Correction: Fitch Rates Grayson County Jr. College District, TX's 2016 GO Rfdg Bonds 'AA'
Fitch Ratings has assigned an 'AA' rating to the following Grayson County Junior College district, Texas limited tax debt:
--$26.4 million general obligation (GO) refunding bonds, series 2016.
In addition, Fitch has upgraded the rating on the approximately $33.6 million (pre-refunding) in outstanding GO bonds to 'AA' from 'AA-' and assigns a 'AA' Issuer Default Rating (IDR).
The Rating Outlook has been revised to Stable from Positive.
The bonds are schedule to sell competitively October 11. Proceeds will be used to refund certain outstanding maturities for debt service savings and to pay related costs of issuance.
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 upgrade of the district's limited tax ratings to 'AA' from 'AA-' and assignment of the 'AA' IDR reflects application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016. The revised criteria highlight the district's demonstrated and anticipated operating financial resilience through cyclical downturns. Key factors that underpin this assessment include the district's ample revenue-raising ability, sound expenditure flexibility, a strong reserve cushion, and limited historical revenue volatility. Continued population and economic growth should keep the liability burden low.
Economic Resource Base
The district's service area is primarily Grayson County and a portion of Fannin County. Grayson County's population base (presently estimated at 125,000) has historically grown modestly. It is located about 60 miles north of the Dallas-Fort Worth metropolitan statistical area (MSA) along the Texas-Oklahoma border, bisected by U. S. Highway 75. The cities of Sherman and Denison serve as a modestly-sized retail/trade and healthcare center for the more rural parts of the county.
The district derives 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, which adds a level of volatility to enrollment trends.
Revenue Framework: 'aa' factor assessment
Fitch expects revenues should naturally grow in line with further population and tax base expansion in the county, which should help to offset additional enrollment-related revenue loss. 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. Sound expenditure flexibility results from moderate carrying costs and the district's ability to adjust its labor costs, if needed.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is low at 7.2% of personal income. Fitch believes further economic and population growth should keep the burden in line with the 'aaa' assessment.
Operating Performance: 'aaa' factor assessment
The district's ample revenue-raising ability, sound expenditure control, and strong reserve cushion should enable the maintenance of a high level of financial flexibility during cyclical downturns.
Financial Flexibility: The rating is sensitive to material deterioration of the district's operating flexibility and revenue-raising ability in its property tax rate and tuition/fee charges as these credit strengths provide an important counter-balance to the possibility of further sluggishness or decline in enrollment.
The local economy is anchored by a relatively stable group of employers and taxpayers predominately in the healthcare, government, education, and manufacturing sectors. Unemployment remained low at 4.2% in July 2016. A sizeable portion of Grayson County remains rural and agricultural in nature, which management anticipates may bring new residential development to the southern portion of the county over time given affordable land and commuting proximity to jobs in the northern portion of the Dallas MSA.
The district's taxing jurisdiction is coterminous with Grayson County. TAV has expanded at a moderate, steady pace annually of about 5% on average. About 40% of the tax base is comprised of residential properties. Top taxpayer concentration is moderate at approximately 9.5%, led by an electric utility at 3.5% in fiscal 2017.
The district's enrollment base is relatively small and growth has been modest historically despite periodic, counter-cyclical swings. Full-time equivalent students totaled 3,971 in fiscal 2015, reflective of approximately 1% annual average growth over the last 10 years (fiscal 2005-2015). More recent enrollment patterns reflect about a 3% decline on average over the last five years. This trend appears to have stabilized however as management indicates enrollment held flat in fiscal 2016, bolstered by improved student retention practices.
Property taxes (both for operations and debt service) are the largest revenue stream, providing about one-third of total revenues in fiscal 2015. District operations have become more dependent on the local tax base in the past decade. Additional tax revenue for operations has largely offset moderate declines in enrollment-related revenues, such as federal (largely Pell grant) revenue, state appropriations, and tuition, as well as some recessionary cuts to state funding.
On average, historical revenue growth in the 10-year period of fiscal 2004 - 2014 strongly outpaced U. S. GDP, which was due in large part to fairly consistent, modest increases to the district's operating property tax rate and tuition/fee charges as well as a voted debt service tax rate implemented during this time period. Fitch anticipates further, moderately-paced tax base gains and economic activity should yield additional revenue gains naturally given the ability of district property taxes to capture that growth, although this assessment is tempered by Fitch's expectation of further, tepid enrollment performance.
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, a locally voted cap limits the district's total property tax revenue to a slightly lower $0.70 per $100 TAV total tax rate.
Significant capacity exists under the local tax rate cap as the district presently levies about $0.18 per $100 TAV or roughly 25% 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 legal ability to independently raise its tuition and fee charges without any 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. The majority of state aid is driven by prior years' enrollment numbers.
Instruction, student services, and administrative expenses consumed about 54% 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 the moderate TAV growth anticipated as well as manageable increases in the cost of services provided.
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 reductions in workforce, salary freezes and staffing cost efficiencies, as well as some programmatic changes.
Fixed carrying costs - the combination of total annual tax-supported 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 tax-supported debt plans, a 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 low at 7.2% of 2014 Grayson County personal income. Fitch expects this burden, largely attributable to overlapping debt, to remain consistent with the 'aaa' assessment. Further overlapping debt issuances are likely to be accompanied with comparable gains in population and income levels.
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 just under $0.05 affords ample taxing margin. The district's more immediate capital needs appear manageable as management anticipates they will be funded in the near term with pay-go capital spending. New facilities presently under consideration include a future residence hall and an academic building, although management indicates a likely mix of self-supporting revenue bonds and some use of reserves is anticipated as the key funding sources.
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 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). 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 'aaa' 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.
Fitch believes the district maintains an exceptionally strong capacity to manage challenges associated with a moderate economic downturn. This assessment is informed by the district's recent fiscal history of unrestricted cash/investments as a proxy for unrestricted general fund balance.
The district's high level of fundamental financial flexibility is a result of the various budgetary tools at its disposal, which include revenue-raising authority, the ability to use its historically strong reserve cushion in excess of Fitch's calculated reserve safety margin, and solid expenditure flexibility. The district's superior financial resilience is also underpinned by historically low revenue volatility (which includes all enrollment-related revenues).
Fitch anticipates district management will continue to adhere to its adopted reserve policy that requires unrestricted reserve levels to be maintained at between 20% - 25% of the ensuing year's budgeted unrestricted revenues despite current plans to drawdown its very high reserves to fund future capital spending.
Given strengthening TAV performance, district management decided to create some ongoing operating budget capacity in recent years to fund its recurring capital needs; this amount has risen to $1 million/year as of fiscal 2016. Steady operating surpluses have also fueled moderate levels of pay-go capital spending in recent years despite continued enrollment declines. Fiscal 2016 performance is projected to again generate a healthy operating surplus (about 5% of operational spending), positive to budget, due primarily to expenditure savings and modestly higher tuition/fee revenue.