AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Canyon Independent School District, TX obligations:
--$65.9 million unlimited tax (ULT) school building and refunding bonds, series 2017.
The bonds are scheduled for negotiated sale the week of December 12th. Proceeds will be used for the construction, renovation, acquisition and equipment of school buildings, and to refund a portion of the district's outstanding debt.
The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
In addition, Fitch has assigned an underlying rating of 'AA' to the bonds, and has affirmed Canyon ISD's Issuer Default Rating (IDR) and its $80 million outstanding ULT debt at 'AA' (pre-refunding).
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program. (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' rating reflects the district's sound economic underpinnings and strong gap-closing capacity from a combination of solid spending flexibility and reserves. Long-term liabilities and fixed costs may increase as a result of capacity-related debt issuances, but are not expected to exceed moderate levels.
Economic Resource Base
The district is located along the southern border of Amarillo in Randall County, serving a 720-square mile area that is largely rural with roughly 54,000 residents. The city of Amarillo is a regional hub that serves as the banking, distribution, and commercial center for the Texas panhandle.
Revenue Framework: 'a' factor assessment
Revenue growth has been strong, above the national GDP for the 10 years through 2014. Future growth will likely track anticipated enrollment growth given the state funding framework. The district's independent legal ability to raise revenues is limited by state law.
Expenditure Framework: 'aa' factor assessment
The district maintains strong expenditure flexibility in salaries and paygo capital spending. The fixed-cost burden for debt service and retiree benefits is moderately low, and will likely remain an affordable portion of governmental spending. Spending growth is expected to trend in line with revenue growth.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is low, reflecting strong state support for retiree benefits. Future capacity-related debt issuance may increase the district's direct debt, although Fitch doesn't expect it to weigh disproportionately on resources.
Operating Performance: 'aaa' factor assessment
The district has a strong history of operating surpluses; reserves are robust and provide ample cushion in the case of an economic downturn, given expenditure flexibility and limited revenue volatility.
RATING SENSITIVITIES
Fundamental Shifts: Although not expected, the rating could be sensitive to shifts in the district's spending practices to accommodate enrollment growth.
CREDIT PROFILE
Growth in the tax base has resulted from the area's available land, spurring predominately residential development pushing south from Amarillo. District enrollment totals almost 10,000 students and has grown at an average annual pace of about 2% for the past 10 years. Management reports the possibility of an uptick in enrollment given current trends in residential development.
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).
Local sources are consistently the largest revenue stream, comprising over half of general fund monies; state sources account for about 40%. The compound annual growth rate (CAGR) of district revenues was 4.2% over the 10 years through 2014. Fitch anticipates enrollment growth will continue to drive revenue growth in excess of national GDP.
The district's M&O tax rate of $1.04 per $100 taxable assessed value (TAV) is $0.13 below the legal limit of $1.17. The district would need voter authorization to raise the rate, and there are no current plans to do so. The district levies a separate, unlimited debt service tax rate that stood at $0.22 per $100 TAV as of fiscal 2017, leaving ample margin under the Attorney General's new money limit of $0.50.
Expenditure Framework
The district's main expenditure item is salaries, common for local governments. Adopted budgets typically include some use of operating revenues for capital projects.
The pace of spending growth has fallen in line with revenue growth. This trend is likely to continue barring any changes in district policy or unanticipated growth-related pressure.
The district's fixed cost burden is moderately low, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling about 10% of 2015 governmental expenditures. Fitch expects the fixed-cost burden to rise slightly as the district begins to pay debt service on the new money portion of this sale. The district retains flexibility in staffing levels given the modest enrollment growth prospects, and does not have any labor contracts or wage pressure.
Long-Term Liability Burden
The district's total debt and net pension liability is approximately 7% of personal income, with the district's direct debt representing about two-thirds of the total. The district will exhaust its remaining bond authorization with the new money portion of this sale, which will be used for a new intermediate school. The district may seek additional debt authorization depending on the outcome of a strategic plan currently underway.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. Like all Texas school districts, Canyon 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 proportionate share of the system's net pension liability paid by the district is minimal, representing less than 1% of personal income.
Operating Performance
The district has historically maintained healthy reserves and is well-positioned to manage a moderate economic downturn given low revenue volatility and solid expenditure flexibility. Fiscal 2015 general fund reserves stood at a strong $30.7 million (46% of spending), and management projects fiscal 2016 will mark another year of positive operating results due to enrollment growth beyond expectations. The fiscal 2017 budget is largely similar to that of prior years and includes the use of some operating revenues for roof replacements. Management reports enrollment is up over 230 students from the prior year.
The district has demonstrated a strong commitment to supporting financial flexibility, despite recessionary pressures and state funding cuts. Budgeting is conservative and typically includes capital projects, and management has been proactive in maintaining operational balance throughout economic cycles.
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, the Municipal Advisory Council of Texas, 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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