AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Odessa Junior College District, Texas' bonds:
--Approximately $65.7 million in outstanding limited tax bonds, series 2011 to 'AA' from 'AA-'.
In addition, Fitch assigns a 'AA' Issuer Default Rating (IDR) to the district.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an ad valorem tax levied against all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
The upgrade of the district's IDR and limited tax bond ratings to 'AA' from 'AA-' is due to the application of Fitch's revised criteria for U.S., state, and local governments, which was released on April 18, 2016. The upgrade reflects the district's ample revenue-raising ability, sound expenditure flexibility, strong reserve cushion, and limited historical revenue volatility. These factors combine to provide the district with a high level of operating flexibility and anticipated financial resilience throughout the economic cycle. Fitch expects the long-term liability burden will remain low.
Economic Resource Base
Revenues are primarily influenced by local trends, including enrollment and property taxes. Enrollment typically runs counter-cyclical to local economic conditions. The district primarily serves the residents of the Midland-Odessa MSA. The local economy is driven largely by the energy sector with all segments of the oil & gas industry well represented, and Fitch expects it may realize some additional moderation due to the continuation of low oil prices.
Revenue Framework: 'aa' factor assessment
Revenue growth has historically kept pace with the U.S. economy, largely due to strong TAV gains driven by the energy sector. Fitch believes natural revenue growth prospects remain solidly above inflation, but slightly below historical trends. The superior ability of the district to raise property tax and tuition/fee revenues in the event of normal, cyclical decline underpins the 'aa' assessment.
Expenditure Framework: 'aa' factor assessment
The pace of spending growth should remain more or less aligned with revenues over time, led by further revenue gains from modest anticipated enrollment growth. Sound expenditure flexibility results from moderate carrying costs and the district's ability to adjust its labor costs, if needed.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is low at approximately 5% of personal income, and composed largely of overlapping debt. Fitch expects the liability burden will remain in line with the 'aaa' assessment despite the likely moderating of income metrics over time from a weaker energy sector, as a stable and modestly growing population base should keep regional debt needs manageable.
Operating Performance: 'aaa' factor assessment
Ample revenue-raising ability and solid expenditure control provide the district with a high level of demonstrated operating flexibility. Fitch believes that, given this flexibility and limited expected revenue volatility, the district's operating cushion would be more than adequate for the district to maintain a high level of fundamental flexibility throughout the economic cycle.
RATING SENSITIVITIES
Maintenance of Revenue-Raising Ability: The rating is sensitive to material deterioration and/or the inability to utilize the district's ample revenue-raising capacity. This credit strength provides important counter-balance to the district's operational dependence on its property tax base and the possibility of further TAV declines.
CREDIT PROFILE
District residents participate in the Midland-Odessa MSA economy and employment base, which is the main service center for the Permian Basin in west Texas. The Permian Basin is one of the country's oldest and largest oil and gas reservoirs. The MSA also serves as a regional retail/commercial and health care hub for surrounding counties. Top employers include the education, medical, and governmental sectors as well as various energy service firms.
The well-documented energy sector decline that began in 2014 has significantly affected the Permian Basin area. Rig counts have fallen sharply since 2014, yet the Permian Basin still accounts for almost half of the nation's rig count. Curtailed exploration and drilling activity in the face of low oil prices has contributed to the moderate growth in Ector County's unemployment. Nonetheless, further economic gains from this sector may be realized as a result of a newly discovered shale formation (Wolfcamp Shale) in proximity to the MSA, which is reportedly one of the largest continuous oil and gas deposits found in the U.S. according to the U.S. Geological Survey.
The district's tax base is coterminous with the county's. Concentration and volatility in the district's property tax base are results of the outsized impact of the energy sector and mineral values; this lack of diversity constitutes a measure of risk to the district. The 10 largest taxpayers, nearly all of which are oil/gas business concerns, represent 16% of TAV in fiscal 2016, which is down from prior years' highs. In total, about 35% of TAV came from mineral values and commercial/industrial property in fiscal 2016; mineral values have contributed no more than one-third of TAV since fiscal 2007.
TAV gains have historically outpaced the district's enrollment trends. Generally strong TAV expansion halted with a 5% TAV decline occurring in fiscal 2016, followed by a 10% decline in fiscal 2017, in line with reduced mineral values and energy sector activity. Average annual TAV growth has been approximately 7% over fiscal 2002-2017, inclusive of the recent declines. Fitch expects near-term TAV trends are likely to be flat or exhibit further decline.
The district's enrollment base is relatively small and has been flat historically despite periodic, counter-cyclical swings. Full-time equivalent (FTE) students totaled 3,453 fiscal 2015, reflective of a roughly 2% annual average decline in FTE students over the last 10 years (fiscal 2005-2015). The return to healthy student growth with a 4% gain in fiscal 2016 reversed recent enrollment losses, and the district continues to realize further student gains in fiscal 2017.
Revenue Framework
Property taxes (for both operations and debt service) are the district's largest revenue stream, providing nearly 50% of total revenues in fiscal 2015. District operations have become more dependent on the local tax base in the past decade. Increasing tax revenue for operations has largely offset moderate declines in enrollment-related revenues, such as federal (largely Pell grant) revenue, state appropriations, and tuition, as well as some recessionary cuts to state funding.
