Fitch Rates Longview ISD, TX's ULTs 'AAA' TX PSF/'AA' Underlying; Outlook Stable
--$8.8 million ULT bonds, series 2015.
The bonds are scheduled for negotiated sale the week of Oct. 12. Proceeds will be used to refund a portion of the district's outstanding ULT debt for interest savings.
Fitch has also assigned an 'AA' underlying rating to the bonds and affirmed the 'AA' underlying rating on the following outstanding bonds (pre-refunding):
--$223.3 million ULT school building bonds, series 2008, 2009, 2010, and 2011;
--$8.9 million ULT tax qualified school construction bonds, series 2010.
The Rating Outlook is Stable.
The bonds are payable from an unlimited property tax levy of the district, 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
STRONG FINANCIAL OPERATIONS: Consistently positive operating margins have yielded significant general fund reserve levels and liquidity, providing the district with a high degree of financial flexibility.
LIMITED, DIVERSE ECONOMY: The district is located in East Texas and the city of Longview is considered a hub in the region, benefiting from its location in a large industrial and retail economy along major transportation corridors. The tax base is resilient and stable, and local employment indicators are positive.
SIZABLE DEBT LOAD: Debt levels are elevated and amortization has improved but remains slow. The debt service tax rate is near the state's tax rate cap for new money debt issuance, but after completion of the 2008 bond program the district reports it has no capital spending pressure that would necessitate additional leverage in the near term.
STRONG FINANCIAL OPERATIONS: The rating is sensitive to changes in the district's strong financial management practices, including conservative budgeting and high reserves, which mitigate concern over the elevated debt burden.
The district is located roughly 120 miles east of Dallas and 60 miles west of Shreveport, LA and served by major transportation corridors. Enrollment in the district varies slightly from year to year but never deviates significantly from the 10-year average of about 8,500 students. The district population of 57,000 has been mostly stable in recent years.
STABLE AREA ECONOMY
The district is located in the Longview metropolitan statistical area, which is an industrial, retail, and distribution center in East Texas. The area economy has traditionally served as a center for oil and natural gas operations but has become increasingly diversified with the growth of education, health care, manufacturing, transportation/distribution, government and retail trade as major employment sectors.
The area employment picture is positive with a fairly low unemployment rate of 5% in July 2015 and potential for improvement with a trend of employment growth outpacing labor force growth. Income levels of district residents are below state and national averages.
Taxable assessed value (TAV) showed resiliency post-recession, marking only one year of modest contraction (3.7%) in fiscal 2011. A trend of flat to modest growth has persisted since then, and management expects that tendency to continue near term.
POSITIVE FINANCIAL OPERATIONS; PLANNED USE OF RESERVES
Several years of positive operating results have significantly increased reserves, with fiscal 2014 fund balance of almost $55 million representing a very high 85% of spending. The year ending Aug. 31, 2015 is likely to be break-even despite having adopted a $2.2 million deficit budget, a practice management typically employs. The fiscal 2016 budget was adopted with a $4 million deficit, a flat tax rate, and a 4% increase in expenditures.
The district is currently in the planning phases of a Montessori campus, a 1,400 student facility that will consolidate the district's Pre-K and Kindergarten classrooms. The estimated cost of the facility is $35 million and will be funded with a combination of remaining bond revenues from construction cost savings ($10 million) and general fund reserves ($25 million), and is expected to be completed by summer 2017. Fitch expects the district's reserve position to remain robust; management has committed to maintain $30 million in fund balance (47% of fiscal 2014 spending).
MIXED DEBT PROFILE
Key debt ratios are elevated due to the issuance of $267 million over four installments since 2008 to support comprehensive rebuilding, renovating, and repurposing of district facilities. Debt is 5.7% of market value (MV) and $4,593 per capita. Amortization has improved to 40% from 24% retired in 10 years, yet remains sluggish.
The district's debt service tax rate is also high at $0.47 per $100 of TAV, which is near the state's statutory cap of $0.50 for new money debt issuance. However, the district reports it is able to fund its limited near-term capital needs from current resources given the recent capital improvements and modest enrollment growth environment.
The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other post-employment benefits (OPEB) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled $600,000 or less than 1% of government spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a manageable 17.4% of governmental spending. The district is considered property wealthy by the state and does not receive debt service assistance.
TEXAS SCHOOL FINANCE 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 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.