Fitch Affirms Midlothian ISD, TX's ULTs at 'A+'; Outlook Stable
--Approximately $51.5 million in ULT bonds at 'A+';
--Issuer Default Rating (IDR) at 'A+'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax pledge of the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA', Stable Outlook). For more information on the Texas PSF, see 'Fitch Affirms Texas PSF Rating at 'AAA', dated Aug. 5, 2015.
KEY RATING DRIVERS
The 'A+' rating is driven by the district's positive revenue growth prospects, its limited independent ability to raise revenues, solid expenditure flexibility, and strong reserve position. Carrying costs associated with pension, other post-employment benefits (OPEB), and debt service spending are moderate but could increase due to potential additional debt issuance. Long-term debt and pension liabilities are elevated and are expected to remain high.
Economic Resource Base
Midlothian Independent School District is located in Ellis County, about 25 miles southwest of downtown Dallas. The district, which has an estimated population of about 35,000, serves the city of Midlothian and portions of the cities of Cedar Hill, Grand Prairie, Mansfield, and Ovilla. Current enrollment is estimated at about 8,472, which represents growth of about 4% from last year.
Revenue Framework: 'a' factor assessment
District operations are funded through a combination of state aid and local property taxes. The district's 10-year general fund revenue growth rate (through fiscal 2014) exceeded both national inflation and GDP. Continued revenue growth is expected, given positive enrollment projections driven by ongoing economic development. The district has very limited independent ability to increase revenues.
Expenditure Framework: 'aa' factor assessment
The district's natural pace of spending growth is expected to be close to or marginally above that of revenues, given enrollment trends and capital needs. The district's debt service and retiree-related carrying costs, which reflect state support for retiree benefits, are moderate but could increase with potential additional debt issuance; the district is seeking authorization to issue debt to accommodate enrollment driven capital needs.
Long-Term Liability Burden: 'a' factor assessment
The combined burden of long-term debt and pension liabilities is elevated but still in the moderate range as a share of district personal income. Fitch expects it to remain at an elevated level due to slow amortization and potential additional debt issuance. Retiree benefit obligations do not represent a significant burden on personal income.
Operating Performance: 'aaa' factor assessment
The 'aaa' operating performance assessment reflects the district's strong reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a solid 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 satisfactory overall financial profile. The ability to address enrollment driven spending pressures while maintaining sound expenditure flexibility and reserves and limiting significant increases to the district's debt burden, could lead to positive rating action.
Accessibility to the larger Dallas Fort Worth metro area and affordable land drove residential development, strong tax base growth and enrollment gains prior to the recession. However, subsequent economic weakness resulted in tax base declines and slower enrollment growth in fiscal years 2010 through 2013. More recently, both taxable assessed value (TAV) and enrollment have picked up, with additional increases projected. Enrollment grew annually by 2% to 3% from 2014 through 2016, and 4% growth is projected for 2017. Longer-term projections anticipate healthy enrollment gains of about 60% from 2016 through 2026. TAV has increased more than 20% from a recent low in fiscal 2013 to roughly $3.08 billion for fiscal 2016.
The district's tax base has historically included a large and stable industrial component, made up of cement, steel, and electric power producers, as well as various distribution centers. In fiscal 2015, the top 10 taxpayers, including their values within the tax increment reinvestment zone (TIRZ) that the district participates in, represented a significant 38% of the district's tax base. The district forgoes operating tax revenue from property within the TIRZ (a loss offset by additional state aid), but recognizes the full value of property in the TIRZ for its debt service tax levy.
District income and wealth metrics compare favorably to state and national averages. Area employment trends have been positive in recent years and unemployment has been declining. The county unemployment rate of 4.2% for July 2016 is down from 4.4% a year prior and is lower than comparable 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 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). About 53% of the district's fiscal 2015 revenues were derived from property taxes, with about 43% generated by state aid.
District revenue growth over a 10-year period (through fiscal 2014) exceeded both national GDP and inflation. Going forward, the natural pace of revenue growth is expected to continue on a positive trajectory given recent and projected enrollment gains.
The district's independent legal ability to raise revenues is limited, as the current operating tax rate of $1.04 per $100 of TAV (to a statutory maximum of $1.17) would require voter approval. The district levies a separate unlimited tax rate of $0.50 per $100 of TAV for debt service, which is at the statutory maximum rate permitted for new bond issuance.
The bulk of the district's expenditures are related to instruction. In addition, general fund outlays include pay-go spending for capital needs.
The natural pace of spending is expected to be at or marginally above revenue growth, given enrollment trends and related spending needs.
The district's solid expenditure flexibility derives from notable control over workforce costs and moderate debt service and retiree related carrying costs that reflect state support for retiree benefits. Carrying costs represented about 18.6% of governmental spending in fiscal 2015.
Long-Term Liability Burden
At 26.1% of personal income, the district's long-term liability burden is moderately elevated and consists mostly of outstanding district debt. Debt issuance was driven by prior enrollment growth and the resulting need for school facilities. The long-term liability burden will likely remain elevated due to slow debt amortization (about 22% in 10 years) and enrollment growth-driven debt issuance plans, which are subject to voter approval.
The district will be asking voters to approve a $268 million bond authorization in November 2016. Proceeds would fund the construction of new school facilities, renovations and additions to existing facilities, land acquisition for future school sites, and other capital and technology needs. Based on existing annual debt service needs, current TAV, and the district's debt service tax rate (currently at the cap for new issuance), the district does not have capacity to issue the proposed total authorized amount. The district's plans to maintain the debt service tax rate at $0.50 per $100 TAV and issue debt over a number of years as expected TAV growth generates additional borrowing capacity.
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 fiscal 2015 for certain districts.
Fitch believes that the district, supported by its solid expenditure flexibility and strong reserves, would maintain a satisfactory safety margin in a moderate economic decline scenario.
The district has shown a high level of financial resilience, maintaining strong reserves through economic cycles. Fiscal 2015 ended with an unrestricted general fund balance of $28.1 million or about 42% of spending. A modest deficit (0.3% of spending) at year-end resulted from operating and capital cost increases associated with the opening of a new high school. Preliminary estimates for fiscal 2016 (year ended June 30) indicate a surplus of over $1 million. The adopted fiscal 2017 budget is balanced.