Fitch Affirms Cedar Hill ISD, Texas' ULT Bonds at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'AA-' rating on the following Cedar Hill Independent School District, Texas' (the district) unlimited tax (ULT) debt:

--Approximately $129.2 million (on a non-accreted basis) in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA' Stable Outlook by Fitch).

KEY RATING DRIVERS

REDUCED BUT HEALTHY RESERVES: The district's reserve cushion remains healthy despite recent fiscal performance that has reduced fund balance to below policy level. Fitch expects the current year's operations will preserve a sound level of reserves and liquidity in line with management's year-to-date projections.

STRONG REGIONAL ECONOMY: The district benefits from its location in the broad and diverse economy of the Dallas-Fort Worth (DFW) metro area. Residents have easy access to a large employment market that continues to outperform the nation in terms of population, employment, and income growth.

TAV MOMENTUM: The somewhat sluggish tax base has begun to realize solidly positive growth after a period of moderate cumulative decline stemming largely from home values depreciation.

WEAK DEBT PROFILE: The district's high debt ratios and slow amortization due to capital appreciation bonds (CABs) are key credit concerns. However, carrying costs for debt and retiree benefits remain manageable as pension and other post-employment benefit (OPEB) liabilities are very low. Concerns over the above average debt burden are eased in part by the strong voter support for the last bond proposition.

RATING SENSITIVITIES

FISCAL POSITION: Maintaining sound reserves that provide healthy financial flexibility as well as strengthened fiscal practices are key to credit quality and an important mitigant to the high debt and narrow debt capacity risk factors.

CREDIT PROFILE

This mature, suburban district is located 19 miles south of downtown Dallas and serves a 42 square-mile area with a population of about 45,000. Enrollment of 7,866 in fiscal 2014 remained flat as compared to the prior year and has grown on average by less than 1% annually since fiscal 2008.

SOUND RESERVES

About half of the district's operating revenue comes from state aid. General fund operations were essentially balanced over the fiscal 2007-2012 period and available fund balance remained at or above the district's prudent fund balance policy floor of 25% of spending. Management was able to adjust spending in line with lower revenues from slight enrollment declines, on which state funding is largely based.

Operating performance deteriorated somewhat in fiscal 2013 due to a variety of factors. First, year-end results fell atypically below budget expectations as enrollment declined unexpectedly along with associated state revenues due to a newly opened charter school. This negative revenue variance was in addition to a roughly $1.5 million expenditure variance due to unbudgeted staff and utilities costs. Finally, a state enrollment audit led to a $2 million audit adjustment to fully address prior years' state aid overpayments. These were offset in part by a one-time, $2 million insurance reimbursement. In total, fund balance declined by a net $2.1 million in fiscal 2013. Unrestricted reserves declined to $12.6 million or 22% of spending, which fell modestly below policy.

Operations in fiscal 2014 benefitted from $1.3 million in additional state aid due to increased per pupil state funding in the biennium (fiscal 2014-2015). The year's operations tracked favorably to a structurally balanced budget, inclusive of some enrollment growth. However, reserves were drawn down by $1.6 million at year-end for the purchase of land. Unrestricted reserves declined to $11.2 million or 19.2% of spending. General fund cash and investments totaled $9.5 million or about two months of operations.

ADHERENCE TO RESERVE POLICY CRITICAL TO RATING STABILITY

The fiscal 2015 adopted operating budget totaled $58 million with a modest surplus projected. Management indicates actual enrollment is up slightly year-to date, which should produce some favorable variance to budget. District officials indicate its reserve policy is up for consideration with the likelihood of its revision downward to formally maintain a 20% threshold. In general, Fitch views reserves as key to providing sound financial flexibility, and this is heightened for the district given they provide an important mitigant to the district's specifically high debt and narrow debt capacity risk factors. Fitch believes the proposed reserve policy would be adequate for the district at this rating level, but further reduction in the policy or inability to adhere to the proposed level would put downward pressure on the rating.

LOCATION IN BROAD AND RESILIENT DFW ECONOMY A CREDIT POSITIVE

The district's proximity to Dallas and location in the broader DFW metro area provides residents with easy access to a large and diverse labor market. Dallas is the second largest city in the state and ninth largest in the nation, with an estimated population of 1.2 million. The city is home to numerous corporate headquarters and prominent economic sectors include transportation, financial services, wholesale trade, manufacturing, oil/gas, and education and government.

The area employment picture is positive, with the city of Cedar Hill and the surrounding DFW region adding jobs at a rate faster than the nation since the recession ended in 2009. Cedar Hill unemployment fell to 5.4% from 6.7% in November 2014, which remained somewhat above the DFW region and state (4.6%), but slightly below the national average (5.5%). Wealth levels are mixed with above-average median household income and low poverty rate offset by an improved but comparatively low per-capita market value of $72,000 in fiscal 2015.

POSITIVE TAV TRACTION IN FISCAL 2015

TAV grew by a healthy 6% in fiscal 2015, which followed a return to stable TAV in fiscal 2014 that somewhat lagged other local entities in the Dallas-Fort Worth MSA. The positive momentum was due in large part to an improved local housing market and rising prices that in contrast, drove much of the cumulative 14% TAV decline from fiscal 2009 peak value to fiscal 2013. Management's expectations for further, modest TAV gains in the near term appear reasonable to Fitch given some development underway in the district, inclusive of some upscale apartment complexes. Taxpayer concentration is minimal with the top 10 payers comprising 9.5% of fiscal 2015 TAV.

OVERALL DEBT BURDEN HIGH

Key debt ratios are high with overall debt at approximately 8.6% of fiscal 2015 market value and $6,165 per capita. Ratios include the current accretion of CABs, which represent 33.5% of outstanding direct debt, as well as debt from overlapping entities. Principal amortization is slow at just 30% of district principal repaid in 10 years.

The debt service tax rate has increased to a high $0.485 per $100 of TAV in support of the 2012 bond authorization, in line with what was promised district voters. This is just below the state's statutory ceiling for new debt issuance of $0.50. Annual debt service rises slightly from $12 million to $14 million over fiscals 2015-2032. As such, future borrowing capacity will depend on TAV gains. However, near-term capital needs appear manageable based on the district's fairly stable enrollment trends and the expanded facility capacity provided by the prior bond program. Management expects to utilize remaining bond proceeds and some pay-go capital spending over the next few years before potentially approaching voters for any larger capital needs.

AFFORDABLE RETIREE COSTS; MODERATE FIXED COSTS

Fitch's concern about the district's elevated debt profile is lessened by its low retiree cost burden. Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. 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; the district consistently funds its annual required contributions. District employees contribute to TRS for pensions at 6.4% of annual payroll, and the state pays the local district's contributions (6.4% of payroll in fiscal 2014), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. Other post-employment benefit (OPEB) contributions paid by the district are nominal as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2014 totaled less than 1% of governmental fund expenditures.

TRS is adequately funded at 80.8% as of Aug. 31, 2013, though Fitch estimates the funded position to be lower at 72.8% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of an elevated debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a manageable 12.5% of governmental fund spending in fiscal 2014 due in part to slower than average amortization. Starting in fiscal 2015, pension contributions for all districts in the state rose to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

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 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, IHS Global Insight, National Association of Realtors, and the Texas Municipal Advisory Council.

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=979479

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1 512-215-3739
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1 512-215-3726
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1 512-215-3739
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1 512-215-3726
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com