AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Austin Community College District, Texas (ACC, or the district) limited tax debt:
--$175 million limited tax bonds, series 2015.
The bonds are scheduled to sell May 19 via negotiation. Proceeds will be used to construct, equip, and renovate school facilities as well as pay related costs of issuance.
The Rating Outlook is Stable.
The bonds are a direct obligation of the district, secured by an annual property tax levy limited to $0.50 per $100 of taxable assessed valuation (TAV) on all taxable property within the district.
KEY RATING DRIVERS
DIVERSE, GROWING TAX BASE: The district's tax base, which includes much of the Austin-Round Rock metropolitan statistical area (MSA), has realized solid annual growth after a brief recessionary decline. Fitch expects this trend will be sustained in the near term given a robust housing market and significant development underway or planned. Taxpayer concentration is moderate, although some technology sector concentration is present. Unemployment is low and remains below state and national levels. Area population trends exceed the state; income/wealth levels are above average.
OPERATING BALANCE DESPITE MARGIN DECLINES: Fitch believes the district's finances remain generally sound due largely to its diversified revenue sources and maintenance of solid reserves in line with established policy. Operations maintain structural balance. However, one-time spending for equipping new campuses and other capital resulted in modest negative operating margins.
REVENUE FLEXIBILITY SOMEWHAT CONSTRAINED: ACC maintains financial flexibility in its ability to raise tuition, but is constrained in raising further operating tax revenue from its levy as it currently taxes at the local limit.
MODERATE LONG-TERM LIABILITIES: Fitch expects the overall debt burden to remain moderate. Carrying costs are manageable, but this partially reflects the below-average amortization of outstanding tax-supported debt. Capital needs are sizeable, although a recently approved general obligation (GO) bond authorization should allow the college to address its most pressing needs.
STRUCTURAL IMBALANCE: The district has maintained structurally balanced operations despite its recent campus expansions and declining enrollment trends. Management forecasts the ability to sustain balanced operations given further tax base and tuition revenue growth, which Fitch believes is reasonable. Inability to do so from unmitigated revenue or expenditure pressures would likely lead to negative rating action.
ACC is located in central Texas and encompasses a sizeable population base of nearly 2 million in the growing Austin-Round Rock MSA. Area population growth has been rapid since 2000, exceeding the state's. ACC operates 10 comprehensive campuses in its taxing jurisdiction and offers instructional programs at its educational centers throughout its larger, eight-county service area.
REVENUE DIVERSITY SUPPORTS OPERATIONS WITH SOME CONSTRAINTS
ACC benefits from a diverse revenue stream, which includes property taxes for operations and debt service (the largest revenue source at 41% or $119 million in fiscal 2014), followed by tuition/fees, and state appropriations. Tuition/fees have provided a fairly steady 20% of total revenues or $59 million in fiscal 2014. ACC implemented tuition and fee increases over recent fiscal years to offset enrollment losses consistent with a strengthening economy, although tuition rates remain affordable. Student enrollment as measured by full-time student equivalents totaled 20,259 in fiscal 2014, which was down by about 3% from the year prior and reflective of moderate, cumulative enrollment decline over the last three fiscal years. Further erosion appears to have halted, though, as fiscal 2015 enrollment remains relatively stable on a year-over-year basis.
ACC is reliant on tuition and fee increases and growth in its large tax base for future revenue growth as it does not have additional financial flexibility in its available operating tax rate. The district has taxed at the locally-imposed operating tax cap of $0.09 per $100 assessed value (AV) since fiscal 2007. Fitch believes this is unlikely to change in the near term as voters recently rejected a proposed increase to the operating tax rate.
STRUCTURALLY BALANCED OPERATIONS AND SOLID RESERVES MAINTAINED
ACC's financial position remains sound, although historically strong, positive operating margins have eroded. Fiscal performance has tightened given the recent trend of typical counter-cyclic enrollment declines, prior fiscal years' state funding cuts, expanded operations from new campuses, and more recently, one-time capital and other spending events. Nonetheless, operations maintain structural balance despite spending growth.
