Fitch Rates White Settlement ISD, TX's ULT Rfdg Bonds 'AAA' PSF/'A+' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following bonds of White Settlement Independent School District (ISD), Texas:

--$16.3 million unlimited tax (ULT) refunding bonds, series 2015A;

--$7.3 million ULT refunding bonds, series 2015B.

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 PSF is available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

The bonds are scheduled for negotiated sale May 4. Proceeds from the sale will be used to refund a portion of the district's outstanding debt for interest savings.

In addition, Fitch affirms the 'A+' underlying rating on the district's $162.6 million in outstanding ULT bonds.

Fitch has withdrawn its ratings for the following bonds due to prerefunding activity:

--ULT school building bonds, series 2005 (all maturities).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district. The bonds have also been approved for the PSF guarantee.

KEY RATING DRIVERS

LIMITED DEBT FLEXIBILITY: The district's debt profile is Fitch's key credit concern. Overall debt levels are high, amortization is slow, and the annual debt cost on the budget is growing. The district's debt service tax rate is currently at the state's cap for new money issuance.

FISCAL CUSHION MAINTAINED: Conservative budgeting of attendance-based state aid and attention to spending levels have contributed to a general trend of surplus operations. However, the district's high level of reserves results partly from debt restructuring to provide near-term operating relief.

ENROLLMENT GROWTH COOLING: Previously rapid enrollment growth has subsided to a moderate pace, resulting in sufficient facility capacity for the near term.

MIXED ECONOMIC METRICS: Taxable assessed value (TAV) gains in three of the past four years reflect a general trend of commercial and residential growth. However, tax base concentration is above average, and wealth metrics are low to average.

LOCATION IN FORT WORTH MSA: The district benefits from its proximity to the broad economic base of Fort Worth. The area employment picture is favorable but remains vulnerable to federal defense spending cuts given the prominence of the sector in the local economy.

RATING SENSITIVITY

DETERIORATION OF FINANCIAL FLEXIBILITY: Conservative budgeting of revenue and spending is an important offset to what Fitch considers a weak practice of deferring debt repayment to maintain near-term flexibility. The district's rating would be pressured by a change in budgeting practice that leads to deterioration of financial operations. Material TAV weakness that increases the debt burden or a significant further deferral of debt service payments could also result in negative rating action.

CREDIT PROFILE

White Settlement ISD is located 11 miles due west of Fort Worth and serves a student population of approximately 6,700 in the primarily residential communities of west Tarrant County.

HIGHLY LEVERAGED, LACK OF DEBT FLEXIBILITY

A key credit concern is the district's ascending debt service schedule and practice of postponing debt repayment in favor or limiting the impact of debt service on the general fund budget. The debt service tax rate, at $0.50 per $100 of TAV, is at the maximum allowed by state law for the purposes of issuing new money debt. While the bonds still carry an unlimited tax pledge, the district has a strong incentive to ensure that debt service can be met with a debt service tax rate no higher than $0.50, as the difference must be repaid with general fund moneys per an agreement made with the state attorney general's office.

The agreement was made in 2008 at the time of the last new money issuance in order to meet the state's tax rate capacity test. The district agreed to dedicate $5.1 million (equal to 11.7% of fiscal 2014 revenues) of general fund moneys annually to make whole the projected gap between the debt service revenue yield from the $0.50 tax rate and maximum annual debt service.

Recent debt restructurings, together with this refunding, provide near-term flexibility as to the tax rate, although some have increased future debt service costs. Officials project that revenues from the $0.50 tax rate and state debt service aid will adequately cover debt service through fiscal 2022 without the use of general fund resources or debt service fund balance. These projections include what appear to be fairly reasonable assumptions of 99% tax collections and 3% annual TAV growth over the near term.

However, absent a change to state law and even with modestly positive tax base prospects, the district will need to further restructure its debt to address annual increases in debt service in the long term. The district anticipates bond issuance for two new schools in three to five years, which would likely necessitate voter approval of an operating tax rate increase and annual debt service transfers from the general fund.

Overall debt on a current accretion basis is high at $7,059 per capita and 13.9% of market value. Annual debt service charges net of state debt aid are currently manageable at 13.1% of governmental spending in fiscal 2014 but will rise given the escalating debt service structure. Maximum annual debt service represents 24.4% of fiscal 2014 spending. Amortization is very slow with only 18% of principal to be retired in 10 years. The slow payout rate is exacerbated by the district's reliance on capital appreciation bonds.

STABLE FINANCIAL OPERATIONS

The district's stable operating performance has been aided by management's continued conservative budget for enrollment growth, on which state aid is largely based. However, operations are also aided in part by management's decision to restructure debt rather than budget general fund moneys to make up the tax rate-debt service shortfall.

Planned capital spending in fiscals 2013 and 2014 drew down the general fund balance by a net $1.3 million rather than the $4.3 million originally planned. The positive variance is attributable to project cost savings and overall budget performance, which allowed the district to provide a $500 discretionary salary step increase in addition to a planned pay hike. The unrestricted fund balance at fiscal year-end 2014 was $12 million (25% of spending).

MAINTENANCE OF SOUND RESERVES CRITICAL TO RATING STABILITY

The fiscal 2015 general fund budget is balanced, and officials project that strong year-to-date enrollment will produce a modest surplus. Fiscal 2016 plans include expanded career and technology education at the high school, and officials expect that additional state revenue from increased student participation in the program will offset higher expenses in the medium term.

Management does not have a formal fund balance target but has expressed the goal of maintaining general fund reserves between 2.5 and 3 months (21%-25%) of operating costs. Although this fiscal cushion offsets limited revenue raising capacity and taxpayer concentration risk, the benefit is offset somewhat by the district's recent postponement of debt repayment.

TAX BASE GROWTH RESUMES

The district's TAV has exhibited a general trend of stable housing and commercial growth since fiscal 2012. TAV fell by 11% in fiscal 2014 following the relocation of a major manufacturing plant that had only moved its corporate headquarters to the district in fiscal 2013. Development in other sectors produced 7% tax base growth for fiscal 2015.

Management projects modest continued TAV gains in the near term, which Fitch considers reasonable given current and planned construction activity. Because regional oil and gas drilling has been modest in recent years, the economic impact of current price declines on the district is projected to be minimal.

BEDROOM COMMUNITY IN FORT WORTH MSA

The district benefits from its proximity to the extensive Fort Worth labor market. Military-related spending historically accounts for a large portion of the Fort Worth MSA economy, but recent gains in other sectors, such as services, construction, and trade have helped diversify employment. In addition, mining (natural gas), ranching, manufacturing, technology, education, and aerospace are significant economic sectors and add a measure of diversity to the region.

The area has maintained an overall positive employment profile. Tarrant County, which encompasses the district and the city of Fort Worth, continues to add jobs on pace with the state. County-wide unemployment improved to 4.1% in February 2015 from 5.5% in 2014, below the state (4.3%) and U.S. (5.8%) rates.

The level of residential activity has slowed in the district, and consequently enrollment growth is at a more moderate pace than in prior years. Previously rapid annual enrollment gains of between 4% and 6% have moderated to a more manageable 2% per year and officials expect this more moderate level of growth to continue in the near term.

MANAGEABLE PENSION 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), 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 postemployment benefit healthcare plan. Including debt service, pension, and OPEB contributions, carrying costs were a low 13.3% of fiscal 2014 governmental spending, benefiting from the state's strong pension funding system currently in place. However, school districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective in fiscal 2015.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past two years a Texas district judge ruled in August 2014 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 would likely follow with changes intended 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, 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=984060

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Contacts

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