Fitch Rates Howard County Jr College District, Texas' 2016 GO Rfdg Bonds 'AA-'; Outlook Stable
--$12.9 million general obligation (GO) refunding bonds, series 2016.
The bonds are scheduled to sell via negotiation as early as the week of Aug. 29. Proceeds will be used to refund certain outstanding maturities for debt service savings and to pay related costs of issuance.
In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA-' and the rating on approximately $14.8 million (pre-refunding) in outstanding GO bonds at 'AA-'.
The Rating Outlook is Stable.
The bonds are payable from an ad valorem tax levied against all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
The district's relatively narrow and concentrated resource base weighs on the rating, which is underpinned by the district's ample revenue-raising ability, sound expenditure flexibility, strong reserve cushion, and limited historical revenue volatility. These factors combine to provide the district with a high level of operating flexibility and anticipated financial resilience throughout the economic cycle. Fitch expects the long-term liability burden will remain moderate.
Economic Resource Base
The district derives significant support from state aid; however, revenues are primarily influenced by local trends, including enrollment and property taxes. Enrollment typically runs counter-cyclical to local economic conditions. The district serves Howard County and much of the surrounding, rural West Texas area with four campus locations. The local economy is driven largely by the energy sector with all segments of the oil & gas industry well represented, and Fitch expects it may realize some additional moderation due to continued low oil prices.
Revenue Framework: 'aa' factor assessment
Fitch believes natural revenue growth prospects are slow--in line with inflation--and slightly below historical trends. The superior ability of the district to raise property tax and tuition/fee revenues in the event of normal, cyclical decline underpins the 'aa' assessment.
Expenditure Framework: 'aa' factor assessment
The pace of spending growth should remain more or less aligned with revenues over time, led by moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases. Sound expenditure flexibility results from moderate carrying costs and the district's ability to adjust its labor costs, if needed.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate, composed largely of overlapping debt. Fitch expects the liability burden will remain in line with the 'aa' assessment despite some moderating of economic trends as a relatively stable and modestly growing population base should result in manageable future capital needs.
Operating Performance: 'aaa' factor assessment
Ample revenue-raising ability and solid expenditure control provide the district with a high level of demonstrated operating flexibility. Fitch believes that, given this flexibility and limited expected revenue volatility, the district's operating cushion would be more than adequate for the district to maintain a high level of fundamental flexibility throughout the economic cycle.
Financial Flexibility: The rating is sensitive to material deterioration of the district's operating flexibility and revenue-raising ability as these credit strengths provide important counter-balance to the possibility of further TAV declines.
The district's taxing jurisdiction is coterminous with Howard County. The county seat (the city of Big Spring), serves as a modestly-sized healthcare, retail, and commercial center for the largely rural, surrounding area. County population gains since 2000 have been modest, averaging less than 1% annually; the population base is presently estimated at 37,500.
The district's enrollment base is relatively small and growth has been flat historically despite periodic, counter-cyclical swings. Full-time equivalent students totaled 2,030 in fiscal 2015, reflective of a 1% annual average decline in full-time equivalent students over the last 10 years (fiscal 2005-2015). The recent modest growth in fiscal 2016 reversed a pattern of enrollment declines and the district expects further student growth in fiscal 2017.
Major employment sectors include health care/education, trade/transportation, mining, manufacturing, and government. The area is also energy-rich and local oil/gas business concerns center around working the long-productive Permian Basin as well as the more recently discovered Cline Shale. Curtailed exploration and drilling activity in the face of low oil prices has contributed to a moderate growth in unemployment year-over-year to 5.9% in June 2016 from 4.6% the year prior.
Taxpayer concentration and TAV volatility in the district's property tax base are also a result of the outsized impact of the energy sector and mineral values; this lack of diversity constitutes a measure of risk to the district. TAV concentration is high, with the 10 largest taxpayers accounting for 23% in fiscal 2016, led by a long-standing refinery at 7%. A previous trend of rapid TAV expansion halted with sizeable TAV decline occurring in fiscal 2016, in line with reduced mineral values and energy sector activity. TAV has fallen by a cumulative 25% to date through fiscal 2017. Nonetheless, average annual TAV growth remains positive at 8% over fiscal 2004-2017, inclusive of the recent declines.
State aid remains the district's largest revenue stream, providing about one-third of total revenues in fiscal 2015. The majority of state aid is driven by prior years' enrollment numbers.
