Fitch Rates Fort Bend ISD (TX) Series 2015C ULT Rfdg Bonds 'AA+' Underlying / 'AAA' PSF
OREANDA-NEWS. Fitch Ratings has assigned ratings to Fort Bend Independent School District, Texas' (ISD; the district) unlimited tax (ULT) bonds as follows:
--$35.2 million ULT refunding bonds, series 2015C 'AAA' enhanced / 'AA+' underlying.
The 'AAA' long-term rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable,' dated Aug. 5, 2015.)
The bonds are scheduled for negotiated sale November 5 . Proceeds from the sale of the bonds will be used to refund certain outstanding obligations for debt service savings and pay issuance costs.
The Rating Outlook is Stable.
The bonds are direct obligations of the district and are payable from an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the PSF guaranty.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The district's financial profile is a positive credit factor, characterized by large reserve levels and a consistent record of conservative budgeting practices.
STABLE AND DIVERSE ECONOMY: The local economic climate continues to demonstrate low unemployment, high wealth levels, and a healthy local housing market.
HEALTHY GROWTH PROSPECTS: Housing construction continues, spurred by major transportation arteries that facilitate access to broad labor markets in the Houston metropolitan area. Residential development has also led to renewed enrollment growth for which Fitch believes the district has conservatively budgeted..
ELEVATED DEBT BURDEN: The district's overall debt levels will remain elevated due to the area's ongoing, growth-related capital needs that include the district's planned debt issuances. Affordability concerns are somewhat offset by consistently strong voter approval of the district's bond priorities. Fitch believes the debt load is manageable due to the district's moderate carrying costs and prospects for further tax base expansion.
SHIFT IN FINANCIAL PROFILE: Ample financial flexibility and strong management practices are evidenced by the district's maintenance of solid reserves while addressing its ongoing capital needs, which is a key credit consideration. The Stable Outlook reflects Fitch's expectation that material change in these factors is unlikely.
The district is the seventh largest school district in the state, with enrollment at just under 73,500 in fiscal 2016. The district service area spans a large 170 square miles in northeastern Fort Bend County (the county; GO bonds rated 'AA+' with a Stable Outlook by Fitch), in a rapidly growing residential and commercial sector of the Houston metropolitan statistical area (MSA).
The district encompasses the incorporated cities of Missouri City (GOs rated 'AA' with a Stable Outlook), Sugar Land (GOs rated 'AAA' with a Stable Outlook), Arcola, and Meadows Place. The district also serves portions of Richmond, Houston (GOs rated 'AA' with a Stable Outlook), and other smaller area communities.
FURTHER ENROLLMENT AND TAX-BASE GROWTH
The district's service area is about 70% developed. Enrollment and tax base growth moderated during the recession but both have ramped up recently with improvement in the economy.
Average daily attendance (ADA) was essentially flat from fiscal 2010-2014. It has since grown annually by a steady 2% in fiscals 2014 and 2015 and is projected to grow comparably over the near term. Fitch considers this realistic given recently surging homebuilding activity within the district. Major road infrastructure currently under construction has spurred ongoing residential development throughout the district which should lead to continuation of student enrollment growth.
The Houston MSA economy made a robust post-recessionary recovery due in part to the strength of the energy sector. However, Fitch believes the recent plunge in oil prices may dampen the pace of growth over the near term. As it is one of the state's petrochemical centers, the positive impact of lower energy prices on that activity may serve as a partial offset to any economic softening (see Fitch's press release, 'Oil Price Decline Likely to Have Targeted Effect on Local Texas Economies & Revenues,' dated Jan. 13, 2015).
Nonetheless, the county's economic momentum has not yet been affected, due to the stability of its other employment sectors and those of the larger Houston MSA. Data indicate that the county housing market is performing well, with ongoing new starts and housing prices continuing to trend up. Fort Bend County's population, which is estimated at about 685,500 in 2014, has grown by a compound average annual rate of 4% since the 2010 census. Wealth levels of the county's population are notably higher than those for the Houston MSA, state, and nation. The county's average 2015 unemployment rate of 4.1% was below the state (4.4%) and national averages (5.2%) for the same period.
The district's taxable assessed value (TAV) growth moderated during the recession and registered only one annual dip (2.5% in fiscal 2011). TAV for fiscal 2015 grew by a strong 11% over the previous year, which was repeated in fiscal 2016 as TAV increased to $32.1 billion The district historically uses a more conservative TAV estimate for planning purposes, which we consider prudent.
Fitch believes TAV has some sensitivity to oil prices and an overvalued housing market (see Fitch's press release, 'Boom-Bust Cities Now Among Most Overvalued U.S. Housing Markets,' dated March 31, 2015). These factors may dampen the growth rate over the next few years.
