AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Del Mar College District, Texas (the district) limited tax debt:
--$9 million limited tax refunding bonds, series 2014.
The securities are scheduled to sell Jan. 22 via negotiation. Proceeds will be used to refund various outstanding maturities for economic savings and to pay related costs of issuance.
In addition, Fitch affirms the following rating:
--$75.4 million in outstanding limited tax bonds (pre-refunding) at 'AA+'.
The Rating Outlook is Stable.
SECURITY:
The bonds are secured by an ad valorem tax levied on all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The district maintains a sound financial profile despite counter-cyclic enrollment loss as a result of a strong local economy. The revenue base is relatively diverse and the district maintains positive operating margins and solid reserve levels. Healthy revenue and more moderate expenditure flexibility remain.
ECONOMIC SECTORS EXPANDING: Much of the commercial/industrial development underway or planned revolves around the petrochemical industry, including refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored the Corpus Christi (the city) economy. Year-over-year unemployment is down and slightly below the state average despite solid labor force growth. The city serves as a regional employment center.
STABLE TAX BASE WITH CONCENTRATION: Tax base concentration is moderately high with notable petrochemical, energy sector concentration in the top taxpayer mix; this lack of diversity constitutes a measure of risk to the district. The district's tax base has historically experienced steady growth. TAV gains have accelerated as the tax base quickly regained its footing after a one-year recessionary decline.
DEBT AND OTHER LONG-TERM LIABILITIES MODERATE: The overall debt burden is moderate. Principal amortization of tax-supported debt is favorably rapid. Capital needs are manageable, assisted by moderating enrollment trends and solid reserves that support some pay-go capital spending. Carrying costs are moderate.
RATING SENSITIVITIES
SHIFT IN CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial position and conservative fiscal practices that support this high-level rating. The Stable Outlook reflects Fitch's expectations that such shifts are unlikely.
CREDIT PROFILE
Headquartered in Corpus Christi (GO bonds rated 'AA', Stable Outlook by Fitch), Del Mar College District is a two-year comprehensive community college serving a population of roughly 350,000 primarily in Nueces County and the surrounding area. Income and wealth levels fall below state and national averages by about 10%-15% as measured by median household income. Population gains since 2000 have been relatively modest, averaging about 1% annually or roughly half of the state's rate of growth.
SURGING ECONOMIC ACTIVITY
Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic center for a 12-county area. The area's economic base consists primarily of petrochemical and shipping, tourism, agriculture, and the military. The deep-sea Port of Corpus Christi (the port) ranks as the fifth largest in the nation and 44th in the world based on tonnage.
Overall economic activity in the metropolitan statistical area (MSA) is up given its proximity to the large and recently productive Eagle Ford Shale oil/gas formation in neighboring counties. Management reports various commercial/industrial projects underway or planned that will capitalize on the area's traditional economic strength in the energy sector and associated industries. They include a number of liquified natural gas (LNG) plants. Also of note is the $2 billion Tianjin Pipe Corporation (TPCO America) steel pipe mill project located adjacent to the port that is projected to be one of the largest Chinese investments in the U.S., adding 600 permanent jobs to the area. In addition, district management reports another large industrial development project by the M&G Corporation that includes construction of two plastics (PET resin) plants in the port and represents a roughly $900 million investment and the addition of 250 permanent jobs.
Relatively low area unemployment levels reflect the expanding economy. Unemployment in the MSA edged down to 5.7% in October 2013 from 5.8% as of October 2012 as healthy year-over-year gains in employment offset the gain in labor force. This rate was below the state and U.S. averages of 6.0% and 7.0%, respectively.
TAV GAIN IN CONCENTRATED TAX BASE
The district's tax base has historically experienced solid growth and TAV quickly regained its footing after registering a modest 4.5% decline in fiscal 2011. A 2% TAV gain was realized in fiscal 2012 and another 2.5% gain occurred in fiscal 2013, which increased TAV to about $18 billion. Top taxpayers consist of a generally stable list of refineries, energy and petrochemical businesses and provide moderately high taxpayer concentration of approximately 16% (fiscal 2014), led by the Flint Hills refinery at 4.6%. TAV growth in fiscal 2014 was strong at roughly 10%, evidence of the increased levels of economic activity in the area. Nonetheless, Fitch recognizes that TAV gains will be tempered over the intermediate term by management's decision to participate in standard, 10-year tax abatement agreements with some of the larger industrial expansions in its taxing jurisdiction, including the planned M&G plastics plants.
WEAK ENROLLMENT TRENDS DRIVEN BY ECONOMIC GROWTH
Most students are local and tuition rates remain affordable despite recent increases. Enrollment grew over the recession, which was in line with the counter-cyclical nature of community college enrollment trends against local economic conditions. However, the district's enrollment gains were not as sizeable as in other community college in the state (a cumulative 11% growth in full-time student equivalents (FTSEs) over fiscals 2009-2011) which was likely due in part to the area's prompt economic recovery.
Student enrollment as measured by FTSEs totaled 7,648 in fiscal 2013, which was down about 8% from the prior year but remained above a steeper 15% decline conservatively budgeted. The recent trend of enrollment declines beginning in fiscal 2011 has largely countered the effect of gains made over the recession and enrollment has generally returned to pre-recessionary levels. Year-to-date enrollment trends in fiscal 2014 reflect a moderating 4% decline that remains slightly below budget. Management largely attributes these losses of students taking credit courses to higher-paid employment opportunities associated with increased Eagle Ford Shale activity.
