Fitch Affirms Leander ISD, TX's ULT Bonds at 'AA-'; Outlook Stable
--ULT school building bonds, series 2009, and 2010;
--ULT school building and refunding bonds, series 2003, 2005, 2007, and 2008;
--ULT refunding bonds, series 2010, 2010A, and 2011.
In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA-'.
The bonds are secured by an unlimited ad valorem tax pledge against all taxable property within the district.
KEY RATING DRIVERS
The 'AA- ' rating reflects Fitch's expectation that the district will maintain financial flexibility throughout the economic cycle due to its solid expenditure control that assists in maintaining a robust reserve cushion. Weighing on the unlimited tax bonds and IDR is the district's large long-term liability burden which Fitch expects to remain a sizable burden on resources.
Economic Resource Base
The district is largely residential in nature, and is located northwest of Austin within the broader Austin-Round Rock metropolitan area. Its large service area includes the cities of Leander and Cedar Park, and portions of Austin and Jonestown. Area population has increased rapidly due to its proximity to job opportunities in the cities of Austin, Round-Rock and Georgetown.
Revenue Framework: 'a' factor assessment
Revenues have historically grown well in excess of national GDP, due to the state's support for school funding and rapid enrollment growth. Fitch expects revenue increases will moderate somewhat going forward, comparable to tempered enrollment growth trends in recent years. The district's revenue raising ability is minimal, as its tax rate is at the statutory cap, without voter approval.
Expenditure Framework: 'aa' factor assessment
District expenditures are likely to keep pace with revenues as enrollment growth continues on a more moderate trajectory. Carrying costs are currently moderate but are expected by Fitch to rise slightly given a slowly rising debt service schedule.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is elevated - a function of rapid enrollment and the need for school facilities - and is largely comprised of a slowly-amortized debt burden. Fitch anticipates the district's long-term liabilities will remain a sizeable burden on resources.
Operating Performance: 'aaa' factor assessment
The combination of the district's expenditure-cutting flexibility and healthy reserve funding levels leave it well positioned to address cyclical downturns.
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility, which Fitch expects it to maintain throughout the economic cycle.
Elevated Long-Term Liabilities: A material increase in the long-term liability burden, although not expected, could pressure the rating.
The district's tax base performed well during the recession, with only one year of modest decline in fiscal 2011.The availability of affordable land within district boundaries will likely continue to spur additional residential development. In a moderate growth scenario the district is projecting enrollment increases of 2%-3% annually through 2025, compared to year-over-year increases as high as 10%-11% a decade ago.
The state school funding framework, underpinned by Texas' robust credit profile (GOs rated 'AAA'/Stable), ensures comparable, statewide per pupil funding levels despite varying local property wealth. Revenue growth is primarily a function of enrollment. Established per pupil funding levels ensure additional state revenue will offset weakness in local (property tax) revenue.
The district's general fund revenues have grown at a compound annual growth rate of 8% over the past 10 years, well above the growth rate for U.S. GDP. Fitch believes revenue growth prospects are favorable but may not match the prior rapid pace as enrollment growth moderates compared to the rapid pace of prior years.
The district's tax rate for operations is at the legal limit of \\$1.04 per \\$100 TAV, without voter approval. 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 without voter approval.
Instruction is the district's largest spending responsibility at over 60% of total general fund spending in fiscal 2015. Strong workforce flexibility and one-year contracts allow the district solid expenditure flexibility. Mandated class size staffing ratios for certain grade levels by the state can be exceeded in certain circumstances by receiving a class size waiver. The district has regularly taken advantage of this flexibility in the past for a large number of its elementary schools.
Spending has expanded at a measured pace historically. 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.
Solid operating flexibility exists in the district's labor costs given the lack of group/collective bargaining or contractual agreements and short employment contracts. Now moderate fixed carrying costs (about 17% of fiscal 2015 governmental spending) are expected by Fitch to increase over time given a slowly rising debt service schedule. If calculated using maximum annual debt service (which occurs in 2049), carrying costs would be a very high 30% of fiscal 2015 spending.
Recent capital needs have been funded by the district's remaining bond authorization. Exceptionally strong growth in the district's taxable assessed values in the past two years has allowed the district to use a small portion of its debt service tax rate of \\$0.47 per \\$100 TAV in fiscal 2016 to pay down debt early. Nevertheless, at \\$0.44 for current debt service, the tax rate affords little flexibility for additional debt or a less protracted amortization schedule for outstanding debt. Preliminary taxable assessed values for fiscal 2017 point towards a further reduction in the tax rate necessary for debt service at around \\$0.40. Only 21% of debt will be repaid within 10 years. The cap for new issuance is \\$0.50.
Long-Term Liability Burden
The district's long-term liability burden is elevated at 31% of personal income, and is made up almost entirely by the slowly-amortizing outstanding debt load. Fitch expects this profile to persist going forward. The district has two facilities slated to open through 2017, which management estimates will be sufficient to address the district's capital needs for the next several years. There is no outstanding authorization for new money debt, but the district may explore additional GO authorization for around \\$400 million in calendar year 2017.
The district has a history of debt management practices which deferred debt repayment with slow amortization and significant use of zero-coupon capital appreciation bonds (CABs). The district implemented a 10-year plan to reduce the CAB portfolio to 25% by 2025, and has made headway by lowering the total CAB portfolio to a still-high 67% currently from 78% in 2014. Furthermore, growth in the tax base has eased pressure on the debt service tax rate, but the district continues to levy enough to retire some debt early.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 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 which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts -- as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015 for certain districts.
The proportionate share of the system's net pension liability paid by the district is minimal. The district's contributions totaled \\$5.2 million in fiscal 2015.
Fitch considers financial resilience to be consistent with an 'aaa' assessment. Fitch believes the district would use a combination of it solid expenditure flexibility and strong reserves to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.
Strong revenue growth and expenditure control allowed the district to maintain positive financial operations and growth in reserves in each of the past seven fiscal years. The general fund balance reached roughly \\$120 million or 46% of spending in fiscal 2015. The fiscal 2016 operating budget increased about 14% over the prior year's budget, and appropriates approximately \\$13 million of general fund balance. The main drivers of the increase were the addition of 155 new positions, costs associated with the opening of two new schools, and a 2% salary increase for all staff. Management anticipates using a much smaller amount of fund balance, currently estimated at less than 1% of budgeted spending. Fitch expects the district will maintain a strong and stable financial position given its historical financial trends, which Fitch considers a balance against the district's previous practice of structuring debt in a manner that elongates principal repayment.