SOLID FINANCIAL RESERVES MAINTAINED
Positive operating margins have resulted in the accumulation of solid general fund reserves despite the challenges posed by substantial state funding cuts. In fiscals 2010 and 2011, the district proactively declared financial exigency, a Texas Education Agency prerequisite for terminating contracted employees, to eliminate 483 positions in order to close a $22 million budget gap. These cuts along with other tight budget constraints enabled the district to generate large surpluses over fiscals 2010-2013.
In line with prior expectations, the district's unrestricted general fund balance remained a strong $167 million, or a high 31% of spending at fiscal 2014 year-end despite transferring out the year's $29 million net surplus (equal to 6% of spending), primarily to the capital projects fund for instructional technology improvements. Management reports the surplus was due largely to continued austerity despite restored state aid cuts, as well as greater than budgeted ADA.
Two percent of spending ($10 million) of the aforementioned surplus was used to eliminate the deficit position in the district's health insurance fund. Interim changes previously implemented and a new health insurance provider as of January 2015 have reportedly stabilized the fund. Management currently anticipates operating performance of the health insurance fund to result in a healthy surplus and addition to net assets at fiscal 2015 year-end.
Unaudited fiscal 2015 results indicate break-even general operating performance, which remains in line with our previous expectation. The adopted budget for fiscal 2016 reflects a modest $2.5 million deficit (less than 1% of spending), due in part to some one-time pay-go capital spending, a built-in $2 million contingency, and some increased transportation costs. The year's budget funds a 2% salary increase totalling about $9.2 million, and adds about 85 new positions to accommodate the year's projected enrollment growth. Added spending is bolstered by additional property tax revenue, gains in enrollment-related state funding, and a modest 1.3% increase in per pupil state aid in the state's proposed biennium budget (fiscals 2016-2017). Management reports actual enrollment trends have been slightly lower than budgeted year to date, but conservative budgeting of ADA is expected to allow the district to make up the difference. Break-even operations are again anticipated by fiscal 2016 year-end, which Fitch believes is reasonable given the district's historical fiscal performance.
Despite the restoration of state funding that began in fiscal 2014, the district remains vigilant about maintaining its solid financial cushion. The district has adopted formal fiscal policies including: to maintain the unassigned general fund balance at 30% of net budgeted operating expenditures for the following year, adopt balanced budgets, and limit the use of fund balance reserves for nonrecurring expenditures. Fitch believes adherence to these policies provides stability for the high credit rating.
ELEVATED DEBT BURDEN
The district's overall debt burden is down slightly given strong TAV growth, but remains high at 8.2% of fiscal 2015 market value and $8,100 per capita. The high overall debt load includes a large number of special districts in the area. Including this issuance, the direct debt pay-out rate is slightly above average with 56% of principal maturing in 10 years.
Voters strongly approved a new $484 million GO bond authorization in November 2014 in support of the first phase of the district's prioritized capital needs. A facilities master plan (FMP) was recently completed which identified the need for 11 new schools and facility improvements, estimated to cost roughly $818 million.
The district has maintained a manageable debt service tax rate (currently stable at $0.30 per $100 of TAV since fiscal 2011), well below the attorney general's tax rate cap for new debt issuance of $0.50 per $100. The debt burden is expected to remain elevated given the large number of special districts within the area, but carrying costs should be manageable, assisted in part by the projected descending debt service schedule, anticipated tax base growth, and phased approach for funding the FMP.
Management plans to limit the tax rate impact from its new GO authorization and to that effect, may initiate a commercial paper program in the near term to fund its more immediate bond project cash flow needs. Fitch believes the district's efforts to minimize the impact on the tax rate does add incremental risk to the district's debt profile. The district's phased approach should make the new debt somewhat more affordable given that the estimated cost of the FMP is only slightly less than the par amount of the district's outstanding debt.
AFFORDABLE RETIREE COSTS
Pension and other post-employment benefit (OPEB) liabilities (largely healthcare benefits) are limited because of the district's participation in the state pension program administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan for which the state provides the bulk of the employer's annual pension contribution. Total pension and OPEB contributions made by the district in fiscal 2014 totalled less than 1% of governmental fund expenditures.
TRS is funded at 80.5% as of its Aug. 31, 2014 valuation,, although Fitch estimates it to be lower at 72.5% when a more conservative 7% return assumption is used. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. Increases in pension funding requirements beyond the 1.5% increase for all districts in fiscal 2015, while not presently anticipated, could create additional budget pressure.
The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable despite an elevated debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) were moderate at 13% of governmental fund spending in fiscal 2014 and are expected to remain manageable given the slowly descending debt service schedule currently projected after reaching maximum annual debt service in fiscal 2016.
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 change intended 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.