Revenue growth in the 10-year period of fiscal 2004 - 2014 strongly outpaced U.S. GDP. This was due largely to the ability of district property taxes to capture robust TAV growth, but also in part to periodic operating tax rate and tuition/fee increases as well as a voted debt service tax rate implemented during this time period. Fitch believes the natural pace of revenue growth will be slower going forward, but above inflation. This assessment incorporates Fitch's expectation of subdued TAV trends and economic activity from the likely continuation of low oil prices, balanced against expected gains from probable near-term enrollment growth and the long-term viability of the U.S. energy industry.
The district's total tax rate is limited to $1.00 per $100 TAV according to state statute, of which no more than $0.50 per $100 TAV can be used for debt service. However, the district's operating property tax revenue is capped at a lower $0.20 per $100 TAV tax levy by locally voted limitation.
Moderate capacity exists under the local tax levy cap as the district presently levies nearly $0.17 per $100 TAV or roughly 80% of its capacity. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. The district also retains full ability to independently raise its tuition and fee charges without any legal limit; tuition and fees made up about 22% of total revenues in fiscal 2015.
Third-party funding support stems from the long-standing commitment of the state and U.S. government to fund higher education. Nonetheless, these revenue streams remain susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures.
Expenditure Framework
Instruction, student services, and administrative expenses consumed about 55% of total spending in fiscal 2015. Fitch expects the natural pace of spending growth should remain more or less aligned to revenues over time, led by further revenue gains from modest anticipated enrollment growth.
The district maintains sound flexibility to adjust instructional outlays to respond to changing enrollment trends. The district can adjust employee headcount and compensation, enabled by the absence of multi-year, contractual agreements or collective bargaining with labor. This expenditure flexibility is tempered by the district's need to recruit and retain a sufficient number of highly educated professionals for instructional and leadership purposes. The district has demonstrated its ability to respond to both state aid and enrollment-related revenue declines. Structural operating balance has been maintained with the use of salary and staffing cost efficiencies as well as some programmatic changes.
Fixed carrying costs - the combination of total annual tax-supported debt service, the actuarially required annual pension funding amount, and the annual spending for other post-employment benefits (OPEB), net of state support - consumed a moderate 11.4% of total operating/non-operating expenses in fiscal 2015. Looking ahead, Fitch expects these fixed costs will remain moderate as a result of the district's lack of future debt plans, a fairly flat tax-supported debt service schedule projected, and manageable retiree costs that are shared with the state.
Long-Term Liability Burden
The long-term liability burden is low at an estimated 5% of 2015 Ector County personal income. Fitch expects this burden, largely attributable to overlapping debt, to remain consistent with the 'aaa' assessment despite the likely moderating of income metrics over time, as a relatively stable and modestly growing population base should result in manageable future capital needs.
Most of the district's debt is supported by a separate tax levy of up to $0.50 per $100 TAV, and the current rate of roughly $0.04 affords significant taxing margin. Principal amortization of the district's tax-supported debt is considered slow at about 25% in 10 years. Capital needs for the district appear manageable; management indicates there are no near-term debt plans and annual pay-go capital spending has declined somewhat due to the majority of district facilities either having been renovated or replaced in the last GO bond authorization.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides roughly half of the community college's (employer) annual pension contribution. Recent reforms have lowered benefits and increased statutory contributions in order to improve plan sustainability over time.
Under GASB 67 and 68, the district reported its share of the TRS net pension liability (NPL) at $6.2 million for fiscal 2015, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL remains small at less than 1% of personal income when adjusted for the 7% investment rate assumption.
Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects modest growth in the NPL even if investment returns meet assumed rates, although the overall long-term liability burden should remain within the 'aaa' assessment range given how small the pension liability is relative to overall debt. In addition, the district and all Texas community colleges remain vulnerable to future policy and funding changes by the state. The district also provides OPEB through the state-run, post-employment benefit healthcare plan, the obligation for which is small at less than 1% of personal income.
Operating Performance
Fitch believes the district maintains an exceptionally strong capacity to manage challenges associated with a moderate economic downturn. This assessment is informed by the district's recent history of maintaining high levels of unrestricted cash/investments (net of bond proceeds). Fitch uses this measure as a proxy for unrestricted general fund balance as the district's enterprise accounting is likely to lead to variability in net asset reporting due primarily to the impact of GASB 68.
The district's high level of fundamental financial flexibility is a result of the various budgetary tools at its disposal, which include revenue-raising authority, the ability to use its historically strong reserve cushion in excess of Fitch's calculated reserve safety margin, and solid expenditure flexibility. The district's superior financial resilience is also underpinned by historically low revenue volatility (including all enrollment-related revenues).
Steady operating surpluses have typically allowed for moderate levels of pay-go capital spending in recent years. Operations again generated a positive margin in fiscal 2015 despite further enrollment decline. The district's operating cushion of unrestricted cash/investments totaled a robust $27.4 million or about 54% of total operating/non-operating expenses at fiscal 2015 year-end. Fiscal 2016 results are expected to modestly improve upon budget and add to the unrestricted position. This operating performance is largely attributable to some additional student-related revenues (flat enrollment was budgeted) and the year's expenditure savings. Fitch anticipates district management will continue to adhere to its adopted policy that requires unrestricted reserves to be maintained at no less than three months of operations.
The fiscal 2017 general unrestricted operating budget of $42.7 million is structurally balanced. Underpinning the year's finances is a modest increase in tuition/fees, additional student growth, and salary increases, balanced against targeted cost savings.
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.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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