AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has downgraded the following bonds of San Benito Consolidated Independent School District, Texas (the district) to 'BBB+' from 'A':
--$32.7 million unlimited tax (ULT) school building bonds, series 2008.
The Rating Outlook is revised to Negative from Stable.
The bonds are payable from an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
DIMINISHED FISCAL CUSHION: The downgrade reflects the adverse financial impact of the district's governance and management practices, including a structural imbalance in the health insurance fund that severely reduced operating reserves. The Negative Outlook reflects the continuing exposure of general operations to this imbalance in the current fiscal year.
RELIANT ON STATE AID: The district is highly reliant upon state revenues to fund operations as a result of its low property wealth and remains subject to fluctuations in state funding.
MIXED DEBT PROFILE: Debt ratios are elevated as a percentage of the district's full market value, while the pace of debt retirement is moderate. Positively, the aggregate carrying costs for debt, pensions, and other post-employment benefits (OPEB) are affordable.
SUBPAR SOCIOECONOMIC INDICES: The area economy is fairly diverse, but typical of many Texas border communities, it suffers from chronically high unemployment, high poverty, and low wealth metrics.
STABLE TAXPAYER BASE: Growth in taxable assessed valuation (TAV) has been slow but stable. Taxpayer concentration is modest.
FINANCIAL STABILIZATION: A lack of progress in restoring structural balance to the district's operating and self-insurance funds will lead to a rating downgrade. Conversely, if the district is able to maintain balanced operations, the Rating Outlook would likely be revised to Stable.
LEADERSHIP CONCERNS: Prolonged delays in appointment of permanent leadership positions that negatively affect district operations or financial results would lead to downward rating pressure.
The district is located on the U.S.-Mexico border in Cameron County and includes the city of San Benito (rated 'A+' by Fitch), a commercial and tourism center in the Brownsville-Harlingen metropolitan statistical area. Student enrollment has fluctuated somewhat in recent years due to competition from nearby charter and magnet schools, and is approximately 11,000.
INSURANCE SHORTFALL DRAINS RESERVES
Fiscal 2014 was the first year of a managed care self-insurance plan for employees. Due to inaccurate claims projections not based on actuarial study, the district's health insurance fund experienced a loss of $6.8 million. The district transferred funds from the general fund to cover the shortfall. In addition, state revenues for operations came in at $2.9 million below budget after enrollment declined by 1.3% in contrast with flat projections.
The combined effect of this imbalance was a $9.7 million general fund deficit (equal to 9% of spending). The unrestricted fund balance ended fiscal 2014 at a low $6.6 million (6% of spending, down from 17% one year prior). Liquidity remained sound at over three months of operating expenditures in spite of the drawdown.
The district reconfigured the healthcare plan in fiscal 2015, and expects that increased employer and employee contributions to fund claims will result in a smaller deficit of $4 million. State revenue to date is in line with budget projections based on flat enrollment, and officials anticipate an unrestricted fund balance of approximately $3 million at year-end (3% of budgeted spending).
The proposed fiscal 2016 budget projects balanced operations, based on enrollment equal to the fiscal 2015 level. The district has executed a new self-insurance plan with a nationally ranked provider, with projected claims that are based on actuarial estimates. Management projects that the new healthcare plan, which has enhanced stop-loss protection over the current plan, will be self-supporting without general fund subsidization in fiscal 2016. The proposed budget conservatively projects insurance claims at the stop-loss attachment point (i.e. maximum under the contract), and also funds pay hikes of 8% for teachers and 3% for all other staff.
Fitch views the district's continued exposure to unexpected insurance claims levels through termination of the current plan in September 2015 with caution. The rating could face further downward pressure if the district is unable to restore fiscal balance.
TAX-RATE SWAP PROVIDES FLEXIBILITY
The district retains a degree of revenue flexibility with a relatively low tax rate that can be raised with board approval. The total tax rate has remained unchanged since fiscal 2010 when the district executed a tax-rate swap, whereby voters approved an operating tax-rate increase of $0.13 per $100 of TAV, yielding maximum state aid for operations, while reducing the debt service tax rate by the same amount.
The net effect of the swap was a level total tax rate and enhanced operating revenue, with an annual debt service fund shortfall of about $3.5 million to be subsidized by general fund resources. Fitch recognizes that this unconventional taxing structure could be subject to legislative or statutory changes, but credit concerns are mitigated by management's ability to reverse the tax rates if necessary.
MANAGEABLE LONG-TERM LIABILITIES
Overall debt is moderate on a per capita basis at $2,168 but high as a percentage of market value at 7.8%, reflecting low property wealth. The pace of direct principal amortization is moderate with 49% retiring in 10 years. Because state debt service support is a function of property wealth and local taxing effort, the reduction of the debt service tax rate triggered a drop in direct state debt service aid from 80% in fiscal 2010 to 23% in fiscal 2014. The gap is now being funded from a mix of the enhanced state and local operating revenues mentioned above. Officials have no plans to issue additional bonds in the near term.
The district's pension and OPEB 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 post-employment benefit healthcare plan. Including debt service, pension, and OPEB contributions, carrying costs were a modest 6.7% of fiscal 2014 governmental fund spending.
The state's funding of school districts' payments to TRS helps keep these fixed costs low. However, like all Texas school districts, the district is vulnerable to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.
LIMITED BUT STABLE RESOURCE BASE
The district covers 100 square miles in the Rio Grande Valley. The area economy is based on agriculture, fishing, manufacturing, trade, and tourism, and also benefits from trade links with Mexico.
Employment growth in Cameron County has matched laborforce growth in recent years, resulting in a March 2015 unemployment rate of 7.1%, down from 8.8% one year prior. This remains well above the state and national averages of 4.2% and 5.6%, respectively. The area's high unemployment rate and low wealth indices are typical of most Texas border communities.
The district's tax base registered consistent growth in the past six years, and despite slowed growth in the economic downturn, averaged 3% annual gains from 2009-2015. Certified fiscal 2016 assessed values indicate modest growth reflecting some commercial construction. Of the taxpayer base, 66% is residential properties and no single taxpayer accounts for more than 3.2% of total valuations.
TEXAS SCHOOL FUNDING 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 considerations.
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, Municipal Advisory Council of Texas, and National Association of Realtors.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form