Fitch Rates Fort Bend ISD, Texas' Series 2016A ULT Rfdg Bonds 'AA+' Underlying / 'AAA' PSF
OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to Fort Bend Independent School District, Texas' (the district) unlimited tax (ULT) bonds as follows:
--$70.4 million ULT refunding bonds, series 2016A.
The 2016A bonds are scheduled for negotiated sale as early as May 18. Proceeds from the sale of the bonds will be used to refund certain outstanding obligations for debt service savings and pay issuance costs.
The 'AAA' long-term rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable,' dated Aug. 5, 2015). Fitch also assigns an 'AA+' underlying rating to the series 2016A ULT bonds.
In addition, Fitch affirms the district's Issuer Default Rating (IDR) at 'AA+' and the 'AA+' rating on approximately $907.6 million (pre-refunding) in outstanding ULT bonds.
The affirmation of the IDR reflects application of Fitch's revised criteria for U.S., state, and local government credits, which was released on April 18, 2016.
The Rating Outlook is Stable.
The bonds are payable from an unlimited property tax (ad valorem) pledge levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF.
KEY RATING DRIVERS
The 'AA+' rating reflects the area's sound economic underpinnings, the district's solid expenditure control that assists in maintaining a strong and stable reserve cushion, and relatively low fixed carrying costs that allow the district a high level of fundamental financial flexibility throughout the economic cycle. Fitch expects solid revenue performance going forward. The long-term liability burden is projected to grow in conjunction with the area's capital needs, but remain moderate over the intermediate term.
Economic Resource Base
The district service area spans a large 170 square miles in northeastern Fort Bend County (GO bonds rated 'AA+' with a Stable Outlook), in a rapidly growing residential and commercial sector of the Houston metropolitan statistical area (MSA). The tax base is predominately residential. Large, master-planned residential developments and commercial projects throughout the county continue to fuel strong taxable assessed value (TAV) and population gains. Wealth levels are above average.
Revenue Framework: 'a' factor assessment
Revenues have historically kept pace with the U.S. economy, due in large part to rapid enrollment gains. Fitch expects this revenue trend will continue given solid enrollment growth is projected for the district, in line with the area's steady residential development. The state school funding framework, underpinned by Texas' robust credit profile (GOs rated 'AAA'/Stable Outlook), ensures comparable, state-wide per pupil funding levels despite varying local property wealth. State aid provides just under half of the district's total operating revenues.
Expenditure Framework: 'aa' factor assessment
Operational spending growth is likely to remain in line with revenue gains given the district's spending profile. The district can adjust its staffing and class sizes in order to control key expenditure items without affecting its educational goals. Fitch expects the district's relatively low carrying costs will increase in conjunction with future debt required to fund enrollment-driven capital needs.
Long-Term Liability Burden: 'aa' factor assessment
The overall liability burden is presently moderate at 16.1% of personal income. Fitch believes additional capital needs resulting from the area's ongoing expansion will require future debt funding and likely drive steady growth in this metric, although Fitch expects it to remain moderate, supported by continued growth in personal income.
Operating Performance: 'aaa' factor assessment
Preservation by the district of a strong and stable reserve cushion throughout the economic cycle is largely due to its sound expenditure flexibility. Fitch's 'aaa' assessment of financial resilience is based on the expectations that reserves will remain sufficient to offset expected modest revenue volatility in an economic downturn.
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid financial flexibility, which Fitch expects it to maintain throughout the economic cycle.
The district's service area is about 70% developed. Enrollment and TAV growth moderated during the recession, but both have ramped up recently with improvement in the economy. Strong TAV gains since fiscal 2012 have outpaced a trend of 2% annual enrollment growth. Preliminary appraisal district estimates project another strong, 11% TAV gain in fiscal 2017, due in part to rising reappraisals. Fitch believes TAV maintains some sensitivity to an overvalued housing market (for more information, see U.S. RMBS Sustainable Home Price Report, First Quarter 2016 update, May 12, 2016, available on Fitch's website at www.fitchratings.com).
