AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has downgraded Leander Independent School District, Texas' (the district) unlimited tax (ULT) debt to 'AA-' from 'AA'. The downgrade applies to approximately $1.3 billion outstanding bonds in the aggregate as follows:
-- ULT school building bonds, series 2001, 2009, and 2010;
-- ULT school building and refunding bonds, series 2002, 2003, 2004, 2005, 2006, 2007, and 2008;
-- ULT refunding bonds, series 2010, 2010A, and 2011.
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
PRESSURE TO MAINTAIN TAX RATE: The rating downgrade to 'AA-' reflects the continued pressure to maintain a tax rate below the statutory $0.50 per $100 taxable assessed valuation (TAV) test that the district must meet to issue new money debt to continue implementing its capital plan. The district has restructured some of its outstanding debt to remain below the $0.50 cap. Further restructurings are likely unless tax base growth accelerates significantly.
CAPITAL NEEDS CONTINUE: The district's enrollment trend moderated somewhat from the rapid growth rates experienced over the past decade. Despite the slowdown, enrollment growth has still averaged 6.5% annually over the last five years resulting in the need for additional facilities over the near-to-medium term.
VERY HIGH DEBT LEVELS: Debt levels are very high and amortization of principal is slow. The current debt structure and debt service tax rate leave little flexibility for issuance of new money debt for additional facilities.
GOOD FINANCIAL PERFORMANCE: Consistently strong financial performance is a stabilizing credit factor. The district has posted positive financial results in four of the past five fiscal years. The district's unrestricted general fund balance and liquidity remain solid. The district has managed this performance despite recent state funding cutbacks and pressures associated with enrollment growth, as evidenced by management's ability to cut spending over the last two fiscal years.
TAX BASE REMAINS SOLID: Despite a significant slowdown in tax base growth and a modest dip for fiscal 2011, the district's TAV exceeds $13 billion. Moreover, the tax base, while still predominantly residential, is diversifying, with increased commercial construction over the past few years.
STABLE ECONOMY: The district benefits from its location within the broad economic and employment base within the Austin-Round Rock metropolitan area, which has above-average wealth levels and relatively low unemployment rates.
HIGH DEBT BURDEN, SLUGGISH TAX BASE GROWTH, AND CONTINUED CAPITAL PRESSURES
The district's pressure to restructure existing debt in order to maintain its tax rate below the state attorney general's $0.50 per $100 TAV test at the time of debt issuances is the result of an ascending debt service schedule coupled with marginal tax base growth over the last three years. Fitch considers the district's debt levels very high. Overall debt levels approximate 12.5% of market value and $11,000 per capita. In addition, amortization is slow, reflecting in part the extensive use of capital appreciation bonds (CABs) to minimize tax rate impacts and shift the debt burden to future taxpayers. Approximately 39% of the district's direct debt is retired in 10 years on a non-accreted basis. Annual debt service increases at a steady rate over the next few years and this will continue to pressure the debt service tax rate if tax base growth remains sluggish.
Management reports plans for new school facilities have been pushed back due to moderating enrollment growth. The remaining $229 million bond authorization is now expected to last three more years, until 2017, with another bond election projected no earlier than the fall of 2013. Although the slower pace of growth has provided a respite from the previous rapid construction program, Fitch expects capital needs and borrowings to continue, maintaining pressure on management to stay below the $0.50 tax rate test ceiling.
CONSISTENT POSITIVE OPERATING RESULTS
The district's financial position is a positive credit factor. The district has historically recorded operating surpluses that have resulted in strong reserve levels, which enhance its financial flexibility. Fiscal 2011 results bettered original projections as tightened spending and a delay in two school openings helped control costs and contributed to an operating surplus (net of transfers) of $10.2 million. The unrestricted general fund balance (committed, assigned and unassigned per GASB 54) at fiscal 2011 year-end totaled $78.6 million or a healthy 34% of spending and transfers out. The general fund operating budget was fundamentally balanced without an operating tax increase, while providing pay raises and maintaining the use of a portion of its maintenance and operations (M&O) tax levy, albeit at a reduced level, for major maintenance projects.
The fiscal 2012 budget includes further spending reductions due to state funding cuts of approximately $13 million. District officials formulated a budget that included spending reductions that bridged the gap without using reserves or raising operating taxes. The reductions include campus and department spending cuts of 5% to 15%, modest class size increases in certain elementary grades, and a headcount reduction of 234 mostly administrative staff. The current forecast calls for an addition to operating reserves of roughly $7 million, with the results boosted by nearly $4 million in federal Edujobs monies. The district will experience another state funding cut for fiscal 2013 of roughly $22 million. Management reports that ongoing savings from the fiscal 2012 cuts have essentially closed this funding gap.
STABLE AND DIVERSE LOCAL ECONOMY
Largely residential in nature, the district benefits from its location in the broad economic and employment base of the Austin-Round Rock metropolitan area. At 6.1% in February 2012, unemployment in the metro area had declined on a year-to-year basis while remaining below state and national levels. The regional labor force and employment registered solid gains of roughly 2% in the 12 months from February 2011-2012. Area wealth levels generally exceed those of the state and the U.S.
While the district had historically experienced double-digit percentage tax base growth due to the availability of affordable land, TAV growth slowed in fiscal 2010 and decreased a modest 1% in fiscal 2011, reflecting a less robust housing market. Fiscal 2012 did show a slight rebound in the tax base, with TAV climbing 2% to $13.3 billion.
As a result of area residential development, enrollment over most of the last decade grew very rapidly, increasing at an average annual pace of about 10% between fiscal years 2003 and 2008. With the economic slowdown, annual enrollment growth trends have slowed but remain solid at about 5.4% over the past three years; district enrollment currently approximates 33,200 students. At present, demographic studies project anywhere from 10,000 to 15,000 new students over the next 10 years, maintaining pressure on the district to construct new campuses.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', Aug. 15, 2011;
'U.S. Local Government Tax-Supported Rating Criteria', Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria