AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Edna Independent School District (ISD), Texas' (the district) unlimited tax (ULT) bonds:
--$21.7 million of ULT bonds affirmed at 'AA-'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited tax pledge levied against all taxable property within its boundaries.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: Reserves remain very high and liquidity is ample despite the periodic cash-funding of major capital improvements. However, the potential attainment of property-rich status in several years may increase budgetary pressures.
OIL & GAS CONCENTRATION: Local economic activity centers on oil and gas exploration and agriculture. Two new gas plants have boosted taxable assessed valuation (TAV) but also resulted in considerable tax base concentration. Diversity in the consumers of the natural gas liquid (NGL) plants' products should provide some stability amidst declining oil & gas prices. The district's proximity to the broader economy of the city of Victoria somewhat mitigates concerns over the narrow economic base.
MIXED SOCIOECONOMIC INDICATORS: Per capita income levels are below average, while market value per capita is high due to expansive farmland and recent large oil and gas sector investments. The unemployment rate is low and the area continues to add jobs.
AFFORDABLE DEBT BURDEN: Key debt ratios are moderate and the annual carrying cost is affordable. The district has no future borrowing plans and remaining capital needs will be funded with resources on-hand.
Edna ISD sits approximately 90 miles southwest of Houston and 25 miles northeast of Victoria in Jackson County. The primary population center of this rural district is the city of Edna (2010 population of 5,500) and the district serves approximately 1,400 students.
ECONOMY BASED IN OIL & GAS ACTIVITY AND AGRICULTURE
This small district has a limited economy based predominantly in agriculture (rice, soybeans, and corn) and oil and gas interests. The district's proximity to the Eagle Ford Shale, one of the largest shale plays in the U.S., has spurred recent tax base, employment and enrollment gains within the district. Mineral values account for only 4% of the district's TAV but the recent addition of two NGL processing plants has substantially increased the district's concentration in the oil & gas sector.
NEW GAS PLANTS INCREASE CONCENTRATION
The new plants (DCP Eagle and Flag City) increased TAV by a large cumulative 45.7% over the two most recent fiscal years. While portions of the plants' values will be abated for general fund taxing purposes over a 10-year period, the full values will be taxable for debt service, as allowed under state-authorized economic incentive agreements.
The new plants have resulted in considerable tax base concentration at 38% among the top 10 payers in fiscal 2015, up from a moderate 11% in fiscal 2013. DCP and Flag City now account for 18% and 9%, respectively, of the tax base. DCP Eagle's parent company, DCP Midstream, LLC is rated 'BBB' by Fitch. Industry concentration is high with oil and gas companies as eight of the top 10 taxpayers.
Additional credit concern stems from the recent declines in oil and gas prices which could impact the production levels of NGLs, a byproduct of gas and crude oil wells. This credit concern is partially offset by the diversity of the plants' end users comprised of oil refineries (upstream users) and petrochemical and plastics companies (downstream users) which benefit under opposite trajectories in oil & gas prices. New NGL processing plants are also considerably more efficient than older plants and should generate profit margins over wider oil & gas price swings, enhancing their long-term sustainability.
Budget exposure to TAV volatility is mitigated by the state's target revenue funding system, which offsets declines in local revenue with additional state aid.
EMPLOYMENT AND ENROLLMENT GAINS ASSOCIATED WITH OIL/GAS ACTIVITY
Area employment indicators, available at the county level, are positive albeit somewhat erratic. Employment in Jackson County grew 3.3% during the 12-month period ending September 2014. The corresponding unemployment rate declined to a low 3.9% from 5% year-over-year. Income levels are below average but the district's market value per capita is a high $148,000.
Fitch views management's conservative budgeting of enrollment-driven state aid as key to maintaining budgetary balance and long-term credit quality. Enrollment has remained flat after increasing unexpectedly by 8% in fiscal 2013. Management notes the increase was in large part due to increases in the oil and gas labor force, which suggests that some of the enrollment upswing may be temporary given the transient nature of this sector. Management expects additional but less significant enrollment gains in the near-term.
HISTORY OF FAVORABLE OPERATING RESULTS AND ROBUST RESERVES
The district has preserved its solid operating reserves despite annual pay-as-you-go capital outlays that have totaled $14.4 million since fiscal 2007.
The district's pay-go funding of $4.5 million (equal to a high 29% of spending) for a new high school and elementary school classroom additions led to a $2.1 million (13.4% of spending) net deficit in fiscal 2013. The planned drawdown reduced the unrestricted general fund balance to $10 million or a high 60% of spending. The financial cushion is considerably larger at 90.8% of spending if adjusted to reflect recurring expenditures only.
MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY
Unaudited fiscal 2014 results point to a moderate $279,000 (2.2% of spending) net surplus. The fiscal 2015 budget is balanced and increased appropriations by a modest 2.7% over the fiscal 2014 budget for teacher pay hikes, four new teaching positions, and pay-go for bus purchases. The addition of teaching positions allowed the district to better accommodate the 8% enrollment spike from fiscal 2013. Officials conservatively budgeted a modest decline in ADA although year-to-date ADA remains level with the prior year.
The balanced fiscal 2015 budget should keep general fund reserves comfortably above the district's formal fund balance floor of three months (25%) of operating expenditures. District reserves have been maintained well above the policy level for some time, and Fitch views this as a critical offset to concerns over the limited, volatile resource base and heightened enrollment volatility.
The recent surge in TAV has brought the district closer to the property value per weighted ADA (wealth per WADA) threshold of $319,000 at which point the district may be required to redistribute a portion of its' resources with other districts. At $272,000, the district's current wealth per WADA is not projected to reach the threshold for several years or more depending on enrollment and TAV growth trends.
MANAGEABLE DEBT BURDEN
The district's overall debt burden is moderate at $2,732 per capita and 2% of market value. The annual carrying cost is affordable at 7.7% of fiscal 2013 governmental spending. Debt service is fairly level and the rate of debt retirement is below average with 44% retired in 10 years.
The district does not have any remaining debt authorization and has no current plans to seek authorization. Remaining capital needs are manageable and consist of parking lot and roof repairs, likely to be funded with available general fund resources in the near term. The recent large gains in TAV allowed the district to reduce its debt service tax rate by a hefty 28% (to a moderate $0.27 per $100 TAV) over the last two fiscal years.
PENSION & OPEB LIABILITIES NOT A CREDIT PRESSURE
The district fully funds its statutorily required contributions for pension and other post-employment benefits (OPEB), both of which are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. TRS remains well funded at 74.5% using Fitch's more conservative 7% investment rate of return assumption.
Audited pension and OPEB contributions in fiscal 2013 totaled $166,000 or a modest 0.7% of governmental spending. This nominal annual required pension and OPEB contribution is a result of the state's significant contributions made on behalf of districts.
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. The Texas attorney general has appealed the judge's 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 operations and maintenance 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, LoanPerformance, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria