Fitch Affirms Edinburg CISD, TX's ULT and LT Bonds at 'AA'; Outlook Stable
-- $141.35 million unlimited tax (ULT) bonds;
-- $10.83 million maintenance tax limited tax (LT) notes;
-- Issuer Default Rating (IDR).
The Rating Outlook is Stable.
The ULT bonds are payable from an unlimited property tax levied against all taxable property within the district. The bonds are further backed by the Texas Permanent School Fund bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas PSF bond guaranty program see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).
The LT notes are payable from the district's operations and maintenance (O&M) tax levy limited to $1.17 per $100 taxable assessed value (TAV).
KEY RATING DRIVERS
The 'AA' IDR reflects the district's overall sound financial position and operating profile, characterized by solid expenditure flexibility, a low debt burden, and adequate gap-closing ability. Steady but slow enrollment expectations temper revenue growth prospects, but also limit near-term capital needs. An economic concentration in the oil and gas exploration sector are somewhat mitigated by diversity among the rest of the top 10 taxpayers.
Economic Resource Base
Serving a population of roughly 160,000, the district's enrollment of slightly more than 34,000 has grown at approximately 1% annually and is expected to maintain that pace in the near term. In-progress housing developments will increase enrollment growth rates in the longer term. A recently executed memorandum of understanding with a local Head Start program added approximately 500 Pre-K students to the district, half of which count towards the average daily attendance (ADA).
Revenue Framework: 'a' factor assessment
A combination of local property taxes and state aid supports district operations. The natural pace of revenue growth is expected to remain strong, given historical performance and continued modest enrollment growth. The district's legal ability to raise revenues is limited.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given recent investments in capital needs and current enrollment trends. The district regularly budgets for pay-go capital spending, providing expenditure flexibility. The district's very low carrying costs reflect state support for retiree benefits, bolstering spending flexibility, while moderate debt amortization tempers flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The combined burden of long-term debt and pension liabilities is low as a share of local personal income. Fitch expects debt levels to decrease in the near term, given the district's modest enrollment growth and lack of debt plans. Retiree benefit obligations do not represent a significant burden.
Operating Performance: 'aaa' factor assessment
The 'aaa' operating performance assessment reflects the district's ample reserve funding levels and adequate level of spending flexibility in the event of revenue declines.
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's expenditure flexibility and healthy reserve levels, which have indicated rating stability.
The district is located in fast-growing Hidalgo County, adjacent to the U. S.-Mexico border and near the southern tip of Texas. The district's service area includes primarily the city of Edinburg, a small portion of the city of McAllen and unincorporated areas of Hidalgo County. The district's economy is anchored by the distribution of agricultural products and goods shipped from Mexico, as well as oil and gas exploration. TAV has experienced some volatility lately as a result of reductions in mineral values. Fiscal 2016 TAV of $5.5 billion increased more than 5% from the year prior.
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 (which varies from district to district).
Approximately 70% of fiscal 2015 district revenues came from state aid, with the remainder generated largely by property tax revenues. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments. Enrollment has grown steadily recently and is projected to continue at roughly 1% annually over the near term.
District revenues have grown at a compounded annual growth rate of 5.5% over the last decade, performing above both national CPI and GDP growth. Fitch expects the natural pace of district revenue growth in future years to lag historical performance, given that enrollment trends drive revenue performance.
The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate of $1.17 per $100 TAV is at the statutory limit. The district levies a separate unlimited debt service tax rate of $0.07 per $100 TAV, well below the statutory cap of $0.50 per $100 TAV for new debt issuances.
The district spends the majority of its operating budget on instruction, consistent with most school districts. The district also budgets approximately $2 million annually for capital outlay from general fund revenues for maintenance and repairs on facilities.
Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given expected enrollment growth and accompanying capital needs.
The district's solid expenditure flexibility reflects a large degree of control over workforce costs and very affordable carrying costs for debt service, which amortizes at a below-average rate, pension and other post-employment benefits (OPEB) of 6.5% of fiscal 2015 governmental spending. Carrying costs benefit from state support for district debt service, pension and OPEB costs.
Long-Term Liability Burden
The district's long-term liability burden is low at 10% of total personal income, and is comprised mainly of the district's outstanding debt. Capital needs are limited and are addressed largely through pay-go spending. The district has no near-term debt plans.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 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 in fiscal 2015. The proportionate share of the system's net pension liability paid by the district is minimal.
The district's financial cushion remains at a healthy level despite recent pay-go capital spending and state funding cuts, contributing to a 'aaa' assessment. Fitch believes the district would use a combination of its solid expenditure flexibility, conservative budgeting and strong reserves to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.
In fiscal 2016 the district budgeted a $14 million draw on reserves to fund their $10 million capital plan. The district completed nearly all of the planned projects at $2.1 million less than expected. Additionally benefitting from savings in payroll, contracted services and supplies, current district projections indicate no more than a $1.5 million draw on reserves. The fiscal 2017 budget is balanced without use of reserves and includes $2 million of capital outlay.