Fitch Rates Little Elm ISD, TX's 2014 ULT Rfdg Bonds 'AAA' PSF/'AA-' Underlying
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns ratings to the following Little Elm Independent School District, Texas' (the district) unlimited tax (ULT) bonds and maintenance tax notes as follows:
--$5.0 million ULT refunding bonds, series 2014 at 'AAA';
--$4.6 million maintenance tax notes, series 2014 at 'AA-'
The aforementioned ULT rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
Fitch also assigns an 'AA-' underlying rating to the 2014 bonds and affirms the 'AA-' rating on the district's approximately $141.4 million (pre-refunding, on a non-accreted basis) in outstanding ULT bonds.
The series 2014 bonds and tax notes are scheduled to sell via negotiation Feb. 18. Proceeds will be used to improve various school facilities, refund a portion of the district's outstanding obligations, and to pay issuance costs.
The Rating Outlook is Stable.
The bonds are payable and secured by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF. The maintenance tax notes are secured by a limited (operating) ad valorem tax pledge levied against all taxable property within the district, which cannot exceed $1.04 per $100 taxable assessed valuation (TAV) unless district voters approve an increase up to the state maximum of $1.17 per $100 TAV.
KEY RATING DRIVERS
STRONG REGIONAL ECONOMY; RAPID GROWTH: The district benefits from its proximity to the larger and diverse Dallas Fort-Worth metropolitan statistical area (MSA), which fared relatively well during the recession. Rapid population growth within the district is of some concern, but wealth levels are above average and county unemployment is low. Taxable assessed valuation (TAV) has rebounded strongly due primarily to increased levels of residential construction since the recession.
HIGH DEBT LEVELS: Debt levels are high due to ongoing capital needs associated with rapid enrollment growth. Amortization of principal is slow reflecting the use of capital appreciation bonds (CABs). Carrying costs are moderate given state support for the district's debt and pension plan.
STRONG AND STABLE FINANCES: Positive financial performance enabled by management's conservative budgeting practices and annual enrollment growth has allowed the district to maintain its solid financial position despite some pay-go capital spending. Liquidity and reserve levels remain high.
NO RATING DIFFERENTIAL: Fitch does not distinguish between the unlimited and limited tax ratings due to the district's significant financial flexibility.
PRESSURE TO MAINTAIN TAX RATE: The district faces continued pressure to maintain a debt service tax rate at or below the statutory $0.50 per $100 TAV test to issue new money debt to continue its capital plans. Concerns are mitigated in part due to the fairly level current debt service schedule, which alleviates upward pressure on the tax rate.
UNREALIZED GROWTH PROJECTIONS: The district's current forecast anticipates a debt service tax rate at or below the $0.50 test cap assuming moderate TAV growth. If this projected growth does not materialize, the district will either have to levy a tax exceeding $0.50 (which will limit the district's additional new money ULT borrowings) or will have to regularly restructure its existing debt to remain below the cap. Either scenario would further strain the district's debt profile and could be inconsistent with the current underlying rating level.
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial position. The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability.
GROWING SUBURBAN COMMUNITY ON LAKE LEWISVILLE
Little Elm ISD is located about 30 miles north of Dallas in the broader Dallas-Fort Worth metropolitan statistical area (MSA). Portions of the district and the city of Little Elm are favorably located along developable land near Lake Lewisville. Population gains since 2000 have been rapid. Income and wealth levels generally exceed regional, state and national averages; the district's 2011 median household income of approximately $72,200 was about 25% higher than that of the MSA and about 40% higher than the state and U.S.
NORTHERN EXPANSION OF DFW MSA
The ongoing expansion of the MSA produced accelerated growth in Denton County with the district recording double-digit annual gains in TAV over the last decade until fiscal 2010. Recessionary pressures led to moderating TAV trends that quickly rebounded with a solid 9% increase in fiscal 2012. A reduced but modest positive gain was realized in the following year as fiscal 2013 TAV softened from previous expectations with higher than usual levels of successful property tax appeals.
Nonetheless, certified TAV from the Appraisal District rose by a strong 11% gain for fiscal 2014 due to the increased levels of residential and some attendant retail/commercial development. Fitch believes management's expectations of additional TAV growth over the near-term due to the ongoing development of high-end residential properties appear reasonable. In tandem with TAV, district enrollment (which presently totals about 6,700 students) also experienced rapid growth over the past decade, but has since moderated to a more manageable pace. Enrollment growth averaged a healthy 2.6% over fiscal years 2009-2014 and comparable 3% - 5% annual increases are projected through 2019.
In addition to participating in the larger MSA employment base, the Denton County economy continues to experience growth. Major employment sectors include higher education, healthcare, manufacturing, and retail trade. County unemployment rates remain below state and national averages; as of November 2013, the rate stood at 5.0%, which was down from 5.2% from a year ago, and below the rates of the state (5.8%) and U.S. (6.6%). In addition, the county's labor force grew 2.1% during this time period.
ELEVATED DEBT RATIOS; LIMITED TAX RATE FLEXIBILITY
The district's high debt levels are a key credit concern and will remain a focus in future review cycles. Debt ratios include currently accreted interest from outstanding CABs, which minimize near-term tax rate impacts and shift debt burden to future taxpayers. The overall debt ratio totals 12.4% of market value or a high $9,515 per capita once overlapping debt is considered.
The district's debt service burden is above average but moderate at about 14.4% of governmental spending in fiscal 2013 given the amount of annual state debt service aid received by the district and the slow pace of amortization stemming from use of CABs (about 27% of principal is retired within 10 years). Annual state support that totaled about 14% of debt service in fiscal 2013 is projected to continue declining and phase out over the near-term based largely on the district's rising property wealth levels.
The district's debt service tax rate has been at the statutory $0.50 cap for new issuances for the last six fiscal years, which limits flexibility regarding the timing and size of borrowings. Management reports sufficient capacity at existing campuses for the near term, but additional school facilities are projected to be needed under current demographic trends within the next five years. Fitch recognizes the capacity in current facilities as a short-term buffer, but cautions that lower-than-expected TAV growth for any period of time will further limit the district's maneuverability; such a scenario would not be consistent with the current rating level. Fitch has noted this existing credit pressure previously.
The refunding portion of this issuance is for savings and does not extend or restructure outstanding debt. Annual debt service is projected to remain fairly level at about $11 million throughout most of the amortization schedule (MADS occurs in fiscal 2017 at $11.7 million). Management reports the district expects to fully open its new K-8 STEM (Science, Technology, Engineering, and Math) academy in a growing lakeside golf community called The Tribute at the start of fiscal 2015. The district maintains about $21 million in unissued ULT bond authorization from its last bond election in 2002 that is expected to fund construction of a new middle school.
STRONG FINANCIAL PROFILE
The district maintains a strong financial profile and significant financial flexibility despite operating pressures associated with enrollment growth and recent state funding cuts over the last biennium (fiscals 2012 - 2013). Conservative budgeting practices have enabled actual year-end results that typically outperform budgeted expectations.
The district's fiscal 2013 year-end financial position remained solid, although below Fitch's prior expectations provided by management of a surplus. The district recorded a $1.6 million net deficit for the year due to some unbudgeted, pay-go capital spending for the lease purchase of a new school bus fleet after finishing its prior bus rental agreement. Unrestricted general fund reserves totaled $18.2 million or 37.2% of spending at fiscal 2013 year-end, which remained well above the district's adopted fund balance policy requiring an unrestricted balance equal to a prudent 24% of spending. Liquidity remained strong with fiscal 2013 cash and investments at $25.6 million or over six months of the year's operating expenditures.
The fiscal 2014 $46.5 million operating budget was adopted as balanced and reflects an increase of nearly 7% from the prior year, largely bolstered by growth to per pupil state funding over the biennium (fiscal 2014 - 2015). Management reports year-to-date operations comparable to budget with enrollment trends favorably slightly ahead. It is anticipated that any associated, unbudgeted revenue gain will serve as an offset to the $350,000 in additional pay-go capital spending approved so far this fiscal year that may grow to roughly $1 million by year-end with additional budget amendments in support of the opening of the district's STEM (Science, Technology, Engineering, and Math) academy in fiscal 2015 and other school facility improvements.
Fitch expects the district will maintain its historically strong financial position at no less than its stated policy level over the near to intermediate term despite the recent trend and uncertainty of unbudgeted pay-go capital spending by year-end. This spending is in addition to modest, unanticipated new money debt issuances recently that in total likely reflect the community's high expectations for its school facilities and educational programs. This leads Fitch to believe the existing GO authorization may not fully address the district's capital needs over the near to intermediate term. The district will seek an operating tax ratification election in September 2014 for the maximum $0.13 per $100 TAV (to $1.17) allowable under the current state school funding formula that if approved by voters, would generate an additional $3.5 million annually for operations.
TEXAS SCHOOL DISTRICT LITIGATION
In February 2013 a district judge ruled that the state's school finance system was unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding as a constitutional flaw in the current system.
The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began last month (January 2014). If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.
OTHER LONG-TERM LIABILITIES MANAGEABLE
Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. District employees contribute to TRS for pensions at 6.4% of annual payroll, and the state pays the local district's contributions (6.4% of payroll in fiscal 2013), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. Other post-employment benefit (OPEB) contributions paid by the district are nominal as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2013 totaled less than 1% of governmental fund expenditures.
TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of a high and growing debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a moderate 15.3% of governmental fund spending in fiscal 2013, largely reflective of state support as well as the slow pace of principal amortization. Starting in fiscal year (2015), pension contributions for all districts in the state will rise to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, IHS Global Insight, and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria