Fitch Affirms Frenship ISD, TX's ULT Bonds at 'AA-' Underlying; Stable Outlook
-- $189.71 million ULT refunding bonds, series 2007, 2008, 2009, 2010, 2014, 2014A, 2015A, 2015B.
--The Rating Outlook is Stable
The bonds are payable from an unlimited property tax levied against all taxable property within the district and 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-' Issuer Default Rating (IDR) and ULT rating reflects the district's solid economic resource base and strong overall financial profile. The district's strong operating profile is supported by solid expenditure flexibility, expectations for steady revenue growth, and exceptionally strong gap-closing capacity. Continued enrollment growth is expected to require a modest amount of capital spending in the near term. As a result, the district's long-term liability burden is expected to remain elevated, though manageable in future years.
Economic Resource Base
The district is located in Lubbock County, serving a 2014 population of approximately 44,600. Enrollment of approximately 8,360 students has increased by an average of 4.3% annually over the last 10 years, due largely to continued population growth. Taxable assessed value (TAV) has exhibited steady growth due to continued growth in housing and retail construction. The local economy is anchored by the health, telecommunications and retail industries.
Revenue Framework: 'a' factor assessment
Revenue growth has been strong, averaging at a level in excess of the national GDP for the 10 years through 2014. Future growth will likely track enrollment growth given the state funding framework, with the district's independent legal ability to raise revenues limited by state law. The current maintenance and operations tax rate is at the maximum of $1.04 per $100 of assessed value (AV) and would require voter approval to raise the rate to $1.17. The Interest and Sinking tax rate is slightly below the maximum at $0.46 per $100 of AV allowing for a limited increase if needed.
Expenditure Framework: 'aa' factor assessment
Spending growth is expected to trend in line with to marginally above revenue growth. The low fixed-cost burden for debt service and retiree benefits reflects state-support for long-term liabilities. There are no workforce related contractual obligations.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is elevated but still in the moderate range, reflecting strong state support for retiree benefits.
The district is currently has no plans for additional borrowing to fund capital needs; Fitch expects that the liability burden will remain moderate in comparison to the district's resource base.
Operating Performance: 'aaa' factor assessment
The district has a strong history of operating surpluses; reserves are robust and provide ample cushion in the case of an economic downturn.
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility and high reserve levels, which Fitch expects it to maintain 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 128-square mile district is located immediately to the west and southwest of Lubbock (GO bonds rated 'AA+'/Stable Outlook), a regional economic hub in west Texas. A portion of the district lies within Lubbock's city limits, which has a population of approximately 249,040. The district's tax base is strong rooted in the residential sector with additional construction planned as the cities in the district move to maximize their residential development. The district's wealth levels are slightly below those of the state and nation. The district's unemployment rate is also lower than both the state and national averages.
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 49% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. The relatively stable level of state support is a function of the district's consistent property wealth levels. State aid is provided on a per-pupil basis tied to enrollment, which has steadily increased in recent years. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments
District revenues have grown at a compounded annual growth rate of 6.1% over the last decade, performing well above national CPI and U. S. GDP growth over the 10 years through 2014. Fitch expects the natural pace of district revenue growth in future years to remain in line with historical performance, given current enrollment trends and expectations for consistent increases in enrollment 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 increased 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) debt service tax rate of $0.46 per $100 TAV, slightly below the attorney general's statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.
The district spends the bulk of its budget on instruction, which is common for school districts. 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, given anticipated enrollment growth and lack of near term capital needs. Enrollment growth has been steady with annual increasing steadily over the last decade. This is expected to continue for approximately the next 10 years.
The district's solid expenditure flexibility reflects substantial control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB), at approximately 16% of fiscal 2015 governmental spending. Carrying costs benefit from state-wide support for the vast majority of school district pension and OPEB costs.
Long-Term Liability Burden
The district's long-term liability burden is elevated at approximately 28% of personal income, and is made up by a mix of the district's slow-amortizing outstanding debt load and overlapping debt. The district's lack of capital needs indicate that debt levels will likely remain the same in the intermediate term. The proportionate share of the system's net pension liability paid by the district is minimal.
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 year 2015 for certain districts.
The district has increased their financial cushion to robust levels despite recent recessionary pressures and state funding cuts, garnering 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.
The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles.