Fitch Rates Clint ISD, TX's ULTs 'AAA' TX PSF/'AA-' Underlying; Outlook Stable
--$16.4 million ULT bonds, series 2015A.
The bonds are scheduled for negotiated sale the week of Oct. 19. 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):
--$181.5 million in ULT bonds.
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 PERFORMANCE: The district consistently records operating surpluses, resulting in the steady growth of unrestricted general fund reserves approaching a healthy 30% of spending.
WELL-LOCATED TAX BASE: The primarily residential district has experienced good population growth and steady gains in its tax base, benefiting from its location on the eastern boundary of El Paso County. The area economy includes international trade, manufacturing and distribution; Fort Bliss, the U.S. Army's second largest installation, and the stabilizing presence of medical, education, and government sectors. Growth prospects are strong.
BELOW-AVERAGE SOCIOECONOMIC PROFILE: District income levels are well below average and the pace of growth has stagnated in the past five years compared to growing state and national income metrics.
HIGH DEBT RATIOS: The district's debt is very high relative to market value, although fixed costs are low relative to governmental spending due to state assistance, and the district retains good flexibility under the state cap for new debt issuance to meet future needs.
DECLINE IN STATE SUPPORT: Material decline in state support for operations and debt service or a weakening of the district's strong fund balance position could pressure the rating.
The district is located approximately 18 miles southeast of the city of El Paso (general obligation bonds rated 'AA' with a Stable Outlook by Fitch). The district serves Horizon City, the town of Clint, and the unincorporated area of East Montana within a large 380-square mile boundary.
LOCAL ECONOMY BENEFITS FROM PROXIMITY TO EL PASO
The district continues to record positive, albeit uneven, growth in its primarily residential tax base. The district's taxable assessed valuation (TAV) grew by a compound annual average of 4% since fiscal 2008, including gains of 3.3% in fiscal 2014 and 0.6% for fiscal 2015. Preliminary figures for fiscal 2016 show growth in market value (3%) but contraction in TAV due to additional exemptions.
Ease of access to the city of El Paso and the Fort Bliss Air Defense Training Center make the district's affordable housing a primary growth driver. The Department of Defense has invested over $7 billion in Fort Bliss in the last seven years; however, the base is not protected from across-the-board cuts at the federal level and Fitch will continue to monitor the potential for a reduction in force and associated impact on the local community. The top 10 taxpayers are represented by a utility, real estate, manufacturing, and construction interests with no taxpayer or industry concentration. Tax collections have averaged close to 100% over the past five fiscal years.
IHS Global Insights points to the El Paso region's younger-than-average population as a key strength, supporting strong service sector growth. However, relatively low skill levels limit high-paying job growth. The city's latest unemployment rate of 5.5% for July 2015 is improved from the prior year, but largely reflects a decline in both resident employment and labor force. Wealth as measured by median household income is about two-thirds of state and national averages.
Enrollment growth averaged 4.4% annually from fiscal 2005 to 2011 but has since been relatively flat at 11,750 students. The district projects flat enrollment for planning purposes and monitors daily attendance closely to make timely budget adjustments if needed. Longer term, outward expansion of El Paso will likely generate additional enrollment gains at the district.
STRONG FINANCIAL PERFORMANCE
Management budgets conservatively and maintains a healthy level of reserves. State funding contributed more than 75% of the district's operating revenues over the past five years, followed by ad valorem tax revenues and federal monies.
The district's financial profile is characterized by positive operating results and strong reserves. Fiscal 2014 audited results were better than a previously projected deficit due to capital expenditures coming in under budget and higher than expected enrollment. At the close of fiscal 2014, the district's unrestricted fund balance stood at $27.5 million, or a healthy 29.3% of spending.
The district estimates closing fiscal 2015 (August 31) with a $4 million surplus. The fiscal 2016 adopted budget was balanced with minimal changes from prior years, including an annual 1.5% salary increase and a 2% tax base growth assumption.
DEBT BURDEN GROWTH
Metrics for overall debt outstanding spiked recently to an elevated $5,825 per capita and a very high 20.2% of market value. The district's debt service payments were a very low 3% of government spending after adjusting for 76% state debt service assistance received in fiscal 2014. The fiscal 2014 debt service payment makes up a higher 9.3% of government spending without the state adjustment. The district receives debt service support from the state through the facilities funding component of the funding formula, which has proved consistent even in times of economic downturn at the state level.
Amortization is slow with 35% retired in 10 years, and management reports minimal capital needs after an $80 million issuance earlier this year. The debt service tax rate is projected to remain at an affordable $0.295 per $100 of TAV, comfortably below the statutory new money issuance cap of $0.50.
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 $1.8 million or a low 1.5% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a low 4.7% of governmental spending, net of state aid for debt.
TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past 18 months 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. 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 consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.