Fitch Affirms Lafayette Parish School Board, LA's Public School Bond Rating at 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Lafayette Parish School Board, Louisiana's (LPSB or the board) ratings at 'AA':

$17.8 million public school refunding bonds, series 2008;

Issuer-Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are special and limited obligations payable from a first lien on a 1% sales and use tax levied in the parish. The sales tax is an irrevocable pledge approved by voters in 1965. Bondholders also benefit from a cash-funded debt service reserve equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

The board's financial position remains sound despite challenges from economically-induced sales tax declines and enrolment losses to competing charter schools in the parish. Management points to a number of additional cost-cutting measures at their disposal if pressures continue. Debt and pension obligations are very manageable, and the board may approach voters as early as spring 2017 for bonding authority to address facility needs.

The 'AA' rating on the sales tax bonds reflect solid assessments for both growth prospects and resilience, and the fact that the rating is capped at the board's IDR due to the use of surplus receipts for operations. The near term growth prospects for the 1% pledged sales tax are soft but should improve with the eventual recovery in oil and gas and the continued diversification and growth of the area economy.

Economic Resource Base

Lafayette Parish is located in south central Louisiana and has an estimated 2015 population of around 240,000. A regional commercial hub, Lafayette has long served as a headquarters for oil and gas service companies. The ongoing energy sector weakness has dampened economic activity in the parish, offset to a degree by gains in other sectors -- primarily healthcare and technology.

Revenue Framework: 'a' factor assessment

The board enjoyed healthy operating revenue gains over the past decade, with energy sector expansion fueling increases over the first part of this period and recent economic diversification offsetting to a degree weakness in the energy sector since 2014. The board has little ability to independently increase revenues, as any property or sales tax increase must receive voter approval.

Expenditure Framework: 'aa' factor assessment

Given the expectation for moderate enrollment increases over the near to intermediate term, operating expenses should generally track revenue growth going forward. Combined debt and retiree benefit payments are a manageable part of the overall expenditure framework.

Long-Term Liability Burden: 'aaa' factor assessment

Overall debt and the board's share of its employee pension program are affordable at less than 10% of estimated parish total personal income

Operating Performance: 'aaa' factor assessment

Despite recent spending adjustments to counter sales tax revenue declines, the board retains sufficient flexibility which, combined with healthy reserves, produce exceptionally strong gap closing capacity. Based on the board's past performance Fitch expects management to promptly restore any flexibility lost during periods of economic weakness.

Sound Debt Service Coverage and Cushion

Current MADS coverage is very healthy at more than 8.0x and should remain sound through an economic downturn, given the use of surplus sales tax revenues revenues for operations.

RATING SENSITIVITIES

Erosion of Financial Flexibility: Continued economic volatility and charter competition would further pressure board revenues. Management's inability to respond promptly with expenditure modifications would erode the board's reserve cushion and overall flexibility, putting downward pressure on the rating.

Weakened Coverage: While not expected, sizable additional leveraging combined with deteriorating sales tax collections would weaken debt service coverage and pressure the current rating.

CREDIT PROFILE

Lafayette's historical reliance on the energy sector has produced both volatility and concentration risk. However, recent diversification into healthcare and technology is buffering some of the negative economic impact from a weak oil and gas industry. The city serves as a regional commercial hub, which offers both a measure of stability and decent growth prospects.

Revenue Framework

The state's minimum foundation program designates combined state and local per pupil funding for each parish in the state. The board's primary operating revenues include state funding (44% of fiscal 2015 general fund revenues), followed by local sales (30%) and property (25%) tax revenues. The use of sales tax receipts for operations creates vulnerability given the area's reliance on the historically volatile energy sector.

Average annual revenue gains for the 10-year period ending in fiscal 2015 of 4.4% bettered both U.S. economic performance and inflation, as energy sector gains and local economic diversification offset later energy sector weakness. Prospects for the near term are modest given current oil and gas industry pressures, but continued diversification of the area economy and Lafayette's role as a regional commercial center suggest brighter long-term growth potential.

The board's legal ability to raise revenues is extremely limited, as any new property tax millage or sales tax, or an increase in an existing tax rate, must be approved by voters.

Expenditure Framework

Spending patterns for the board are typical for a school district -- instruction accounted for nearly 2/3 of fiscal 2015 general fund outlays, with operations and administration comprising the majority of other spending.

