AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following Clint ISD, TX obligations at 'AA-':
--Issuer Default Rating (IDR);
--$181.7 million in unlimited tax (ULT) bonds.
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 exceptionally strong gap-closing capacity from a combination of spending flexibility and ample reserves. Long-term liabilities are an elevated burden on the resource base partly due to the low income levels in the district, but are not expected to increase given the lack of pressing capital needs or debt plans.
Economic Resource Base
The district is located approximately 18 miles southeast of the city of El Paso (general obligation bonds rated 'AA'/ Stable Outlook ). The district serves Horizon City, the town of Clint, and the unincorporated area of East Montana within a large 380-square mile boundary. Population is estimated at about 43,000.
Revenue Framework: 'a' factor assessment
Revenue growth has been strong, above the national GDP for the 10 years through 2015. Future growth may diminish as enrollment flattens; though will likely stay positive given the state funding framework for economically disadvantaged students. The district's independent legal ability to raise revenues is limited by state law.
Expenditure Framework: 'aa' factor assessment
The fixed-cost burden for debt service and retiree benefits is low, reflecting strong state support, and will likely remain a small portion of governmental spending. Spending growth is expected to trend in line with revenue growth.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is somewhat elevated, partially as a result of low personal income levels in the district; it is not expected to change materially given the dearth of new money debt plans.
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
Decline in State Support: Material decline in state support for operations and debt service, the dominant revenue source for the district, could pressure the rating.
CREDIT PROFILE
Ease of access to the city of El Paso and the Fort Bliss Air Defense Training Center make the district's affordable housing the primary growth driver. El Paso County and Juarez, Mexico comprise the largest U.S.-Mexican bi-national metroplex, with a combined population of more than 2.5 million. The top 10 taxpayers in the district are represented by utility, real estate, manufacturing, and construction interests.
Enrollment growth averaged a healthy 3-4% pre-recession, but in the last several years it has been primarily flat with some years marking modest contraction. The district projects flat enrollment for planning purposes and monitors daily attendance closely to make timely budget adjustments if needed. Taxable assessed value (TAV) has maintained a trend of modest to moderate growth, marking only one year of decline in the last 10 years due to increased exemptions.
The campaign proposal of President-Elect Trump to withdraw from the North American Free Trade Agreement (NAFTA) has created considerable uncertainty for the area's established economic structure. The full implementation of such a policy would be a credit negative for the local economy. But Fitch believes the proposed shift to trade protectionism would be met with significant corporate lobbying and demands from Congress to approve any treaty changes (For more information, see "Fitch: Trump Policies Would Be Negative for US Public Finances, dated Nov. 9, 2016).
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).
State sources dominate the budget at almost 80% of revenues; local and federal sources make up the remainder. The compound annual growth rate (CAGR) of district revenues was high at 6.2% over the 10 years through 2015. This growth rate may diminish due to the current enrollment trends but will likely stay at least above inflation over the long-term given state revenue growth prospects. The state funding formula weights students that are classified as economically disadvantaged more heavily; 87% of Clint ISD's 2016 student body was considered economically disadvantaged.
The district's M&O tax rate of $1.04 per $100 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 $0.3665 per $100 TAV as of fiscal 2017, leaving margin under the Attorney General's limit for issuance of additional debt 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 generally fallen in line with revenue growth. This trend is likely to continue barring any changes in district policy or unanticipated spending pressure.
The district's fixed-cost burden is low, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling 6% of 2015 governmental expenditures, net of the roughly 54% received in state support for debt service. Fitch expects the fixed-cost burden to stay low assuming no material change in support from the state. The district retains flexibility in staffing levels given flat enrollment trends, and does not have any labor contracts or wage pressure.
Long-Term Liability Burden
The district's total debt and net pension liability is elevated at approximately 29% of personal income with the district's direct debt representing about three-quarters of the total. The burden will likely stay elevated in the mid-term given the slow pace of amortization (32% retired in 10 years). The district does not remain with any bond authorization after a large issuance in 2015 to address the majority of their capital needs.
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, Clint 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 represents less than 3% of personal income.
Operating Performance
The district has historically maintained ample reserve levels, which should allow it to manage through periods of economic weakness while preserving a midrange level of fundamental financial flexibility. The district's operations perform well under a moderate economic stress scenario generated by the Fitch Analytical Sensitivity Tool (FAST) even without considering the offsetting policy action that Fitch expects the district would take to address recessionary revenue declines.
The district has demonstrated a strong commitment to supporting financial flexibility, despite recessionary pressures and state funding uncertainties. Budgeting is conservative and typically includes capital projects, and management has been proactive in maintaining operational balance throughout economic cycles. Fiscal 2015 general fund reserves stood at a strong $32.3 million (34% of spending), and management projects fiscal 2016 will mark another year of positive operating results despite the $4.3 million budgeted deficit. The fiscal 2017 budget includes a flat tax rate and a deficit of $11 million due to an 11% increase in spending over the prior year's budget. Given past performance, Fitch does not expect the deficit to be realized in full.
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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