Major employment sectors include engineering, oil services and exploration, education, manufacturing, and healthcare. Easy access to Houston's employment base and the county's own growing economy has helped mitigate the impact of the energy sector contraction. Unemployment is up slightly year-over-year to 4.7% in March 2016, but it remains in line with the state and U.S.
Property taxes provide slightly over half of the district's operating revenue, and state aid slightly under half. Revenue growth is primarily a function of enrollment. The district is the seventh largest school district in the state based on enrollment, which is estimated at about 74,000 students in fiscal 2016. Established per pupil funding levels ensure additional state revenue will offset weakness in local (property tax) revenue. The district's property taxes are derived from a diverse local taxpayer base.
Future revenue performance should reflect continued, robust growth trends given expectations of steady enrollment gains and state support for educational programs.
The district's tax rate for operations is at the legal limit of $1.04 per $100 TAV. The district has independent control over only a very small portion of its operating revenues. Per state statute, the district cannot increase its operating property tax levy further unless it receives voter approval.
Fitch expects the district's natural spending pace will remain equal to or slightly exceed revenue gains based on its current expenditure trends and the enrollment-based state funding formula. Instruction is the district's largest spending obligation at about 66% of operational spending in fiscal 2015. Individual, one-year employment contracts for the majority of the workforce and the ability to exceed mandated class sizes for certain grade levels in times of fiscal stress allow the district sound expenditure flexibility. This is tempered by the district's need to maintain a competitive salary structure in the large and accessible Houston MSA employment base to recruit and retain highly educated professionals.
The district's carrying costs are relatively modest at about 11% of fiscal 2015 governmental spending. Fitch expects these fixed costs will slowly rise going forward as a result of current and future debt plans, but remain moderate.
Financial exigency, a Texas Education Agency prerequisite for terminating contracted employees, was proactively declared by the district in fiscal 2010 and 2011 in order to address recessionary state funding cuts. This special status allowed the district to eliminate nearly 500 positions in order to close a $22 million budget gap.
Long-Term Liability Burden
The district's long-term liability burden is driven predominately by overlapping debt levels that are a result of ongoing, rapid population expansion and funding of the resulting capital needs. The district's pension liability is modest as the state pays the majority of the district's employer pension costs. The liability burden is moderate at 16% of personal income, and Fitch expects it will remain in this range over the intermediate term as a likely continuation of robust population gains should be met by increased total personal income levels.
The district maintains its debt service tax rate at $0.30 per $100 TAV, preserving healthy flexibility below the state-imposed $0.50 per $100 TAV cap for new money issuance.
Voters strongly approved a $484 million ULTGO bond authorization in 2014 to fund the first phase of the district's prioritized capital needs. These needs were determined in a recently completed facilities master plan (FMP), which identified the need for 11 new schools and facility improvements, estimated to cost roughly $818 million.
The district presently maintains $447 million in bonding capacity from its 2007 and 2014 authorizations, and expects to continue its phased approach in using the authorization over the next three to five years in order to limit tax rate impact.
Pension and other post-employment benefit (OPEB) liabilities (largely healthcare benefits) are limited because of the district's participation in the state pension program administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan for which the state provides the bulk of the employer's annual pension contribution. Total pension and OPEB contributions made by the district in fiscal 2015 totaled less than 2% of governmental fund expenditures.
Fitch judges the district's financial resilience in a moderate economic decline scenario to be consistent with an 'aaa' assessment. Fitch expects the district would use its strong gap-closing capacity to preserve financial flexibility through the economic cycle.
The district has employed some debt management practices to limit the debt service tax rate impact by deferring debt repayment, particularly with its prior use of zero-coupon capital appreciation bonds. Nonetheless, Fitch believes management presently maintains prudent guidelines and caps for its debt management tools.
Formal fiscal policies previously adopted by the district include maintaining the unrestricted general fund balance at 30% of net budgeted operating expenditures for the following year, adopting balanced budgets, and limiting the use of fund balance reserves for non-recurring expenditures. Fitch's expectation that the district will continue to adhere to these policies is reinforced by recent financial performance and conservative budgeting.