AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following United Independent School District, TX ratings:
--Issuer Default Rating (IDR) at 'AA-';
--$332.6 million unlimited tax bonds at 'AA-'.
The Rating Outlook is Stable.
The unlimited tax bonds are payable from an unlimited property tax levy.
KEY RATING DRIVERS
The 'AA-' IDR and unlimited tax bond rating reflects the district's moderate long-term liability burden and superior financial flexibility, aided by ample expenditure flexibility and modest carrying costs.
Economic Resource Base
United ISD encompasses a sizeable 2,450 square miles in Webb County, with the Rio Grande River forming a portion of its western boundary. The district serves an estimated population of 168,248, which includes a portion of Laredo (GO bonds rated 'AA'), the third most populous city on the U.S. - Mexico border.
Revenue Framework: 'a' factor assessment
The district has realized strong revenue growth over the past 10 years at a rate in excess of inflation and U.S. GDP gains. It does not have the ability to independently raise revenues, but Fitch believes revenue growth prospects remain solid based on enrollment and demographic trends.
Expenditure Framework: 'aa' factor assessment
Fitch expects the pace of spending growth to be generally in line with revenue gains. Expenditure flexibility is derived from management's control over workforce costs and low carrying costs.
Long-Term Liability Burden: 'aa' factor assessment
The liability burden is moderate, comprised nearly equally of direct and overlapping debt. Fitch expects additional debt will be accompanied by continued gains in personal income, keeping the liability burden moderate over time.
Operating Performance: 'aaa' factor assessment
Fitch expects the district's financial flexibility to remain solid through an economic downturn based on ample financial reserves and solid expenditure flexibility.
Shift in Fundamentals: The IDR and GO bond ratings are sensitive to material change in the district's strong expenditure flexibility and prudent budgeting, which Fitch expects the district to maintain throughout economic cycles.
Transportation, warehousing, and distribution sectors have historically produced the district's core economic growth. These sectors benefit from the Laredo's major role, as the nation's largest inland port, in international trade and should provide stability to the local economy in the wake of ongoing contraction in natural gas and oil drilling activity.
In recent years, economic activity has been boosted by substantial oil and natural gas exploration and production in the nearby Eagle Ford formation. However, the 2014 plunge in oil prices stalled new drilling activity and led to the reduction in the number of active wells within Webb County by over 50% according to the Texas Railroad Commission. TAV declined by 13% in fiscal 2017 due primarily to reductions in mineral values, a reversal after a period of strong 10% compound average growth Mineral values now comprise 18% of TAV, down from 30% in the prior year. Nine of the district's top 10 taxpayers are in the oil & gas sector. Management projects another large decline in mineral values in fiscal 2018, resulting in a more moderate 4%-5% decline in net TAV.
Commercial development continues within the district, particularly within the warehouse and distribution sector, supplemented with retail and multi-family projects. Beyond the district's boundaries (but within Laredo) lies a $100 million outlet mall which is scheduled to open March 2017 and projected to add over 1,000 permanent jobs to the local economy.
Funding for public schools in Texas is provided by a combination of local (property tax), state, and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach whereby the combination of local and state funding for operations meets a predetermined per pupil amount that varies from district to district. In fiscal 2015, the district received 50% of its total general fund revenues from state sources, followed by property taxes (40%).
The district's general fund revenues grew by a 10-year CAGR of 6% between 2004 and 2014, above the pace of inflation and U.S. GDP growth rate. The pace of growth, which is driven in part by enrollment, is likely to slow in the near term due to contraction in the area's energy sector, but Fitch expects medium term revenue growth will rebound to historical levels due to the continued rapid growth of Laredo's overall economy. The reduction in property tax revenues due to the 13% TAV decline in fiscal 2017 will have an immediate impact on the district's budget as lower revenues will not be offset by increased state funding until fiscal 2018. The state uses prior year AV in determining state aid. Therefore, the district projects fiscal 2017 net revenues to decline by $21 million or 5.4% of fiscal 2016 revenues. However, Fitch does not expect the state's structural lag to materially impact the district's strong medium term revenue growth prospects.
United ISD's maintenance and operations (M&O) tax rate of $1.04 per $100 of taxable assessed valuation (TAV) is at the statutory cap above which voter approval is required, leaving it with no independent revenue-raising flexibility. The district does not have plans to seek voter approval of an increase in its M&O tax rate.
Instructional costs account for 56% of fiscal 2025 operating expenditures, which Fitch expects to grow in line with revenues, along with the district's other operational costs.
The district's pace of expenditure growth is expected to be generally in line with revenue growth given the moderate pace of growth in its enrollment base. Average daily attendance (ADA) flattened in fiscal 2016 due to contraction of the energy sector but is rising again in the current year.
The district's expenditure flexibility is derived from discretion over its workforce costs and modest carrying costs. The district operates with individual one-year contracts and does not engage in collective bargaining. The district's carrying costs are low at 8.4% of fiscal 2015 spending, comprised primarily of debt service. Fitch expects carrying costs to remain modest-to-moderate based on the district's measured pace of debt issuance and the assumed ongoing state funding for the vast majority of employer pension contribution. The district does not offer other pension employment benefits.
Long-Term Liability Burden
The district's long-term liability burden is elevated but still within the moderate range at 19% of personal income and is comprised almost equally of direct and overlapping debt, in addition to a modest net pension liability. The recent lower pace of enrollment growth allowed the district to slow its capital program comprised of seven schools. As a result, the district delayed its planned 2016 issuance and is considering issuing $60 million to $75 million of its remaining $209 million bond authorization during summer 2017.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68 reporting, TRS's assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption. The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts that state statute requires districts to assume.
Fitch expects United ISD to retain ample financial flexibility in a moderate economic downturn based on its strong expenditure flexibility and robust financial cushion. Fitch's analytical sensitivity tool (FAST) suggests that the district's operating revenues would be impacted only modestly, resulting in manageable net losses in an unaddressed scenario.
The district accumulated large reserves during the current economic recovery despite cuts in state aid revenues, allowing the district to use a portion of reserves for pay-go capital outlays and still maintain solid fund balances.. The fiscal 2015 audit posted a modest $514,000 net general fund operating surplus (0.1% of spending) after pay-go capital outlays of $10.4 million or 2.7% of spending. The resulting unrestricted general fund balance declined to $83 million, equal to 21% of spending. A healthy net income of $8.7 million (2% of spending) is projected for fiscal 2016., increasing the financial cushion to about $91.8 million or 25% of spending.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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