Fitch Rates Texas Southmost College District, Texas GOs 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to Texas Southmost College District, Texas' (TSC or the district) $4 million limited tax bonds, series 2009 and $3 million maintenance tax notes, series 2009. In addition, Fitch affirms the 'AA-' rating on the district's approximately $61 million outstanding general obligation (GO) bonds and $12 million maintenance tax notes. The Rating Outlook is Stable.

Scheduled for a negotiated sale on June 18, 2009, 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 low direct debt levels with below-average amortization, enrollment growth levels that have recently dipped but remain strong overall, healthy tax base growth, and the continued maintenance of 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 overall enrollment growth as well as the area's low wealth levels, which heighten 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 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 trends in this area continue to exceed those of the state and nation. The majority of TSC students are from the local area within the district's boundaries, and in recent years, the district has experienced strong enrollment growth from area high school students in dual enrollment programs. However, as previously projected, headcount enrollment and semester credit hours (which determine the level of state funding) declined in Fall 2008 for non dual enrollment students from prior years' substantial annual growth rates. TSC officials attribute this decline to the implementation of minimum academic progress standards that should ultimately improve the district's transfer and graduation rates and believe the full effect of these related enrollment declines has been reached.

TSC benefits from a relatively diverse revenue stream, supported primarily by tuition and fees at 41% of total revenues in fiscal 2008, as well as state appropriations and property taxes. State appropriations rose slightly in fiscal 2008. Tax base growth remains healthy, averaging approximately 9% annually over the past five years, although comparable to national trends, preliminary estimates for fiscal 2010 TAV growth are more modest. Growth in taxable resources has enabled the district to maintain a low and stable maintenance tax rate. Despite declining rates of tuition discounting and tuition and implemented increases, 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 2004-2008 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. In fiscal 2008, the operating margin was slightly better than the previous two fiscal years at approximately 14% and at an increased level totaling $9.4 million of non-restricted cash and investments, liquidity improved as well. District officials report that the fiscal 2009 budget (adopted as balanced) remains on target and anticipate closing fiscal 2009 with a slight surplus.

The current bond offering represents the final borrowing from 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 tax notes will fund maintenance and renovation of existing district facilities. TSC also has approximately $28 million in outstanding revenue debt supported by various student use fees. While the 2004 authorization is currently exhausted, district officials do not anticipate approaching voters for another authorization over the near term, indicating that similar to previous years, additional maintenance tax notes may be issued to address the most critical deferred maintenance needs.

This issuance is expected to minimally impact the debt service tax rate. 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 bond rating of 'AA-' by Fitch). Amortization remains somewhat below average, with about 43% repaid in 10 years.

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