Fitch Affirms Red Oak ISD, TX ULTs at 'A+'; Outlook Stable
--\$83.9 million outstanding series 1999, 2007, 2008 and 2009 bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district.
KEY RATING DRIVERS
FUND BALANCE DRAW FOR CAPITAL: The district continued to draw on reserves built up from increasing revenues for capital projects. Fitch expects general fund balance to stabilize and stay above a satisfactory level to balance revenue growth limitations.
HIGH DEBT BURDEN: Overall debt levels remain elevated due to recent borrowings and slow amortization. Debt service and pension contribution carrying costs are affordable due to significant state support.
LIMITED ECONOMY; POSITIVE GROWTH PROSPECTS: The district serves bedroom communities for the Dallas metro area. Positive growth momentum continues with business expansion, residential developments and collaboration with a technical college.
RATING SENSITIVITIES
FINANCIAL CUSHION: Downward rating pressure could arise from structural imbalance and significant erosion in reserve levels.
CREDIT PROFILE
Red Oak ISD is located 20 miles south of Dallas and serves 5,600 students in the city of Red Oak and the surrounding area. Its location on Interstate 35 provides residents with easy access to the Dallas metro area and a significant portion of district residents commute to jobs throughout the region. The socioeconomic profile is characterized by average to above average incomes, a low poverty rate, and favorable employment numbers.
SATISFACTORY OPERATING RESULTS
Satisfactory operating results are supported by steady enrollment and revenue growth. Management anticipates a slower pace of 1%-2% enrollment growth over the near term, depending on the pace of residential developments in the area. The district's current operating tax rate of \$1.17 per \$100 of taxable assessed valuation (TAV) is at the statutory maximum, indicating reduced financial flexibility going forward. This is partially mitigated by state funding, which back fills almost two-thirds of the district's revenues, and further helped by growing enrollment and expenditure control.
The district achieved consistent operating surpluses even during the recession and built up unrestricted general fund reserves to 24.5% of spending by fiscal 2012. Operations continue to be structurally balanced. During fiscal 2013 and 2014, the district used surplus revenues and reserves to fund for capital projects and ended fiscal 2014 with \$9.2 million (19.8% of spending) in unrestricted general fund balance. The fiscal 2015 operating budget is balanced, but includes over \$2 million in one-time capital spending, and subsequently a planned drawdown of fund balance to \$7 million, or around 14% of spending.
Most of the current year capital spending is related to the conversion of an intermediate school to an elementary school and a junior high school to a middle school, to accommodate anticipated enrollment growth. The reserve level at the end of the current fiscal year will likely stay above the policy target of 12.5% and Fitch expects no significant further fund balance drawdowns. A sound financial cushion and the intention for keeping a certain level of reserves are crucial for maintaining financial flexibility.
HIGH DEBT, MANAGEABLE CAPITAL NEEDS
Overall debt ratios are high at \$4,839 per capita, or 7.9% of market value, mostly due to slowly amortizing debt issuances from the \$95 million 2007 authorization.
The district's classroom capacity after the conversion of an intermediate school is expected to be sufficient to accommodate enrollment growth in the near term. The need for additional space and resulting bond financing may arise in the medium term, but is not being considered currently.
AFFORDABLE CARRYING COSTS
Fitch's concern about the elevated level of the district's debt is lessened by the moderate long-term liability burden on the budget including pension and other post-employment benefits (OPEB).
Carrying costs (including debt and benefit contributions) for fiscal 2014 were low at 9% of governmental spending, due primarily to state support of more than one-third of total debt service payments and the district's minimal required contributions to pension and retiree healthcare programs (totaling \$582,000, or 5% of governmental spending).
The district participates in the Teacher Retirement System of Texas (TRS), a cost sharing multiple-employer pension plan, and the TRS-run post-employment healthcare plan. TRS funding position is satisfactory, at 73% funded using Fitch's more conservative 7% rate of return assumption compared with 81% funded as reported by TRS. Pension contributions for all districts in the state rose to 1.5% in fiscal 2015 on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in district funding requirements beyond fiscal 2015, while not presently anticipated, could create additional budget pressure, which Fitch will monitor.
PART OF DALLAS REGIONAL ECONOMY, GROWTH PROSPECTS
The expansion of suburban development south of Dallas in recent years fueled the district's population growth, which has increased at an average annual rate of 2.4% since 2000.
The district's assessed value (AV) grew to \$1.4 billion after some modest declines during the recession, and stands at 14% above pre-recession peak. Triumph Group, a manufacturer of components for aircrafts, continues its expansion in Red Oak. The fiscal 2015 tax roll reflects \$141 million of Triumph AV, or 10% of the total district tax base. At completion, Triumph is expected to achieve an AV of \$180 million and create a total of 1,200 jobs, placing it firmly as the largest property taxpayer and employer for the district, far exceeding the second largest property taxpayer at 1.5% and second largest private sector employer with 310 workers.
The district is participating in a tax abatement agreement with Triumph which will exclude new facility values exceeding \$80 million from operating taxes for eight years beginning in 2013; values are not subject to abatement for debt service tax purposes. Taxpayer concentration due to Triumph expansion (\$80 million, or 6% of M&O tax base, and \$141 million, or 10% of I&S tax base) is largely mitigated by the state's per student funding formula which would backfill a portion of any operating property tax revenue loss. State support for debt service that the district currently receives due to its low property wealth would also likely increase with any sudden, material TAV declines.
Another significant positive development is Texas State Technical College (TSTC) opening of a 102,000-square-foot training facility at Red Oak High School campus in October 2014. TSTC can accommodate up to 6,000 students, and is expected to attract manufacturing companies and enhance the district's technical education offering.
TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past two years, a Texas district judge ruled in August 2014 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. The Texas attorney general has appealed the judge's 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.
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