Although historical revenue growth has outpaced inflation, Fitch believes the natural pace of revenue growth going forward will be slower, comparable to inflation. Revenue-raising by the district has been fairly consistent historically and gains from probable enrollment growth are balanced against Fitch's expectation of subdued TAV trends from the likely continuation of low oil prices. In addition, Howard County's somewhat distant location from other population centers also provides an inherent constraint to the assessment
The district's total tax rate is limited to $1.00 per $100 TAV according to state statute, of which no more than $0.50 per $100 TAV can be used for debt service. However, the district's total property tax revenue is capped at a lower $0.70 per $100 TAV tax levy by locally voted limitations.
Significant capacity exists under the local tax levy cap as the district presently levies about $0.25 per $100 TAV or roughly one-third of its capacity. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. The district also retains full ability to independently raise its tuition and fee charges without any legal limit; tuition and fees made up about 11% of total revenues in fiscal 2015.
Third-party funding support stems from the long-standing commitment of the state and U. S. government to fund higher education. Nonetheless, these revenue streams remain susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures
Instruction is the primary purpose of the institution and a key operating expense, consuming about 30% of total spending in fiscal 2015. Fitch expects the pace of spending growth should remain more or less aligned to revenues over time, led by further revenue gains from modest anticipated enrollment growth as well as moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases.
The district maintains sound flexibility to adjust instructional outlays to respond to changing enrollment trends. The district can adjust employee headcount and compensation, enabled by the absence of multi-year, contractual agreements or collective bargaining with labor. This expenditure flexibility is tempered by the district's need to recruit and retain a sufficient number of highly educated professionals for instructional and leadership purposes.
The district has demonstrated its ability to respond to both state aid and enrollment-related revenue declines. Structural operating balance has been maintained with the use of salary and staffing cost efficiencies as well as some programmatic changes.
Fixed carrying costs - the combination of total annual debt service, the actuarially calculated annual pension funding amount, and the annual spending for other post-employment benefits (OPEB), net of state support - consumed a moderate 11% of total operating/non-operating expenses in fiscal 2015. Looking ahead, Fitch expects these fixed costs will be moderate to low as a result of the district's lack of future debt plans, a flat and rapidly amortizing debt service schedule projected, and manageable retiree costs that are shared with the state.
Long-Term Liability Burden
Including this issuance, the long-term liability burden is moderate at 11.7% of 2014 Howard County personal income. Fitch expects this burden, largely attributable to overlapping debt, to remain consistent with the 'aa' assessment despite the likely moderating of income metrics over time as a relatively stable and modestly growing population base should result in manageable future capital needs.
Most of the district's debt is supported by a separate tax levy of up to $0.50 per $100 TAV, and the current rate of $0.05 affords ample taxing margin. The district's capital needs for the district appear manageable as management anticipates they will be funded in the near-term with pay-go capital spending.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides roughly half of the community college's (employer) annual pension contribution. Recent reforms have lowered benefits and increased statutory contributions in order to improve plan sustainability over time.
Under GASB 67 and 68, the district reported its share of the TRS net pension liability (NPL) at $3.8 million for fiscal 2015, 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 $6.8 million). The NPL remains small at less than 1% of personal income when adjusted for the 7% investment rate assumption.
Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects modest growth in the NPL even if investment returns meet assumed rates, although the overall long-term liability burden should remain within the 'aa' assessment range given how small the pension liability is relative to overall debt. In addition, the district and all Texas community colleges remain vulnerable to future policy and funding changes by the state. The district also provides OPEB through the state-run, post-employment benefit healthcare plan, the obligation for which is small at less than 1% of personal income.
The 'aaa' financial resilience assessment reflects Fitch's expectation that the district will maintain an operating cushion sufficient to maintain a high level of financial flexibility throughout the economic cycle, taking into consideration the district's superior budgetary flexibility and limited expected revenue volatility. This assessment is informed by the district's recent history of unrestricted cash/investments (net of bond proceeds), which Fitch uses as a proxy for unrestricted general fund balance.
The district typically funds pay-go capital spending annually, which most recently included the use of about $1 million in reserves (3% of total fiscal 2015 expenses) to open new campus facilities in the city of San Angelo. Operations again generated a positive margin in fiscal 2015 despite further enrollment decline. The district's operating cushion of unrestricted cash/investments totaled a robust $14.5 million or about 44% of total operating/non-operating expenses at fiscal 2015 year-end. Fiscal 2016 results are expected to improve upon budget. This is largely attributable to the year's modest enrollment growth and increased, student-related revenues as compared to budget in addition to slower than planned pay-go capital spending according to management.
The preliminary fiscal 2017 general operating budget of $29.4 million is structurally balanced with some use of reserves (about $600,000) planned to implement various capital projects. A modest increase in tuition/fees and additional property tax revenue are anticipated to support the year's spending priorities.