Nonetheless, the district is realizing gradual gains in its dual enrollment/early college high school student population and management expects to strengthen this program over the near term. This particular student market is reportedly underserved locally as compared to other Texas community colleges, although their instructional (contact) hours count equally for state funding purposes. Fitch believes the district's trend of solid annual financial performance and management's ability to right-size a portion of its spending to enrollment trends should enable the district to successfully navigate any related financial pressure over the near term. In addition, management continues to expand its workforce training program, which currently includes some of the area's larger energy industry firms, and in conjunction with the dual enrollment program, is expected to largely offset traditional enrollment loss.
REVENUE DIVERSITY MITIGATES STATE FUNDING VOLATILITY
The district benefits from a diverse revenue stream comparable to most community colleges in the state, which includes property taxes for operations and debt service (the largest revenue source at about 44% of total revenues or nearly $46 million in fiscal 2013), followed by federal (largely Pell grant) revenue and state appropriations. Increased federal revenues due to higher levels of Pell grants for low-income students began to moderate in fiscal 2011 given the year's flat enrollment. These federal revenues totaled $21.3 million or about 19% of total revenues in fiscal 2013, which was down from a high of $27.1 million in fiscal 2010. They fell slightly below the fiscal 2011 $24 million state appropriation total, reversing positions as the district's second largest revenue source. For fiscal 2013, the slight uptick in the year's Pell grant revenues to $18.7 million despite lower enrollment trends was tied largely to the prior year's change in the district's timing of student aid disbursements and subsequent reporting that affected both fiscal years. Fitch anticipates a reduced level of Pell grant revenue in fiscal 2014 based on the year's enrollment trends and no expected change in reporting.
The district's tuition rates remain competitive despite recent increases, and along with above-average taxing margin for operations, they provide a measure of financial flexibility. Unlike many other Texas community colleges, the district's operating tax rate is not limited by local statute. The district's overall tax rate has remained moderate and stable at nearly $0.26 per $100 AV over the last three fiscal years (fiscals 2011-2013) and dropped by nearly $0.01 in fiscal 2014 given the year's strong TAV growth. The rate is well below the state's statutory ceiling of $1.00 per $100 AV tax rate (not to exceed $0.50 for debt service). State aid as a percentage of total revenues and per student funding has trended downward given cuts to state appropriations that have occurred over the last four fiscal years (fiscals 2010-2013). About 19% or $19.5 million of total revenues came from state funding in fiscal 2013, which was down from about 24% in fiscal 2008.
POSITIVE FINANCIAL PERFORMANCE; RESERVES STRENGTHENED
District operations have generated positive margins in all of the last five fiscal years despite state funding cuts and enrollment loss. Management's conservative and proactive fiscal practices have typically allowed the district to outperform its structurally balanced annual operating budget. For fiscal 2013, the operating margin remained strongly positive at 10.7%, assisted by expenditure savings implemented in the prior fiscal year, delayed re-staffing, and additional property tax revenue. Liquidity levels, as measured by available funds at fiscal year-end, remained adequate at 46.6% of total operating/non-operating expense in fiscal 2013. The year's favorable operating results allowed management to strengthen reserves; the nearly $7 million surplus was designated towards improving the unrestricted capital (plant fund) reserves to $11.6 million at year end. Unrestricted operating reserves remained at $20 million or roughly 25.6% of the ensuing fiscal year's budget at fiscal 2013 year-end, which held slightly above the upper end of management's formal 20%-25% policy level.
The adopted $78.2 million fiscal 2014 budget is structurally balanced and includes an additional $3.4 million in property tax revenue and a slightly higher state appropriation while sharing a marginally lower 50% (versus roughly 60% in the last biennium) portion of the employer's cost of healthcare/pension benefits with the state. The district realized modest improvement in appropriation levels over the current biennium (fiscal 2014-2015) similar to all Texas community colleges given the results of the 2013 legislative session and stronger economic conditions and revenue trends in the state. Growth in industry/contract training and continuing education supports management's budgetary assumption of just under $1 million revenue gain from the year's modest tuition/fee increases despite some expected decline in traditional student enrollment. Approximately $1.2 million is maintained in the budget as a separate contingency reserve. Management reports year-to-date revenue and expenditure trends remain in line with budget and another operating surplus appears likely by year-end.
MODERATE DEBT AND OTHER LONG-TERM LIABILITIES
Overall debt levels remain moderate at approximately $3,235 per capita or 4.4% of market value. Principal amortization of tax-supported debt is favorably rapid with 90% repaid in 10 years. In addition to its tax-supported debt, the district has approximately $27.2 million in outstanding self-supporting revenue bonds (rated 'A+', Stable Outlook by Fitch). Capital needs are manageable, assisted by moderating enrollment trends and reserves that support some pay-go capital spending. Management looks to finalize its larger capital plans before approaching voters for a future GO bond authorization as early as November 2014. Taxpayers last approved a $108 million GO bond authorization by a strong 60%/40% margin in 2003. Nonetheless, district officials continue to proactively manage the district's capital needs and favorably cash-funded the purchase of 95 acres for a future campus location in October 2013, utilizing $6.6 million in plant fund reserves.
The college's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the college historically provided the bulk of the employer's annual pension contribution. The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. Beginning with the 2012-2013 biennium, the state did not fully fund its statutory pension obligation for community college districts, which required the districts to contribute more (roughly 60%) to the pension program. The employer's pension contribution is now shared at a marginally lower 50% with the state as of the 2014-2015 biennium. Carrying costs (debt service, pension, OPEB costs, net of state support) totaled a moderate 13.7% of total expenses in fiscal 2012, even after considering the increased payment for employee pension benefits passed on to the college by the state.
Additional information is available at 'www.fitchratings.com'.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814451
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