Fitch Rates Garland ISD, TX's $153MM ULT Bonds 'AAA' PSF/'AA+' Underlying; Outlook Stable
--$153.3 million unlimited tax (ULT) school building bonds, series 2016.
The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas PSF is available in Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www. fitchratings. com'.
In addition, Fitch assigns an 'AA+' underlying rating to the bonds and affirms the 'AA+' rating on $463 million in outstanding ULT bonds of the district.
The Rating Outlook is Stable.
The series 2016 bonds are scheduled for negotiated sale October 5. Proceeds from the sale will be used to construct and equip new facilities, renovate existing school facilities, and finance technology upgrades.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.
KEY RATING DRIVERS
The 'AA+' rating reflects Fitch's expectation that the district will maintain healthy financial flexibility throughout the economic cycle due to its solid expenditure flexibility and robust reserves. Although the district's revenue-raising ability is very limited, Fitch expects the state funding formula to provide protection from potential shifts in the local economy.
Economic Resource Base
This relatively mature district experiences stable enrollment and is part of the broad Dallas-Fort Worth (DFW) metropolitan statistical area economy, serving an estimated population of over 300,000 in the cities of Garland, Rowlett, and Sachse. Residents have access to a diverse employment market that continues to outperform the U. S. in terms of population, employment, and income growth. Statewide economic trends are positive.
Revenue Framework: 'a' factor assessment
The state aid and property taxes that support district operations typically yield strong revenue growth slightly faster than the U. S. economy, based on the state's per-student funding formula. The district's independent legal ability to raise revenue is limited by state law.
Expenditure Framework: 'aa' factor assessment
The district is relatively mature and retains solid expenditure flexibility given a lack of enrollment pressure; Fitch expects growth in spending to trend with revenue growth. The moderately low fixed-cost burden reflects state support for debt service and employee benefits.
Long-Term Liability Burden: 'aa' factor assessment
Debt and pension liabilities are moderately low relative to personal income. Fitch anticipates the district's long-term liabilities will remain manageable as the remaining bond authorization is issued through 2018.
Operating Performance: 'aaa' factor assessment
The district's expenditure-cutting flexibility and solid reserve funding leave it well positioned to address cyclical downturns. Conservative budget practices and revenue stability further support Fitch's expectation of continued financial flexibility.
Manageable Long-Term Liabilities: A material increase in long-term liabilities beyond current plans could result in a rating downgrade.
The district benefits from the large and diverse labor market of the DFW MSA. Dallas is home to numerous corporate headquarters and prominent sectors include transportation, financial services, wholesale trade, manufacturing, oil/gas, and education and government. The district's tax base is primarily residential, with a stable industrial/commercial representation and modest housing stock. Garland's industrial market is the second largest in the MSA and includes a diverse mix of manufacturing and distribution concerns. The tax base experienced compounded annual growth of 2.6% over the past 10 years, which include a period of modest recessionary decline. Taxable assessed value (TAV) growth for fiscal 2017 was strong at 7.6%.
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 targeted revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district). In fiscal 2015 the district received 66% of operating revenues from state aid, followed by property taxes at 31%.
The district's general fund revenues have grown at a rate above U. S. CPI and GDP over the 10 years ended with fiscal 2014, despite state budget cuts in the 2012-2013 biennium. This strong trend is due in part to higher state funding for new educational programs, and Fitch anticipates that enrollment stability will yield revenue growth in line with U. S. economic performance, absent policy action.
The district's tax rate for operations is at the legal limit of $1.04 per $100 of TAV. The district would need voter authorization to raise the rate and there are no current plans to do so. The district levies a separate, unlimited debt service tax rate of $0.42 for fiscal 2017, remaining below the $0.50 statutory cap for new debt issuance.
The district's main expenditure item is instruction at 66% of general fund spending. The district typically funds some capital outlay from the general fund for facility maintenance and repairs, but Fitch expects this will subside somewhat with recent and planned bond issuance.
Fitch expects expenditure growth to align with revenue growth absent policy action, based on the current trend of relatively flat enrollment. Management indicates that the operating costs of a planned career and technology facility will be offset by higher state funding for student participation in the program.
The district's fixed cost burden is affordable, with carrying costs for debt, pensions, and other postemployment benefits equaling 6.5% of fiscal 2015 governmental expenditures, net state aid for debt service. Debt service costs are expected to increase with planned debt issuance through 2018, but this is offset somewhat by spending flexibility in staffing given modest enrollment growth prospects and strong control over wages and benefits.
Long-Term Liability Burden
The district received strong voter support in 2014 (62%) for its $455 million bond program for a combination of new facilities and improvements to existing facilities. After this offering, management plans to issue the remaining $89 million of ULT authorization by early 2018, compared with amortization of $78 million within that same period. The long-term liability burden is moderately low at 10.5% of personal income, and is expected to remain manageable with planned issuance.
The district participates in the Teacher Retirement System of Texas (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. The proportionate share of the system's net pension liability paid by the district is modest, representing less than 1% of personal income. The district's contributions are currently limited by state law (total contribution of $9.9 million in fiscal 2015).
The district has maintained a robust fiscal cushion despite recessionary pressures and state funding cuts, and retains expenditure flexibility to manage well through economic downturns. General fund operations have generated surplus results in each of the past six fiscal years, enabling the district to address various capital needs while still adding to reserves. Unrestricted general fund balance at fiscal 2015 year-end was 35.5% of spending, and unaudited results for fiscal 2016 point to a modest surplus of $3.5 million (0.7% of spending).
Management has demonstrated a strong commitment to maintaining operational balance and outperforming conservative budget assumptions. Fitch expects the district's conservative financial management practices to support financial flexibility throughout the economic cycle. The fiscal 2017 budget projects a modest drawdown based on conservative assumptions for both revenues and expenditures.