Fitch Rates Mesquite ISD, TX's ULT Bonds Underlying 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following unlimited tax (ULT) bonds for the Mesquite Independent School District, TX (the district):

--$26.5 million ULT school building bonds, series 2015A;

--$20.6 million ULT refunding bonds, series 2015B;

--$28.5 million ULT refunding bonds, series 2015C.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas Permanent School Fund is available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.. Fitch also assigns an 'AA+' underlying rating to the bonds.

The series 2015A, 2015B, and 2015C bonds will sell via negotiation the week of March 16. Proceeds of the bonds will be used to construct school facilities, purchase technology, and refund a portion of the district's outstanding debt for interest cost savings.

In addition, Fitch affirms the 'AA+' underlying rating on approximately $389 million of outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district. The Texas PSF guaranty applies to all outstanding bonds of the district except the series 2009 ULT school building bonds.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: Financial results have been consistently healthy, enabling the district to accumulate sound operating reserves and ample liquidity. A drawdown on reserves is planned in the current fiscal year for a large capital renovation project, which is expected to reduce reserves closer to policy level.

DIVERSE REGIONAL ECONOMY: The district benefits from its location in the broad and stable 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.

STABILIZED TAX BASE: Taxable assessed value (TAV) has gained positive traction after a period of downward pressure from declining home values. Fitch considers the cumulative TAV decline as fairly moderate and modest TAV growth over the near term is likely.

MIXED DEBT PROFILE: Overall debt is high relative to market value. This is balanced against above-average principal amortization and an affordable cost structure resulting from significant state support for district debt.

MANAGEABLE CAPITAL NEEDS: Fitch believes capital needs in this mature district remain manageable despite a steady pace of enrollment growth. Pay-as-you-go capital spending allowed management to meet many of its capital needs and postpone its more sizable capital projects and associated debt plans until tax base growth resumed.

RATING SENSITIVITIES

MAINTENANCE OF STRONG RESERVES: The preservation of the district's strong financial position is key to continuing credit quality strength.

CREDIT PROFILE

This mature, suburban district is located 35 miles east of downtown Dallas and serves an estimated population of nearly 176,000 in the cities of Mesquite, Balch Springs, and Seagoville. Current enrollment of about 40,100 is up 1% from last year. Wealth levels are slightly below those of the larger DFW metro area.

CONSISTENTLY STRONG FINANCIAL PERFORMANCE

The district's financial performance has been strong despite large state funding cuts for all Texas school districts in fiscals 2012 and 2013. The district generated surplus operating results in each of the last five audited fiscal years (2010-2014).

The district typically outperforms its conservative preliminary projections, as demonstrated by a $6.1 million general fund surplus in fiscal 2014 (2% of spending) despite the use of $14.5 million for one-time capital outlays. The positive results benefited from larger than budgeted enrollment gains as well as improved state funding for K-12 public education in the new biennium (fiscals 2014-2015). The district's unrestricted general fund balance totaled $91.3 million or a strong 30% of spending at fiscal 2014 year-end, well above the district's 15%-21% reserve policy. Liquidity was sound with general fund cash and investments representing more than four months of operations.

The district's fiscal 2015 operating budget reflects a $7 million use of fund balance due to planned capital spending of roughly $14 million to renovate a football stadium. The budget also includes across the board pay increases of 2%. Despite the budgeted operating deficit, Fitch expects that reserves will be maintained closer to the higher end of established policy, preserving sufficient financial flexibility in line with the above-average rating.

BROAD AND RESILIENT DFW ECONOMY

The district's proximity to Dallas and its 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 the ninth largest in the country, with an estimated population of 2.5 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 city of Mesquite and the surrounding DFW region have added jobs at a rate faster than the nation since the recession ended in 2009. Mesquite's December 2014 unemployment rate was 4.2%, down from 5.9% the prior year, despite a 2% year-over-year gain in labor force. City unemployment is comparable with the DFW metro (4.0%) and the state (4.1%) and below the U.S. rate (5.4%).

TAV RESUMED POSITIVE GROWTH

A trend of TAV declines reversed modestly in fiscal 2014, due in part to the growth in commercial/industrial values as well as multi-family residential construction. This trend continued in fiscal 2015, with 4.8% growth reflecting reappraisal gains. The district's tax base is largely residential and a weak housing market had dragged on the district's TAV, resulting in a cumulative 13% decline in fiscals 2009-2013. Home prices have nonetheless improved since the low point of the recession, and Zillow reports an average listing price of $110,000, up from the low point of $95,000 in 2012.

The tax base is not concentrated as the top 10 payers comprise only 6% of fiscal 2015 TAV. Fitch believes management's modest 2% TAV growth assumptions over the near term are reasonable given healthy industrial development in recent years and a trend of residential price gains. This should serve to further spur the economy.

Fitch's concerns about the operational impact of prior years' TAV declines are largely mitigated by the state's funding formulas, which generally ensure level per-pupil funding (absent state budget cuts in the last biennium) by backfilling lost local revenues with additional state aid. The district's debt affordability and capacity would be reduced if TAV changed course and declined further, constraining its ability to address future capital needs.

HIGH DEBT WITH MANAGEABLE CAPITAL NEEDS

Overall debt is high as a percentage of market value at 8.2% on an accreted basis, but debt per capita is moderate at $3,186. Despite the unfavorable debt burden, fiscal 2014 debt service was relatively low at 4.8% of governmental fund spending, reflecting substantial state debt service support (about 54% of ULT debt service in fiscal 2014). The amortization rate is slightly above average with 61% of non-accreted principal retired in 10 years, including planned issuances.

This offering exhausts the district's 2007 bond authorization, and is not projected to require a tax rate increase from the moderate debt service rate of $0.37 per $100 TAV. This projection is based on modest TAV and enrollment growth assumptions which Fitch believes are reasonable given recent history. Management plans to hold a general obligation bond election in May 2015 for $180 million. If the bonds are approved and issued, proceeds will expand classroom capacity throughout the district.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teacher 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 postemployment benefit healthcare plan. Total carrying costs for debt service, pension, and OPEB contributions were a modest 5.5% of fiscal 2014 governmental fund spending, benefitting from the state's strong subsidy for both debt service and pensions. However, school districts are susceptible to future funding changes by the state as evidenced by a new, relatively modest employer contribution requirement of 1.5% of salary effective fiscal 2015.

TEXAS SCHOOL FUNDING LITIGATION

For the second time, 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, Zillow.com, the Municipal Advisory Council of Texas, and the 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=981111

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1 512-215-3727
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
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1 512-215-3727
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
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com