Fitch Rates Judson ISD, Texas Series 2016 ULT Bonds 'AAA' PSF/'AA-' Underlying; Outlook Stable
--$329.5 million unlimited tax (ULT) school building and refunding bonds, series 2016.
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 has assigned an underlying 'AA-' rating to the district's series 2016 ULT bonds.
The 2016 ULT bonds are scheduled to sell August 23 via negotiation. Proceeds will be used to equip, construct, and renovate school facilities, refund certain outstanding obligations for savings, and to pay costs of issuance.
In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA-' and the 'AA-' underlying rating on approximately $409 million (pre-refunding) in outstanding ULT bonds.
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 series 2016 bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF.
KEY RATING DRIVERS
Underpinning the 'AA-' IDR and ULT ratings is the district's superior financial resilience which Fitch believes will be maintained throughout the economic cycle, largely derived from its solid expenditure control. The local economic profile is sound and further expansion in the district's population and enrollment appears likely. This should yield solid, future revenue gains naturally and maintain the long-term liability burden at an elevated but still moderate level despite future capital needs.
Economic Resource Base
The district serves approximately 130,000 residents and is largely made up of various small bedroom cities in the northeast portion of the San Antonio-New Braunfels metropolitan statistical area (MSA). Participation of district residents in the MSA's diverse and growing employment base underpins the local economic profile as well as its proximity to several military bases. Recent enrollment trends reflect generally steady, modest annual gains, which has moderated from prior rapid growth years.
Revenue Framework: 'a' factor assessment
District revenues are limited by state law according to the school funding system. The district has little to no ability to independently raise revenues. Nonetheless, Fitch believes growth prospects for revenues are solid given locally robust economic trends that should support the likely continuation of current enrollment trends as well as the ability of district property taxes to capture that growth.
Expenditure Framework: 'aa' factor assessment
Enrollment is a key driver of both revenue and expenditure trends, which should keep the pace of spending generally aligned with revenues over time. Sound expenditure flexibility is a result of the district's ability to adjust its labor costs if needed as well as moderate carrying costs that benefit from state support and slow principal amortization.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is moderately elevated. Fitch expects likely growth in the area's long-term liabilities will be balanced against additional economic expansion and remain consistent with an 'a' assessment.
Operating Performance: 'aaa' factor assessment
Limited historical revenue volatility and solid expenditure control provide the district with a high level of demonstrated operating flexibility, allowing for strong reserves to be maintained. Fitch believes the district's operating cushion would be more than adequate for a 'aaa' financial resilience assessment in a moderate economic decline, with the district maintaining a high level of fundamental flexibility throughout the economic cycle.
Financial Flexibility: The rating is sensitive to the district's ability to maintain its high level of operating flexibility in light of a controlled revenue environment (pursuant to the state's funding formula) that remains vulnerable to state funding cuts during economic downturns.
San Antonio is the second largest city in the state and seventh largest in the U. S. Prominent sectors include: military and government, domestic and international trade, convention and tourism, medical and healthcare, and telecommunications. Employment gains remain steady despite the contraction of the energy sector that services the nearby Eagle Ford Shale.
The district's enrollment base totaled approximately 22,000 students in fiscal 2016. Fitch expects enrollment will continue to make steady gains of 1%-2% annually, in line with demographic projections. The district is approximately 70% built-out and the pace of enrollment expansion has moderated from rapid gains realized pre-fiscal 2010.
The property tax base remains moderately concentrated at 15% of taxable assessed valuation (TAV) in fiscal 2016, which is largely attributable to the presence of various distribution/warehousing businesses along a major transportation corridor (Interstate 35). TAV trends generally reflect increasing gains since the recession. Fitch expects this performance will be sustained given a robust housing market, typically healthy increases in reappraisals, and further residential, retail, and commercial development projects underway or planned. However, while near-term tax base growth prospects remain strong, an analysis of home price and economic trends over time leads Fitch to believe Texas home prices may be above long-term sustainable levels (for more information, see Fitch's "U. S. RMBS Sustainable Home Price Report," dated May 2016).
About 60% of the district's general operating revenues come from state aid. 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, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).
Looking ahead, Fitch expects revenue gains to be solid - above the rate of inflation, but below U. S. GDP - although slightly below historical trends given moderated enrollment gains. Further population and economic expansion should drive these gains.
