Fitch Rates Texas Southmost College District $5MM GOs 'AA-'

AUSTIN, Texas--(BUSINESS WIRE)--Fitch has assigned an 'AA-' rating to Texas Southmost College District (formerly Southmost Union Junior College District) Texas' $5 million limited tax bonds, series 2008 and $5 million maintenance tax notes, series 2008. In addition, Fitch affirms the 'AA-' rating on the Texas Southmost College District's (TSC) outstanding $55.8 million general obligation (GO) bonds and $6.5 million maintenance tax notes. The Rating Outlook is Stable.

Scheduled for a negotiated sale on June 25, 2008, the bonds and notes are direct obligations of the district, payable from an ad valorem tax levied against all taxable property within the district. The tax notes are subject to the district's $0.35 per $100 taxable assessed valuation (TAV) limit for maintenance and operations, while the GO bonds are subject to a separate limit of $0.50 per $100 TAV. Bond proceeds will be used to renovate existing facilities, construct and equip buildings, and pay costs of issuance.

The 'AA-' rating is based on the district's solid tax base growth, low direct debt levels with below-average amortization, strong enrollment growth, and satisfactory finances. The district's ample local maintenance taxing margin provides added financial flexibility. Also considered in the rating are operational and financial pressures stemming from increasing enrollment as well as the area's low wealth levels, which heightens sensitivity to tuition and property tax increases. However, through its long-term partnership with the University of Texas-Brownsville (UT-B), Fitch believes the district is well-positioned to meet these financial and operational challenges. Prospects for ongoing enrollment and economic growth in the district's service area appear promising.

The district is a two-year comprehensive, open-enrollment community college operating jointly with the UT-B. Located in Brownsville, Texas near the U.S.-Mexico border, the district was originally founded in 1926 and became independent and was renamed in 1949. In 2005, the district changed its name to Texas Southmost College District. The district encompasses approximately 530 square miles in the eastern portion of Cameron County and includes all of Los Fresnos, Brownsville, and Port Isabel Independent School Districts. Population growth in this area is among the fastest in the state and nation; the estimated 2008 district population of 218,000 has risen at an annual rate of slightly more than 6% since 2004. The majority of TSC students are from the local area within the district's boundaries, and in addition, starting in Fall 2006, the district experienced substantial enrollment growth from area high school students in dual enrollment programs. Both headcount enrollment and semester credit hours (which determine the level of state funding) have recorded substantial gains annually since 2003. District officials anticipate a slight drop in enrollment for Fall 2008, noting the prior semester's enrollment numbers, based on the recent implementation of minimum academic progress standards that should ultimately improve TSC's transfer and graduation rates.

TSC benefits from a relatively diverse revenue stream, supported primarily by tuition and fees at 44% of total revenues in fiscal 2007, as well as state appropriations and property taxes. State appropriations have been essentially flat since fiscal 2005. Tax base growth has been healthy, averaging almost 9% annually over the past five years. Growth in taxable resources has enabled the district to maintain a stable operating and maintenance (O&M) tax levy. Despite declining rates of tuition discounting since fiscal 2004, tuition and fees remain very affordable compared to other parts of the country and in relation to TSC's closest competitors.

Although a direct comparison of fiscal years 2004-2007 results with prior year performance is difficult due to the change in reporting format associated with the partnership with UT-B, the district has recorded essentially break-even or better operating results. For fiscal 2007, the operating margin was comparable to the prior year at over 12%, which was a significant improvement from 2005. District officials anticipate closing fiscal 2008 with no more than a modest drawdown on reserves of $100,000.

The current bond offering represents the fourth phase of borrowing of a $68 million GO bond authorization approved by voters in 2004 that was designed to meet capacity needs and expand programs. Prior to this authorization, the district had very little GO debt outstanding. The remainder of this authorization is expected to be issued within the next 12 months, with minimal impact to the debt service tax rate. The tax notes will fund maintenance and renovation of existing district facilities. Direct debt ratios remain low, with overall ratios increasing to moderately high levels, reflecting substantial issuances by the city of Brownsville (GO debt rated 'A+' with a Positive Outlook by Fitch) and the Brownsville Independent School District (underlying GO bonds rated 'AA-'). Payout is below average, with about 39% repaid in 10 years.

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