Fitch Rates Galena Park ISD, TX's $102.7MM ULT School Bldg & Rfdg Bonds 'AAA' PSF/'AA+' Underlying
--$102.7 million unlimited tax school building and refunding bonds series 2016.
The bonds are expected to price via competition the week of Sept. 26. Proceeds will be used to fund facility improvements and to refund debt for savings.
Additionally, Fitch has affirmed the district's $166 million (pre-refunding) in outstanding ULTs and Long-Term Issuer Default Rating (IDR) at 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited property tax levy 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+' IDR and unlimited tax bond rating are based on the district's strong operating performance, supported by solid expenditure flexibility, and solid revenue growth prospects. The rating also reflects the district's moderate long-term liability burden.
Economic Resource Base
Galena Park ISD is a mature district serving six Houston-area communities, including Galena Park, Jacinto City and a portion of Houston, with enrollment of approximately 22,550.
Revenue Framework: 'a' factor assessment
The district's revenues have outpaced U. S. GDP growth over the 10 years ending in 2014, reflecting the district's ability to capture the benefit associated with ongoing rapid expansion of the tax base due to strength of the energy sector and high oil prices. The assessment reflects Fitch's expectation of lower, but still solid, growth based on current tax base trends and Fitch's view of the Houston area's growth prospects. The district lacks the ability to independently increase operating revenues.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending is expected to align with revenue growth. The district's expenditure framework is characterized by workforce cost flexibility and moderate carrying costs, driven primarily by debt. The assessment assumes that the state will continue to provide the majority of employer pension and other post-employment benefits (OPEB) contributions.
Long-Term Liability Burden: 'aa' factor assessment
The district's long-term liability burden is a moderate 16% of personal income with the potential to be pressured based on regional debt needs in relation to population and income growth. The district's net pension liability is modest.
Operating Performance: 'aaa' factor assessment
Historically strong revenue growth and conservative budgeting have enabled the district to accumulate sizable reserves. Fitch expects the district to demonstrate strong financial flexibility during a moderate economic downturn based on sound expenditure flexibility and the strength of its existing financial cushion.
Long-Term Liability Burden Growth: The pace of growth in long-term liabilities relative to population and income could pressure the current rating.
The district's location in the Houston ship channel provides it with particular exposure to oil & gas, petrochemicals, trade, and transportation sectors of the broad Houston economy. The district's taxable assessed valuation (TAV) realized a compound annual growth rate (CAGR) of 6.2% over the 10 fiscal years through fiscal 2014 and strong gains of 16% and 6% respectively in fiscal 2015 and fiscal 2016. Flat 2017 TAV resulted from reported depletion of liquid inventories, offset by residential, commercial and industrial growth. Top 10 taxpayers are dominated by the industrial and oil and gas sectors, comprising a high 26% of fiscal 2016 TAV. Officials anticipate modest TAV gains due to ongoing growth throughout all property sectors. Fitch considers this assessment reasonable based on current trends and likely growth associated with economic reliance on the region's sizable petrochemical and industrial base.
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 that varies from district to district. In fiscal 2015, the district received 43% of its revenues from the property tax, with the bulk of the remainder from state sources.
The district's revenues realized a strong 4.3% CAGR for the 10 years ending 2014 on average annual enrollment growth of 1% and TAV growth of 6.2% during the same period. The district's revenue growth exceeds that of enrollment growth due to a combination of state funding increases and the district's ability to capture a one-year benefit from TAV gains before state funding is adjusted. Fitch anticipates the district to realize solid growth, above that of inflation, over the medium term based on a combination of an expanding tax base and modest enrollment growth.
Galena Park ISD does not have the ability to independently raise revenues to support its operations because its maintenance and operations (M&O) tax rate of $1.243 per $100 of TAV is at the maximum statutory limit. The district's maximum M&O rate exceeds that of most Texas school districts by authority granted through a special Harris County statute, voted into place by the electorate in 1964.
Instructional costs account for 57% of fiscal 2015 operating expenditures, which Fitch expects to grow in line with revenues, along with the district's other operations costs.
The district's carrying costs, 10.5% of fiscal 2015 spending, are driven primarily by debt service at 8.4% of spending. Fitch expects carrying costs to remain moderate based on anticipated growth in projected debt service and the district's operational spending. The assessment assumes that the state will continue to fund the vast majority of employer pension and OPEB contributions. The district's 10-year principal amortization is average at 53%.
Long-Term Liability Burden
The district's long-term liability burden is a moderate 16% of personal income. The district's $555 million long-term liability burden consists primarily of debt ($513 million). This issue will fund facility improvements and infrastructure and leaves the district with $200 million of authorization from its May 2016 election which the district plans to issue over the next several years. The district's debt burden may become elevated but remain moderate to the extent that population and income do not increase commensurate with regional debt needs over the next several years. The district's I&S tax rate of $0.27 provides ample capacity under the state's new issue cap of $0.50 per $100 of TAV.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68 reporting, TRS's assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 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 that state statute requires districts to assume. Like all Texas school districts, Galena Park 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 that became effective in fiscal 2015. The district's pension contributions are determined by state statute, rather than actuarially, and similarly to other Texas school districts, have historically fallen short of the actuarial level. Recent state reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time. The proportionate share of the system's net pension liability paid by the district is minimal, representing about one-half of 1% of personal income. Galena Park ISD's contributions are currently limited to the 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $4 million in fiscal 2015).
Fitch expects the district to demonstrate strong financial resilience during a moderate economic downturn based on its sizable financial cushion and sound expenditure flexibility.
Galena Park ISD completed fiscal 2015 with unrestricted reserves of $123 million, representing 65% of spending. The district anticipates its strong fiscal 2016 operating performance to further enhance its financial cushion. The district has a commitment to maintaining a large financial cushion as reflected in its 15% of spending reserve floor.
Galena Park ISD historically achieves operating results that are favorable to its conservative budget. The district builds its reserves during economic upturns and regularly attends to facility and equipment maintenance needs.