Fitch Rates Tomball ISD, Texas GOs 'AAA' PSF; 'AA' Underlying; Outlook Stable
--\$134.6 million unlimited tax (ULT) school building and refunding bonds, series 2015.
The bonds are expected to sell via negotiation during the week of Feb. 23, 2015. Proceeds will be used to refund outstanding obligations for debt service savings and to fund completion of a new school, renovation of existing schools and the purchase of school buses.
Fitch affirms the 'AA' underlying rating on \$206.9 million (pre-refunding basis) of outstanding district ULT bonds.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2015 bonds and certain series of outstanding bonds also carry a guarantee provided by the PSF, whose bond guaranty program is rated 'AAA' by Fitch.
(For more information on the PSF, see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sept. 4, 2014 and available at www.fitchratings.com.)
KEY RATING DRIVERS
SOUND FINANCES: The district has maintained good financial flexibility, with reserve balances at strong levels despite state funding uncertainties and operating and capital pressures associated with ongoing enrollment growth.
ELEVATED DEBT LEVELS; ADDITIONAL ISSUANCE PLANNED: District debt levels are high and expected to remain elevated, as additional issuance is planned and amortization is slow. Combined debt service, pension, and other post-employment (OPEB) costs are manageable.
SOLID ECONOMIC INDICATORS; GROWTH CONTINUES: Local employment trends have been positive and recent area unemployment levels are at the state average but below the national average. The local economy benefits from its proximity to the large Houston MSA and is experiencing continued residential and commercial expansion. Taxable assessed valuation (TAV) has seen good annual growth in recent years, which is projected to continue.
The rating is sensitive to the district's continued ability to manage expenditures and maintain solid reserves, while addressing operating and capital pressures associated with enrollment growth and state aid uncertainties.
Tomball Independent School District, encompassing 83 square miles, is located to the northwest of the Houston metro area and serves the city of Tomball and a number of smaller communities. The district had a population of approximately 59,000 in 2013. District enrollment growth has been strong, with a current student population of about 13,000 projected to grow, on average, by about 5% annually over the next five years.
SOUND FINANCES, STRONG RESERVE LEVELS
District financial performance has been solid. Despite financial pressures related to enrollment growth and fluctuating state funding levels, the district has maintained reserves at strong levels. Unrestricted general fund balances in the last four years have been at about 50% of spending or greater. Fiscal 2013 ended with a strong unrestricted general fund balance of \$52.9 million or 62.7% of spending. In fiscal 2014, the district spent \$7.9 million on the purchase of 205 acres of land, which contributed to an operating deficit after transfers of \$4.3 million (4.3% of spending). The year ended with a reduced general fund unrestricted balance of \$50.2 million, or a still solid 50% of spending.
The fiscal 2015 budget is balanced, but the district is expecting better than budgeted performance. The current estimate for fiscal 2015 is an operating surplus of almost \$3 million, driven by lower actual personnel costs due to vacancies and turnover, and increased state funding from stronger enrollment growth. The district has a history of conservative budgeting, with actual results typically outperforming budgeted projections.
Enrollment growth is projected to continue. As a result, the district will be challenged to maintain fiscal stability while addressing increases in operational and capital needs. The district has historically taken proactive measures to maintain financial balance and flexibility, including expenditure reductions and reserve set-asides. Additional, though limited, flexibility is derived from the district's current operating tax rate, which at \$1.02 per \$100 of TAV is \$0.02 below the statutory cap.
PROXIMITY TO HOUSTON; TAX BASE GROWTH CONTINUES
The district benefits from its proximity to Houston, with many district residents commuting to jobs there. The city's economy has been expanding at a healthy pace in recent months, with major drivers including energy, healthcare, and the Port of Houston. However, the recent plunge in oil prices is expected to slow the pace of growth over the near term. Local employment has shown recent annual increases and unemployment has been declining. Harris County unemployment, 4.6% as of November 2014, declined from 5.7% a year prior and is equal to the state average and lower than the national average (5.5%). District wealth and income levels are above average.
The district was historically more rural and agricultural, but available land combined with proximity to the large Houston employment base spurred residential and accompanying retail/commercial development in recent years. The district's tax base enjoyed rapid growth of over 12% annually from fiscal 2007 through 2009. Annual growth continued, slowing for fiscal 2010 through 2013 (about 3% to 9%), but has picked up again, with annual growth of about 11% and 15% for fiscal 2014 and 2015, respectively.
Continued growth is expected in the near term as the district reports ongoing residential and commercial expansions. Commercial development includes the Grand Parkway Town Center, Tomball Medical Center facilities renovation and expansion, and a new 120 acre business and technology park. In addition, Noble Energy, Exxon Mobil, and Southwestern Energy have construction projects in process, with the Noble Energy and Exxon Mobil projects expected to be completed in 2015. District taxpayer concentration in fiscal 2014 was mid-range at about 13% for the top 10 taxpayers; the list was led by Hewlett-Packard (about 5%), which is also a major district employer.
ELEVATED DEBT LEVELS
The district's overall debt levels, including overlapping debt, are high on a per capita basis (\$11,974 in fiscal year 2014) and as a percentage of market value (9%). Debt service as a percentage of fiscal 2014 governmental spending is above average at about 15%. Debt amortization is slow, with only about 37% of principal retired within 10 years.
Debt levels are expected to remain high as the district addresses capital needs associated with continued enrollment growth. Fiscal 2015 ratios are estimated at \$13,417 per capita and 8.7% as a percentage of market value. In addition to the Series 2015 bonds, the district plans to issue \$33 million in new money bonds over the next two years, which represents the remainder of a \$160 million GO bond authorization approved by voters in May 2013. Even with this additional issuance, the debt service tax rate (\$0.34 per \$100 TAV currently) is expected to remain below the statutory \$0.50 per \$100 TAV tax rate test for new debt.
The district provides pension and retirement health benefits through the Teacher Retirement System of Texas (TRS). Pension and OPEB costs are modest (about 0.9% of fiscal 2014 spending). As of Aug. 31, 2013, the TRS funded ratio was 80.8% or 77.5% using Fitch's more conservative 7% discount rate. Combined debt service, pension, and OPEB costs are manageable at about 16% of fiscal 2014 governmental expenditures.
Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015.
TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past two years a Texas district judge ruled in August that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.
Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. Fitch expects the state will appeal the latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.