The district realized a decline in net position with an accompanying modest negative 3.7% operating margin in fiscal 2013 that softened somewhat but remained negative at 2.1% in fiscal 2014. Management indicates these year-end results were largely attributable to one-time, non-capitalized spending for equipping new campuses ($9 million in fiscal 2014) and other capital (bond) costs. The district's net position would have increased by $3 million in fiscal 2014 excluding these expenses.
The larger $10.4 million net position decrease in fiscal 2013 was compounded by a one-time, $4.3 million pension contribution under dispute for fiscal 2012 that was required by the state to be paid so as to receive the year's appropriation. Solid unrestricted cash reserves that provide healthy financial flexibility were maintained at roughly $54 million or about 18% of total spending in fiscal 2014, slightly exceeding stated policy that requires nearly 17% or two months of spending in reserves.
The fiscal 2015 $283 million operating budget grew about 2% from the year prior and was adopted as balanced with break-even results and flat enrollment trends assumed. The year's budget growth was primarily supported by TAV growth with a roughly $5 million net gain in property tax revenues to support increased operating and salary costs. Year-to-date, management reports enrollment is holding stable as compared to budget and stronger than estimated TAV growth is projected to generate some additional property tax revenue. In total, management anticipates balanced spending and increasing the unrestricted cash position by about $6 million or 2% of spending at fiscal 2015 year-end, which Fitch believes is reasonable given the enrollment and revenue trend.
STRONG ECONOMY AND TAV GAINS
The MSA continues to grow at a strong pace given area population trends and the resulting economic expansion. Unemployment in the MSA declined to a low 3.0% in February 2015, which was down from 4.2% the year prior, remaining below the state and U.S rates of 4.3% and 5.8% respectively. Taxable assessed valuation (TAV) has realized ongoing, solid growth after a moderate, one-year recessionary decline; a strong, nearly 11% TAV gain was realized in fiscal 2015. TAV is presently estimated to increase by another strong 9% in fiscal 2016. A continued pace of at least a 5% annual TAV growth is projected by management over the near term, which Fitch believes is reasonable given the strong economy and various new development projects underway or planned. Concentration among the top 10 taxpayers was moderate at 4% in fiscal 2015; slightly more than half of the top taxpayers are large, high-tech firms.
MODERATE LONG-TERM LIABILITIES
Overall debt levels remain relatively moderate at approximately $4,274 per capita or 4.8% of market value. Principal amortization of the district's tax-supported debt remains slow with 32% retired in 10 years. ACC has leaned heavily on the issuance of revenue and lease revenue debt (not rated by Fitch) to meet its capital needs. This new money issuance is the first portion of a roughly $386 million GO bond authorization approved by 58% of voters in November 2014. Much of the bond package is directed toward various renovation/expansion needs at existing facilities.
Fitch does not expect issuance of the full GO bond authorization to have a significant impact on overall debt ratios. District officials anticipate issuing the remainder of the bond authorization annually through fiscal 2017 which is expected to require a maximum two- cent tax rate increase under what Fitch believes to be reasonable TAV assumptions. Fitch believes this bond program should allow the district to address its sizeable capital needs, although Fitch expects district officials to take a measured, strategic approach when implementing various capital improvements, consistent with prudent management practices.
ACC's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the college historically provided the bulk of the employer's annual pension contribution. TRS is just 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 college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. The employer's contribution is shared at roughly 50% with the state. Increases in pension funding requirements beyond fiscal 2015, while not presently anticipated, could create additional budget pressure, which Fitch will monitor.
Carrying costs (debt service, pension, OPEB costs, net of state and self-support) were approximately 8.3% of total expenses in fiscal 2014 and are expected to remain manageable even with scheduled increases in annual debt service.
Additional information is available on www.fitchratings.com
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
U.S. Local Government Tax-Supported Rating Criteria