Fitch Rates Yoakum ISD, TX's ULT Bonds 'AAA' TX PSF/'A ' Underlying; Outlook Stable
--\\$5.2 million ULT refunding bonds, series 2015.
The bonds are scheduled for negotiated sale the week of Aug. 24. Proceeds will be used to refund a portion of the district's outstanding debt for interest cost savings.
In addition, Fitch assigns 'A+' underlying rating to the series 2015 bonds, and affirms the 'A+' on the following obligations:
--\\$38.4 million in ULT school building bonds, series 2008, 2014A, and 2014B;
--\\$2.1 million in ULT refunding bonds, series 2012.
The Rating Outlook is Stable.
The bonds are payable from an unlimited property tax levy and also carry the Texas PSF bond guarantee (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).
KEY RATING DRIVERS
RAPID TAXBASE TRANSFORMATION: Significant energy sector investments more than tripled the district's taxable assessed valuation (TAV) in recent years. The district is among the areas of the expansive Eagle Ford shale with the highest levels of oil drilling and exploration, exposing the tax base to shifts in mineral values.
HIGH TAX BASE CONCENTRATION: The largest contributor to recent TAV gains is a natural gas liquids (NGL) processing plant. The plant provides some diversity within the energy sector as it is assessed as industrial property versus mineral values, which are more sensitive to commodity price swings.
EXPANDING FINANCIAL RESERVES: General fund reserves were recently replenished by increased property tax revenues after a period of draw-downs for one-time spending. The district is now considered property-wealthy under the Texas Education Code and may be subject equalization payments.
MIXED DEBT LEVELS; LIMITED CAPITAL NEEDS: Mixed debt ratios and elevated carrying costs are balanced against a lack of future debt plans and minimal retiree liabilities.
FINANCIAL PROFILE STABILITY: The rating is sensitive to material reductions in the district's fiscal cushion given the potential for further tax base contraction or enrollment losses.
Yoakum ISD is located about 100 miles east of San Antonio, TX and lies within the counties of Dewitt, Lavaca, and Gonzales. The city of Yoakum (population 5,954) comprises the bulk of the district's 2014 population of 9,000.
ENERGY SECTOR TRANSFORMING ECONOMY
The historically agricultural economy has undergone a rapid transformation fueled by oil exploration and production and natural gas liquids (NGL) processing. Two of the district's three counties have the second and seventh highest rig counts within the Eagle Ford shale, which encompasses 30 counties. The district's TAV more than tripled from fiscals 2012-2015, increasing TAV per capita to a high \\$228,000 due in part to the construction of a \\$560 million NGL processing plant. Certified values for fiscal 2016 show the first year of contraction since 2011 at 18.5% driven by the slump in oil prices and subsequent reduction in drilling activity.
The top 10 taxpayers account for a high 35% of TAV in fiscal 2015, led by EOG Resources at 19% of TAV. Concentration is down from 64% one year prior as a result of a tax abatement agreement between the district and Enterprise Products Partners LP's (Fitch IDR 'BBB+'/Outlook Stable), the owners of the NGL processing plant. Per the agreement, the TAV of the NGL plant declined from \\$560 million in fiscal 2014 to only \\$10 million for an eight-year period beginning in fiscal 2015. Starting in fiscal 2023, the NGL plant will be assessed at full market value. The NGL's tax abatement applies only to the operations and maintenance levy.
RECENTLY ENHANCED RESERVES
Due to annual pay-as-you-go capital outlays (ranging from 3%-9% of spending), the district posted annual deficits through fiscal 2012, reducing its unrestricted fund balance to a modest \\$1.7 million, equal to 13.7% of spending. Surging TAV growth enabled the district to expand its unrestricted fund balance to 45% at the close of fiscal 2014, well in excess of the informal 20% fund balance target. Fiscal year 2015, ending Aug. 31, is expected to mark another year of surplus, although smaller than the fiscal 2014 surplus, inclusive of the \\$250,000 equalization payment made to the state as a result of the district's property-wealthy status.
The fiscal 2016 proposed budget is balanced and includes a 2% uptick in enrollment, a 3% across-the-board salary increase, and an increase in the debt service tax rate to \\$0.3898 from \\$0.3148 per \\$100 TAV. The district receives an annual revenue protection payment from Enterprise as part of the tax abatement agreement, budgeted at \\$400,000 for fiscal 2016, and is expected to continue for the duration of the abatement. Due to the contraction in the tax base the district does not anticipate making an equalization payment to the state in fiscal 2016, although at current tax base levels it is still considered property-wealthy. In the case of revenue volatility going forward, Fitch expects changes due to shifts in the tax base or state aid would be offset by actions to balance the budget.
MIXED DEBT PROFILE
Debt levels are high on a per capita basis (\\$7,042) but are more moderate as a percentage of market value (3.9%). The district reports no additional facility needs for the medium to long term, mitigating the risk of reaching the \\$0.50 new money cap to pay debt service due to a contracting tax base. Debt service is level and amortization is moderate with 55% of principal retired in 10 years.
The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan which also provides other post-employment benefits (OPEB). The combined pension and OPEB contributions, which are set by state law, totaled \\$171,000 or less than 1% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a moderate 9% of fiscal 2014 governmental spending but will increase to an estimated 23% of fiscal 2014 spending when it begins paying debt service on the recent bond program starting in fiscal 2015.
The state's funding of school districts' payments to TRS helps keep these fixed costs low. However, like all Texas school districts, the district is vulnerable to future funding changes by the state, as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.
TEXAS SCHOOL FUNDING LITIGATION
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 and was the second such ruling in the past two years, 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.
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 would likely follow with changes intended to restore its constitutionality. Any changes that include additional funding for schools and more local discretion over tax rates would be positive credit factors.