Enrollment gains at LPSB for the near term are expected to be modest given the current economic environment and competition from several charter schools in the parish. As such, spending pressures are expected to be manageable and to generally track revenue gains over the forecast period.

Carrying costs (combined debt, pension and retiree healthcare) for fiscal 2015 were a moderately high 20.2% of governmental spending. The board benefits from ample control over headcount and wages, and states it retains a variety of spending reduction measures that can be employed if necessary.

Long-Term Liability Burden

The board has issues both property tax debt and sales tax debt to finance capital improvements, and also has issued certificates of indebtedness and other instruments backed by general fund revenues. The debt burden is moderate, and the pace of amortization is fairly rapid with nearly 70% retired in ten years.

District employees participate in one of several state-sponsored pension plans. The combined ratio of plans' assets to liabilities is 65%, reduced to an estimated 60% when a more conservative 7% rate of return assumption is used.

The board spends from roughly $6 million to $30 million annually on capital needs. Longer term facility needs are sizable at $300 million to $500 million, and management reports plans to issue roughly $140 million in debt in 2017 to address certain needs; they also are considering a return to voters next year for new millage authority for additional borrowing. The current rate of debt retirement should enable the board to fold in a moderate amount of new debt without materially increasing the debt burden.

Operating Performance

The current environment, characterized by energy sector weakness and ongoing charter school competition, is posing a significant challenge to the board's financial resilience. To date, results indicate management's responses are working. Financial reserves are healthy and increasing, and management reports various cost cutting measures still available in addition to the measures taken to date. The combination of remaining expenditure flexibility and a strong operating cushion should enable the board to successfully navigate the current uncertain economic climate.

Despite current revenue pressures, the board has managed to maintain spending levels with no deferral of required items. Pay/go capital spending continues at a pace consistent with historical trends, and full pension contributions are made.

Preliminary fiscal 2016 operating results indicate a small surplus and addition to reserves. For fiscal 2017, management has budgeted a 7% sales tax decline and has instituted a salary freeze and other expenditure reductions. The budgeted used of $5 million in reserves reflects a conservative budgeting approach; actual results typically outperform original budgetary forecasts.

Sales Tax Legal Provisions Standard

The legal provisions for the series 2008 bonds include an additional bonds test (ABT) of 2.0x and a cash-funded debt service reserve (calculated at MADS). The ABT is historical, taking the average of pledged sales tax collections for the prior two years. The flow of funds is standard, with any surplus pledged revenues used for operational expenses of the board. The 1% sales tax was authorized in 1965 and has no expiration date.

Solid Revenue Analysis Results

To evaluate the sensitivity of the pledged sales tax revenues to cyclical declines, Fitch considers both (1) the revenue sensitivity results produced by Fitch's analytical sensitivity tool (FAST) assuming a recessionary 1% decline in U.S. GDP, and (2) the largest cumulative decline in pledged revenues over the period covered by the sensitivity analysis (1999-2014). The FAST results generate a 4.0% sales tax revenue decline under the moderate recession scenario, and the largest consecutive decline was 10.1% in 2009-2010.

The pledged revenues have displayed minimal volatility over the past ten years but are currently experiencing a period of decline. The 10-year average annual growth rate from 2006-2015 was 3.4%. Fiscal 2015 revenues totaled $65.0 million, up 2.2% from the prior year and generating healthy 8.7 times (x) MADS coverage. The coverage calculation includes debt service on series 2010 parity bonds, currently outstanding in the amount of $4.4 million. The near term growth prospects for the 1% pledged sales tax are soft but should improve with the eventual recovery in oil and gas and the continued diversification and growth of the area economy.

Assuming the pledged revenues were leveraged to the 2.0x ABT, a severe revenue decline of 50% would still allow for payment of debt service; this cushion is healthy -- 12.5x the 3% revenue decline produced by FAST in a 1% GDP decline scenario and 5x the largest consecutive revenue decline. The board is not expected to leverage the pledged revenues to the ABT, as surplus revenues are a critical operating revenue source of the district. Assuming a moderate amount of additional leveraging to 7.5x MADS coverage, sales tax revenues could withstand a more than 85% drop and still generate 1x current MADS coverage. This cushion is more than 21x the 4% recessionary revenue dip produced by FAST and nearly 9x the largest consecutive revenue decline.

Fitch expects healthy debt service coverage and only moderate additional leveraging given the use of surplus pledged revenues for board operations. The rating on the sales tax bonds is capped at the board's 'AA' IDR given this fact.

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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Contacts

Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com