area. Taxable assessed value (TAV) has also exhibited steady increases due to high demand for available property. The local economy is anchored by the medical and manufacturing industries.

Revenue Framework: 'a' factor assessment

Revenue growth has been strong, in excess of the national rate of inflation and GDP for the 10 years through 2014. Future revenue gains will likely track enrollment growth given the state funding framework, with the district's independent legal ability to raise revenues limited by state law.

Expenditure Framework: 'aa' factor assessment

Spending growth is expected to trend in line with, to marginally above, the pace of revenue growth. The low fixed-cost burden for debt service and retiree benefits reflects state-support for long-term liabilities. Individual, short-term employee contracts enhance the district's spending flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The district's long-term liability burden is moderate in relation to the local resource base. This liability is expected to increase with additional borrowing plans but should remain manageable.

Operating Performance: 'aaa' factor assessment

The district has a strong history of operating surpluses and healthy reserves; these features, combined with budget flexibility, demonstrate significant financial resiliency.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility and robust reserve levels, which Fitch expects it to maintain through a typical economic cycle.

CREDIT PROFILE

Pearland ISD serves most of the city of Pearland, the city of Brookside Village, and unincorporated areas in Brazoria County. The district consists of a total of 23 campuses, including four high schools, four junior high schools, four middle schools and 11 elementary schools. Enrollment in 2016-17 totals 21,563 students and has registered annual increases averaging around 2.5% over the past five years.

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 majority of districts are funded using a targeted 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 district operating revenues come from state aid, with the remainder generated by local property tax revenues. The moderate level of state support is a function of the district's above average property wealth levels. State aid is provided on a per-pupil basis tied to enrollment, which has increased in recent years. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments.

District revenues have grown at a compounded annual growth rate of about 6% over the last decade, performing significantly higher than national CPI and GDP growth. Fitch expects the natural pace of district revenue growth in future years to be slightly lower than historical performance, given current enrollment trends and expectations for district build out. The district's most recent demographic study (fall 2015) suggests the district will achieve build-out in the 2025-2026 school year with an enrollment of roughly 23,000 students.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate of $1.04 per $100 TAV would need voter authorization to be increased to the statutory limit of $1.17. Management reports no current plans to do so. The district levies a separate unlimited debt service tax rate of $0.3756 per $100 TAV, well below the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

The district spends a significant amount of its operating budget on instruction. The district also funds some annual capital outlay from general fund revenues for maintenance and repairs on facilities.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given expected moderate enrollment growth and upcoming capital needs.

The district's solid expenditure flexibility reflects substantial control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB) of approximately 11% of fiscal 2015 governmental spending(net of state debt service support). Carrying costs benefit from state support for the vast majority of district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is moderate at approximately 12% of personal income and is made up of an even mix of direct and overlapping debt. The district's large capital needs indicate that debt levels will likely increase in the near to medium term. The proportionate share of the system's net pension liability paid by the district is minimal.

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, effective in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has increased its financial cushion to exceptionally strong levels despite recent recessionary pressures and state funding cuts, contributing to the 'aaa' assessment. Fitch believes the district would use a combination of solid expenditure flexibility, conservative budgeting, and strong reserves to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.

Fiscal 2016 projections include a modest operating surplus and a $595,000 increase in general fund reserves to $49.6 million or a sound 30% of spending. The fiscal 2017 adopted operating budget totals approximately $172 million. The budget features a $16.7 million deficit (including $5 million for renovation and construction projects), but Fitch expects the district's history of outperforming budget projections to materially shrink the deficit by year-end.

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, InvestorTools, and the Municipal Advisory Council of Texas.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013347

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Nicole Wood
Director
+1-212-908-0735
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Nicole Wood
Director
+1-212-908-0735
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com