Fitch Affirms Cypress-Fairbanks ISD, TX ULT Bonds 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the 'AA' rating for Cypress-Fairbanks Independent School District, TX outstanding $1.8 billion unlimited tax (ULT) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited annual property tax levy.

KEY RATING DRIVERS

STRONG FINANCIAL OPERATIONS: Management's attention to efficiencies in staffing and operating costs, in conjunction with solid revenue growth, has enabled it to amass a strong fund balance and ample liquidity.

LARGE TAX BASE RESUMES RAPID GROWTH: The district's expansive tax base has returned to rapid growth due to substantial new development. Fitch believes the tax base's prospects for continued growth are promising given its location within the broad and diverse Houston MSA.

ENROLLMENT GROWTH: The district's enrollment base is the third largest in the state and is returning to moderate growth after a recessionary lull, resulting in debt pressures to provide sufficient instructional capacity.

MODERATE LONG-TERM LIABILITIES: The overall debt burden is expected to remain elevated given voters' recent approval by a wide margin of a $1.2 billion bond authorization. However, the post-employment liability burden is modest. Total carrying costs are currently moderate but will also rise as bonds are issued.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to material changes in fundamental credit characteristics, including the district's strong financial management practices. The district's history of reserve adequacy and sound financial management practices indicates expected rating stability.

DEBT MANAGEMENT: Issuance of the very large GO bond authorization absent continued TAV growth would adversely impact the district's debt metrics and result in negative rating pressure.

CREDIT PROFILE

The district is located in the larger Houston metropolitan area and serves the rapidly growing northwest portion of Harris County and surrounding areas, with a 2014 population of about 522,000.

ENROLLMENT GROWTH TRENDING UP

The district's average daily attendance (ADA), currently at about 107,000, is returning to solid growth after moderating since fiscal 2011. Fiscal 2015 ADA is on track to grow by 2.6% and management projects moderate annual growth of 2%-2.5% for the next several years. Fitch believes this projection is realistic, based on the return of building activity within the district, led by two master-planned communities with a combined projected build-out of 20,000 homes over a 10-year period.

TAX BASE RETURNS TO RAPID GROWTH

Resurgent residential and commercial development has fueled large TAV gains, totaling almost 10% and 17% in fiscal years 2014 and 2015, respectively. Tax base growth is focused on the western edge of the district along the Grand Parkway Tollway, a major corridor within the Harris County (GOs rated 'AAA' by Fitch). The top ten taxpayers are a mix of energy companies, retail, utility, and manufacturing and account for a modest 5% of TAV. Fitch believes long-term prospects for additional development in the district, albeit at a more moderate rate than currently, remain promising, given the district's location in the broad, diverse Houston MSA.

STRONG FINANCIAL MANAGEMENT

The district has posted positive results in each of the last five fiscal years. The fiscal 2013 audit posted a $56.2 million net surplus (4% of spending), increasing the general fund's unrestricted fund balance to $212.7 million or a strong 31.7% of spending, above the district's informal 14% fund balance goal. Such results were aided by greater than budgeted property tax and state aid revenues. The district also conservatively budgeted contingency appropriations of $11 million (1.6% of spending) in the event classroom size waivers were not approved by the state (they were subsequently approved).

Unaudited results for fiscal 2014 point to another large surplus of $64 million or 8.2% of spending, fueled by conservative property tax revenue projections and another $11 million in unspent contingency appropriations for classroom size waivers. The fiscal 2015 budget is balanced and based on ADA growth of 2.6% which is in line with year-to-date enrollment trends. The budget also funds notable teacher pay hikes of 3.5% - 5.9% and increases the starting teacher salary at $50,025, the highest among neighboring districts.

HIGH APPROVAL RATE OF LARGE CAPITAL PLAN

A high 69% of voters approved a large $1.2 billion bond authorization in May 2014. The bonds will finance school facility renovations (accounting for one-half of bond costs), the construction of three new schools, one replacement school, acquisition of six school sites, plus transportation, security, and technology upgrades. Management expects such improvements will provide sufficient capacity through 2020. Later this month, the district expects to issue $330 million in new money bonds, including $157 million from previous authorizations. The remainder of the 2014 authorization will be issued in $250 million installments over the next four years.

The overall debt burden is elevated at $8,060 per capita and 9.1% of market value due in part to a large number of municipal utility districts within the district and inclusive of next month's scheduled issuance. The debt burden is projected to rise moderately absent continued solid TAV growth based on the district's four-year timeframe for issuance of its authorization. Current principal amortization is slow with only 35% of principal retired within 10 years.

MANAGEABLE TAX RATE AMIDST LARGE BOND PROGRAM

The district communicated to voters that the 2014 authorization would require a projected $0.045 debt service tax rate increase from its current rate of $0.41 per $100 TAV. The district now expects the tax rate impact to be less due to a large 16% gain in AV in fiscal 2015, well above the assumed 9% gain in the district's projection. Management now expects the debt service tax rate to peak at about $0.44 per $100 TAV, somewhat under the maximum $0.50 rate needed to secure the AG's approval for new debt issuance. Management of the debt service tax rate will be aided by the district's plan to continue to use part of its debt service fund balance that still totaled a large $50 million or 33% (adjusted for refunding) of spending in fiscal 2013.

LIMITED PENSION/OPEB OBLIGATIONS

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). 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. Including debt service, pension and OPEB contributions, carrying costs were a moderate 15.1% of fiscal 2013 governmental spending, benefitting from slow debt amortization and the state's strong support for school district pension costs currently in place. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August that the state's school finance system is 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February, 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. Fitch expects the state will appeal the latest ruling to the state supreme court. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates.

Additional information is available at 'www.fitchratings.com'.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

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=888534

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1 512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1 512-215-3727
or
Committee Chairperson
Managing Director
Amy Laskey, +1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1 512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1 512-215-3727
or
Committee Chairperson
Managing Director
Amy Laskey, +1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com