Fitch Rates Harlandale ISD, TX's ULT Bonds 'AAA' TX PSF/'AA-' Underlying; Outlook Stable

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

--$3.4 million ULT school building bonds series 2015;

--$61.2 million variable-rate ULT school building bonds series 2015.

The bonds are scheduled for negotiated sale the week of August 11th. Proceeds from the bonds will be used to design, construct, renovate, acquire, and equip school facilities.

In addition, Fitch assigns an 'AA-' underlying rating to the bonds, and affirms the 'AA-' underlying rating on the following obligations:

-$57.5 million ULT refunding bonds series 2009, 2015, and 2015A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and also carry the Texas PSF bond guarantee (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).

KEY RATING DRIVERS

SOLID FINANCES: The district's financial condition is sound, with strong fund balances that have increased significantly in recent years and provide ample operating flexibility.

LOW INCOME DISTRICT IN SAN ANTONIO: The district benefits from its location within the city of San Antonio, TX. However, wealth indicators are well below state and national averages. District taxable assessed values (TAV) have shown growth recently after a period of contraction.

MANAGEABLE DEBT LEVELS REFLECT STATE SUPPORT: District debt levels are manageable due to significant state funding support for debt service. Capital needs are moderate and are being addressed with a combination of pay-go spending and an affordable level of debt.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: Financial deterioration resulting in a spending down of fund balances beyond the stated policy could put downward pressure on the underlying rating.

CREDIT PROFILE

The district is located within San Antonio, about three miles south of the downtown center and encompasses 13.7 square miles. The urban area is mostly residential interspersed with a limited number of commercial establishments. In recent years the district has regained some population it lost post-recession but has yet to return to the previous peak.

Enrollment has also shown moderate gains, averaging 1.3% annual growth since 2009. Improved student counts reflect the initiation and expansion of a district pre-K program, the opening of an early-college high school, as well as the district's efforts to increase attendance rates.

SIGNIFICANT STATE SUPPORT

As a property-poor district under the Texas Education Code, the district receives significant state support for both operations and debt service. State aid constituted about 80% of general fund revenues and covered 77% of debt service in fiscal 2014. Stable debt service and enrollment should keep state funding levels constant for the near term assuming consistency in the state funding formula.

SOLID FINANCES FEATURE STRONG ENDING BALANCES

The district has increased general fund ending balances in recent years, adding significantly to reserves since 2009. The unreserved/undesignated general fund balance increased from about $3 million (2.8% of spending) in fiscal 2008 to $61.8 million (47.6% of spending) at the end of fiscal 2014. Positive operating results were augmented by additional state support, partly driven by average daily attendance (ADA) exceeding budgeted figures.

District officials built up reserves in anticipation of a six-year $21 million plan that utilizes fund balance for operational and one-time purposes to improve the educational process through additional teachers in specialized areas, instructional materials, and equipment. Fiscal 2015 marked the first year of this plan, which was incorporated into the adopted budget and included the use of $7.3 million in fund balance in addition to $4 million in carryover encumbrance from the previous fiscal year. Management reports that the fiscal year ending June 30 will show a smaller draw on fund balance ($7.9 million) due to vacant positions, unspent departmental funds, and one-time projects coming in under budget. The fiscal 2016 budget includes a flat tax rate and enrollment assumption, and a $5.5 million draw on fund balance for projects included in the six-year plan.

The full realization of the roughly $21 million plan in the mid-term is contingent upon certain factors, including consistency in operational support from the state. Management reports their commitment to maintaining at least 2.5 months of operations in general fund reserves (the state recommended target) or $25 million (19% of 2014 general fund spending) and will not spend down fund balance beyond stated policy; an important credit consideration for Fitch.

ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO

The district is small but benefits from its location within the broader city of San Antonio economy (city limited tax bonds rated 'AAA' with a Stable Outlook by Fitch), which is primarily composed of military and government, domestic and international trade, tourism, health care, financial services, and telecommunications sectors.

City employment has shown recent annual growth and unemployment remains lower than county, state, and national levels. The city's unemployment rate was 3.5% as of March 2015, down from 5.3% a year prior and below state (4.2%) and national (5.6%) rates. However, district wealth indices are below average and poverty rates are well in excess of state and national levels.

TAV contracted a cumulative 14% from fiscals 2010-2013 as a result of the high number of foreclosure sales which lowered overall residential values. Fewer foreclosures and higher demand for district housing have reversed that trend, with fiscals 2014 and 2015 showing growth of 1.8% and 4.6%, respectively. Certified values for fiscal 2016 show a more robust increase of 8% due mostly to revaluations.

The district's operations tax rate is at the state's maximum permitted of $1.17 per $100 TAV subsequent to the passage of a tax ratification election effective fiscal 2009. The debt service tax rate has room under the $0.50 new money cap at $0.359 for fiscal 2016, coming down from a higher $0.435 just five years prior, aided by refunding activity.

MANAGEABLE DEBT AND CAPITAL PLANS

The district's debt levels are manageable as debt is supported by state funding allocations. Without state support, the debt burden is very high at 18% of market value. Debt levels are more manageable on a per capita basis at $4,534. Amortization slows with this issuance to 40% retired in 10 years from the previous 50%.

This issuance is part of a $20 million reimbursement resolution that the board approved in October 2013 for construction of the early-college high school, a health science/technology building, and an auto shop building expansion, among other additions.

The remaining bond proceeds will fund other facility improvements, including the construction/renovation of two elementary campuses, expanded pre-K, and parking lot improvements. School capacity is adequate for the current student population while maintaining recommended student-teacher ratios and limited use of portable classrooms.

The district's debt structure includes variable-rate bonds with a three-year initial fixed-rate term, a soft put back to bondholders in lieu of liquidity support, and the option to periodically reset the rate to a long-term fixed basis. The risk to the district is in the case of a failed remarketing whereby the district would pay an elevated but manageable interest rate. Fitch considers the risk of a failed remarketing minimal based on the district's rating which indicates strong market access, as well as the district's strong financial position.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other post-employment benefits (OPEB) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled less than 2% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits (net of state support) comprised a very low 4.2% of governmental spending.

TEXAS SCHOOL DISTRICT LITIGATION

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 and was the second such ruling in the past two years, 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.

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. Any changes that include additional funding for schools and more local discretion over tax rates would be positive credit factors.

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, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, US Federal Government (non-public information), and the Municipal Advisory Council of Texas.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989203

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989203

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Meyer, CPA, CFA
Director
+1-512-215-3733
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, Texas 78701
or
Secondary Analyst
Rebecca Meyer, CPA, CFA
Director
+1-512-215-3733
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com