Fitch Affirms Cypress-Fairbanks ISD, TX ULT Bonds at 'AA'; Outlook Stable
In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. Certain series are further backed by the PSF bond guaranty program, 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
The 'AA' IDR reflects the district's strong economic and financial profile. The district's stellar operating profile is supported by high expenditure flexibility, expectations for continued strong revenue growth, and ample gap-closing capacity. Fitch anticipates that moderate to high enrollment growth will require considerable capital spending in the near term, with the increasing liability burden somewhat offset by expectations of continued population and economic growth.
Economic Resource Base
The district is located in Harris County and serves a 2015 population of approximately 539,000 residents. Enrollment of approximately 115,000 students has grown rapidly over the last decade. Taxable assessed value (TAV) has exhibited strong expansion due to the growing Houston metropolitan economy. The local economy is predominantly residential with retail and mixed commercial enterprises and modest energy market exposure.
Revenue Framework: 'a' factor assessment
A combination of local property taxes and state aid supports district operations. Fitch expects the natural pace of revenue growth to increase ahead of both national CPI and GDP growth, given historical performance and continued solid enrollment trends. The district's legal ability to raise revenues is limited, as the current tax rate resides at the legal limit.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth should remain in line with or modestly above that of revenues, given manageable capital needs and current enrollment trends. The district's moderate carrying costs reflect state support for retiree benefits, bolstering spending flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The combined burden of long-term debt and pension liabilities consumes a moderate share of resident personal income. Fitch expects debt levels to increase with planned issuance of approximately $1.2 billion over the next five years to address enrollment-related capital needs. Retiree benefit obligations do not represent a significant burden on resident income.
Operating Performance: 'aaa' factor assessment
The 'aaa' operating performance assessment reflects the district's very high reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a considerable 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 high expenditure flexibility and ample reserve levels, which allow the district to handle enrollment growth pressures. The Stable Outlook reflects Fitch's expectation that the district will maintain its strong financial position throughout the economic cycle.
Manageable Long-Term Liabilities: A material increase in long-term liabilities above the level currently expected could result in downward rating pressure.
The district is located in the greater Houston metropolitan area and serves the rapidly growing northwest portion of Harris County and surrounding areas. Like population, enrollment has grown considerably over the last decade, moderating in recent years.
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 majority of districts are funded using a target revenue approach while others are funded on a formula basis. Using the target revenue approach, a combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).
District revenues are split evenly between state aid and local taxes. Enrollment, which is a key component of state funding, has grown at a moderate pace in recent years, driving strong revenue performance. Expectations for continued strong revenue growth absent policy action drive future revenue performance, as the district's tax rate for operations is at the state cap.
District revenues have grown at a compounded annual growth rate of 6.1% over the last decade, performing well-ahead of both national CPI and GDP growth by 3.8% and 2.6%, respectively. Fitch expects the natural pace of district revenue growth in future years to remain above of CPI and GDP, given current enrollment trends and expectations for ongoing enrollment growth in future years.
The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is $1.04 per $100 TAV and would need voter authorization to be raised to the statutory limit of $1.17. There are currently no plans to do so. The district levies a separate, unlimited interest and sinking fund (I&S) tax rate of $0.4 per $100 TAV, below the attorney general's cap of $0.50 per $100 TAV. Very strong TAV growth trends indicate that future debt plans are not expected to materially diminish flexibility under the I&S tax rate cap.
The district spends the vast majority of its operating budget on instruction. The district also funds some annual 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. Planned increases in debt service costs related to future capital plans are likely to be offset by increasing property tax revenues related to AV growth.
The district's solid expenditure flexibility reflects control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB), at 14.1% of fiscal 2015 governmental spending. Carrying costs benefit from state-wide support for school district pension and OPEB.
Long-Term Liability Burden
The district's long-term liability burden is manageable at 12.9% of personal income, and is split between the district's slow-amortizing outstanding debt load and debt of overlapping issuers. The district's growth-related capital needs will be addressed by a $1.2 billion debt authorization, passed with a high 69% of voters approval in 2014. The authorization is expected to provide sufficient capacity through fiscal 2020. The district's total liability burden is expected to remain manageable including the planned issuance.
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 TRS 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 has consistently strengthened its financial cushion to very high levels despite recessionary pressures and state funding cuts, garnering an 'aaa' assessment. Fitch believes the district would use its solid expenditure flexibility to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.
The district has demonstrated a strong commitment to enhancing its financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles. In years of recovery, the district has increased fund balance levels to a high 43.4% of spending in fiscal 2015. Unaudited results for fiscal 2016 indicate further additions to reserves, increasing available fund balance to approximately 45% of spending, and the fiscal 2017 budget is balanced.