NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA' rating on outstanding unlimited tax general obligations (ULTGO) bonds of the Goose Creek Consolidated Independent School District (the district) as follows:
--$28.1 million series 2004;
--$57.8 million series 2005 and 2005A;
--$124.1 million series 2006;
--$51.2 million series 2007 and 2007A;
--$7 million series 2011;
--$41.2 million series 2012.
The Rating Outlook is Stable
The bonds are payable from ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are payable from the Texas Permanent School Fund (PSF) guarantee, whose bond guarantee program is rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).
KEY RATING DRIVERS
STRONG FINANCES; ABUNDANT RESERVES: The district historically outperforms the budget and maintains sizable general fund reserves despite recent draws. Fitch considers the district's high reserves a key mitigant to revenue fluctuations associated with state school variability and above-average concentration of the economic base.
HIGH DEBT; MANAGEABLE PENSIONS: The burden of high debt on the budget is made manageable by the state's support of district pension payments. Carrying costs, including debt service and retiree obligations, represent an affordable share of governmental spending. Significant increases in the district's liabilities burden, though not expected, could pressure financial flexibility.
HIGHLY INDUSTRIAL ECONOMY: The local economy is highly industrial with a significant petroleum presence (both exploratory and refining) led by Exxon Mobil, which accounts for a very high 36% of the district's tax base. Fitch expects the district's tax base concentration to remain substantially high despite recent growth in other sectors.
FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in the district's financial flexibility as ample reserves mitigate exposure to economic cyclicality and state funding uncertainty.
Goose Creek CISD serves a 2015 census population of about 111,000, primarily in the southeastern portion of Harris County, the sixth largest manufacturing county in the U.S., and partially in Chambers County. The district is located approximately 23 miles outside of Houston.
SOLID FINANCIAL MANAGEMENT
Fitch considers the maintenance of conservative budgeting practices and sizeable fund balances as key credit mitigants to the highly concentrated tax base and history of state aid volatility. Solid financial management has maintained ample reserves with an unrestricted fund balance of $69.5 million, equaling a sound 33% of spending in fiscal 2015.
The fiscal 2016 budget includes a 3% raise for all employees, driving a $5.6 million use of general fund reserves, intended to attract strong teaching candidates to the district. The district expects state increases to public education funding to provide a direct benefit to its base revenue following steep state aid cuts in the 2012-2013 biennium. Year to date results have outperformed budget, narrowing the gap to $4.5 million, and management expressed commitment to reducing the gap further and achieving balance in fiscal 2017.
Fund balance is expected to remain high at 30% of fiscal 2016 spending and well above the district's recently formalized policy of 25% of general fund spending. Fitch considers reserves at or above this level to adequately offset the risk posed by high tax base concentration and state aid volatility.
ELEVATED BUT MANAGEABLE LONG-TERM LIABILITIES
The district's high debt levels are a key credit concern. Overall debt totals $8,214 per capita and 8% of total market value, driven by growth-related needs and high overlapping obligations. The district's most recent debt issuance was from its $268 million 2013 bond election. The full authorization funds construction of three new elementary schools, a technology center, a transportation center, and various capital improvements. Although the district has no plans to seek additional bond authorization, additional debt beyond the current authorization could pressure the rating. Amortization is below average with 42 % retired in 10 years. Carrying costs for debt service, pensions and other-postemployment benefits (OPEB) are moderately low at 16.1% of fiscal year 2015 governmental spending.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state -- as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.
Under GASB 68 the district reports its share of the TRS net pension liability (NPL) at $2.9 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption).
CONCENTRATED, INDUSTRIAL ECONOMY
The district's tax base is represented largely by petrochemical, oil refining, distribution, electric utility and manufacturing entities, led by ExxonMobil, which comprised a high 36% of the fiscal 2015 tax base. ExxonMobil's Baytown plant is the largest petrochemical refinery in the U.S. While the concentration represents a credit risk, oil refining and petrochemical processing play a key role in the national economy. The balance of upstream refining activity and downstream processing helps to mitigate the impact of oil price volatility.
Fiscal year 2015 market value of $11.3 billion ($102,000 per capita) is sizeable and has rebounded above its pre-recession peak. District expectations for 2% annual TAV growth going forward appear reasonable, given the composition and growth history of the tax base. Multiple top taxpayers have announced plant expansions over the next several years. Expected private investments bode well for the district's tax revenues, continued employment growth and the local housing market. The district's median household income is about average, while unemployment trends higher than average.
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. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
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