Fitch Affirms Little Elm ISD, TX at 'AA-'; Outlook Stable
--Issuer Default Rating (IDR);
--$138.7 million unlimited tax (ULT) bonds;
--$4.4 million maintenance tax notes.
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.) The maintenance tax notes are payable from a limited (operating) ad valorem tax pledge levied against all taxable property within the district, which cannot exceed $1.17 per $100 taxable assessed valuation (TAV).
KEY RATING DRIVERS
The 'AA-' affirmation of the IDR and ULTs and maintenance tax note ratings reflects the district's strong operating performance while successfully managing rapid enrollment growth. Long-term liabilities are expected to remain a moderate burden on resources inclusive of possible increases in the near term to expand facility capacity. Strong area residential growth is likely to continue through the medium term, providing for revenue growth via enrollment gains.
Economic Resource Base
Little Elm ISD is located about 30 miles north of Dallas in the broader Dallas-Fort Worth MSA in Denton County. Portions of the district and the city of Little Elm are located along developable land near Lake Lewisville. Population gains have been rapid for this small district, driving enrollment growth, and income metrics are on par with regional trends.
Revenue Framework: 'a' factor assessment
Revenue growth has been robust, averaging well in excess of the national GDP in the last 10 years. Future growth will likely mirror this trend as enrollment growth continues to be strong. The district's independent legal ability to raise revenues is limited by state law.
Expenditure Framework: 'aa' factor assessment
District spending has kept pace with revenue growth, reflecting operating costs for new schools and additional teachers and staff. State support for pension and other post-employment benefits (OPEB) costs helps keep the fixed-cost burden in moderate territory and expenditure flexibility is solid.
Long-Term Liability Burden: 'aa' factor assessment
Long-term liabilities are a moderate burden on resources, partly due to elevated wealth metrics and population growth. Additional debt plans to address capital needs may increase the burden on resources somewhat, but levels are expected to remain in Fitch's moderate range due to expected continued growth in the economic base.
Operating Performance: 'aaa' factor assessment
The district has navigated the robust growth environment through management's commitment to conservative budgeting practices. Fitch believes reserves would provide ample cushion in the event of an economic downturn.
Healthy Financial Profile: The district's history of maintaining solid reserves while addressing operating and capital needs remains a key credit factor.
The ongoing expansion of the Dallas MSA produced accelerated growth in Denton County with the district recording double-digit annual gains in TAV for over a decade until fiscal 2010. Recessionary pressures led to moderating TAV trends that quickly rebounded; fiscal 2017 TAV marked the third consecutive year of double-digit growth, bringing the tax base to $3.2 billion.
Fitch believes management's expectations of additional TAV growth over the near term due to the ongoing development of high-end residential properties are reasonable. In tandem with TAV growth, district enrollment (which presently totals about 7,200 students) also experienced rapid increases over the past decade; enrollment averaged a healthy 4% annual growth rate during this period and 3% - 5% annual increases are projected in the near - to mid-term.
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).
State support is the district's largest revenue stream, comprising half of general fund monies, followed closely by property taxes at 45%. The compound annual growth rate (CAGR) of district revenues over the 10 years through 2014 was robust at 8.5%, well in excess of U. S. GDP growth. Fitch anticipates robust enrollment increases will continue to drive revenue growth that is in excess of national economic growth.
The district's maintenance & operation (M&O) tax rate increased to the maximum rate of $1.17 per $100 of TAV in fiscal 2016 following a voter-approved transfer of $0.13 from the debt service fund, lowering the interest and sinking fund (I&S) rate to $0.37 per $100 TAV. The tax rate swap provides the district with approximately $1 million in additional state aid for operations, which flows to the general fund balance each fiscal year for subsequent transfer to the debt service fund. Fitch views the tax rate structure as unconventional, but notes a number of Texas school districts have instituted similar swaps. Fitch also recognizes the debt service tax rate could be raised without voter authorization to repay outstanding debt and reverse the tax rate swap if needed.
The district's main expenditure item is personnel at about 85% of the budget, common for school districts. Adopted budgets typically include salary increases and additional staff to address growth, as well as some use of operating revenues for one-time spending.
District spending has generally kept pace with revenue growth to accommodate student body growth. This trend is likely to continue barring any changes in district policy.
The district's fixed-cost burden is moderate, with carrying costs for debt, pensions and OPEB equaling 17.8% of 2015 governmental expenditures and taking into account the 7% in debt service received from the state. Fitch expects the fixed-cost burden to rise slightly as the district issues debt to address capital needs, but to remain moderate given the likelihood of similar growth in the district's budget and strong state support for retiree benefits. Areas of flexibility are primarily instruction, including class sizes, staffing patterns, and teacher salaries.
Long-Term Liability Burden
The district's debt and net pension liability of $278 million represents 12.7% of personal income, almost entirely in the form of debt. The district does not have any unissued debt authorization but may approach voters as early as 2017 depending on the results of a needs assessment. Amortization is very slow at 24% retired in 10 years, reflecting the rapid growth profile of the district and the state's tax rate restrictions, which weaken the district's long-time liability profile.
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. Like all Texas school districts, Little Elm 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 proportionate share of the system's net pension liability paid by the district is minimal, representing just 0.5% of personal income.
The district maintains a strong financial profile and significant financial flexibility despite operating pressures associated with enrollment growth. The district's unrestricted general fund reserves totaled $23.2 million or 43.6% of spending at fiscal 2015 year-end, which remained well above the district's prudent adopted fund balance policy requiring an unrestricted balance equal to 24% of spending. Fitch believes this level of fund balances provides significant fiscal cushion in the event of a future economic downturn that impacts financial operations. Management reports the year that ended Aug. 31 will be largely break-even.
Conservative budgeting practices have enabled actual year-end results to typically outperform budgeted expectations. The fiscal 2017 budget was adopted as balanced and shows a 10% increase in revenues over the prior year's budget driven largely by property taxes, which take up a larger portion of district revenues as tax base growth continues.