The district has almost no ability to independently raise its operating revenues. Per state statute, the district cannot increase its operating property tax levy ($1.04 per $100 TAV) further unless it receives voter approval. The district levies a separate, unlimited debt service tax rate of $0.38 per $100 TAV in fiscal 2016.
Third-party funding support for operations stems from the long-standing commitment of the state to fund K-12 education. Nonetheless, this revenue stream remains susceptible to changes in local enrollment trends and recessionary pressures on state revenues.
Instruction is the primary purpose of the institution, consuming about 65% of operational spending in fiscal 2015. Modest enrollment gains are anticipated and management reports the district has recently caught up in providing competitive teacher salaries. Therefore, Fitch expects spending pressures will be manageable, which should remain more or less aligned with the expected solid pace of revenue growth over time.
The district has demonstrated its ability to adjust staffing and class sizes in order to control key expenditure items in times of fiscal stress without affecting its educational goals. This is tempered by the district's need to maintain a competitive salary structure in the San Antonio-New Braunfels MSA employment base in order to recruit and retain highly educated professionals. Nonetheless, management's legal control of labor costs and headcount remains strong.
Fixed carrying costs - the combination of total annual debt service, the contractually required annual pension funding amount, and the annual actual spending for other post-employment benefits (OPEB), net of state support - consumed a moderate 11.6% of fiscal 2015 governmental spending. Fitch expects these fixed costs will slowly rise going forward as a result of the district's current and future debt plans as well as anticipated declines in state support for debt service. Nonetheless, these costs should remain moderate and in line with the 'aa' assessment given low retiree costs that reflect primary state funding of this expense.
Long-Term Liability Burden
Including this issuance, the long-term liability burden is moderately elevated at 19% of personal income. About 60% of the overall burden is derived from the district's direct debt (roughly $615 million post-refunding) and principal amortization is slow (about 25% retired in 10 years). Near-term district debt plans include re-approaching voters in 2017 for about $52 million in capital needs to complete a new high school. Fitch expects the likely increases in the overall liability burden will be balanced against further population and income gains, remaining consistent with an 'a' assessment.
The new money portion of this issuance is the majority of the district's outstanding $214 million ULTGO bond authorization, recently approved by voters. It will primarily fund two new elementary schools and improvements/upgrades to existing school facilities and technology and is expected to meet the district's capital needs over the next five to six years. The projected debt service tax rate increase of $0.05 per $100 TAV in fiscal 2017 to support the new debt preserves moderate flexibility below the state-imposed $0.50 per $100 TAV cap for new money issuance.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides the bulk of the employer's (the district) annual pension contribution. Recent reforms have lowered benefits and increased statutory contributions in order to improve plan sustainability over time.
Under GASB 67and 68, the district reports its share of the TRS net pension liability (NPL) at just $25.4 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption, for a liability of $42 million). The NPL adjusted for a 7% interest rate assumption remains small at less than 1% of personal income. The district also provides OPEB through the state-run, post-employment benefit healthcare plan.
Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects there will be modest growth in the NPL even if investment returns meet assumed rates, although not outside of expectations for the 'a' assessment given how small the pension liability is relative to overall debt. Like all Texas school districts, Judson ISD 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 2015.
The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves and a high level of financial flexibility throughout the economic cycle.
The district periodically draws down a modest portion of its high reserves to proactively fund some of its future capital needs. Most recently, district management chose mid-year to utilize $2 million (1% of budgeted spending) in fiscal 2016 to purchase a future school site.
Unrestricted general fund reserves totaled $45.3 million or 24.4% of spending in fiscal 2015, comfortably above the district's adopted policy requiring reserves at no less than two months or roughly 17% of general fund spending. Fiscal 2016 results are projected to fall below budget due to the year's atypical modest enrollment loss compared to budget and decline in associated student-related revenues. Nonetheless, reserves should remain ample at about $44 million or 24% of budgeted spending according to management.
The adopted fiscal 2017 budget includes a $4.1 million (2% of spending) drawdown on reserves, largely due to the initial, increased costs associated with the opening of a new high school. These budgeted results are expected to improve over the fiscal year, which Fitch believes is reasonable given the district's historical trend of budget outperformance and conservative assumptions.