Fitch Rates Waxahachie ISD, TX's ULT Bonds 'AAA' PSF/'AA-' Underlying; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following unlimited tax (ULT) bonds of Waxahachie Independent School District, Texas (the district):
--$50 million ULT school building bonds, series 2016.
The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas Permanent School Fund is available in Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.
The bonds are scheduled for negotiated sale on Feb. 24, 2016. Proceeds from the sale will be used to construct new facilities and renovate existing facilities of the district.
In addition, Fitch assigns an 'AA-' underlying rating to the series 2016 bonds and affirms the underlying 'AA-' rating on $210.3 million of outstanding ULT bonds (accreted basis).
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: District finances are well-managed, characterized by structurally balanced operations and maintenance of sound reserve levels.
FAVORABLE LOCATION NEAR DFW: The district benefits from its location along a major transportation corridor and proximity to the larger Dallas-Fort Worth (DFW) economy and employment base.
SOME TAX BASE CONCENTRATION: Top taxpayer concentration is above average, but recent healthcare and retail investments are helping to diversify the tax base. New construction produced solid taxable assessed valuation (TAV) gains in each of the past two years.
WEAK DEBT PROFILE: Overall debt levels are high and the pace of amortization is very slow, reflecting extensive use of capital appreciation bonds (CABs). Projected enrollment growth will pressure facility capacity over the medium to longer term.
PRESERVATION OF BUDGET BALANCE: The maintenance of budgetary balance and solid reserve levels is necessary to mitigate the credit concerns over high debt, very slow amortization, and any operating pressures associated with new facilities.
Waxahachie ISD is located about 30 miles south of Dallas in the center of Ellis County along Interstate 35E. Moderate enrollment growth is occurring and the current student count is approximately 8,200.
STABLE LOCAL ECONOMY
The district's proximity to the broad, diverse DFW economy and employment base, as well as its location along a major transportation route, has fostered a well-established local manufacturing and industrial base. In addition, the availability of affordable land has spurred residential development and accompanying enrollment growth. Healthcare investments and an improving housing market have prompted new residential construction in the past three years.
The unemployment rate for Ellis County improved to 3.6% in December 2015 from 3.8% one year prior due to employment growth that outpaces the state and U.S. District wealth levels are average, with median household income and per capita income at 112% and 87% of national norms, respectively. Market value per capita of $86,000 in fiscal 2016 is boosted by the district's industrial base.
TAX BASE EXPANSION
Aggregate TAV growth of 13% over the past three years reflects increased residential and commercial construction activity. The fiscal 2016 TAV of $3.16 billion represents a solid increase of 5.7% over the prior year.
Fitch expects moderate tax base growth to continue over the near term, based on current residential building activity and other positive economic indicators (including development spurred by the recent expansion of a medical complex). Taxpayer concentration remains above average with the top 10 payers at about 16% of fiscal 2016 TAV, led by a Walgreens distribution center at 4.7%. Other top taxpayers include a fairly diverse mix of manufacturing concerns.
SOUND FINANCIAL OPERATIONS
District financial operations are solid, with positive operating margins supporting pay-as-you-go capital spending. General fund operations in fiscal 2015 were balanced before a $9.7 million land purchase for future school sites. The deferral of $1.5 million in capital spending, along with positive revenue and expenditure variances, produced a drawdown of $4.6 million, smaller than projected at last review. Despite the use of reserves, the unrestricted fund balance remained a sound $20.3 million or 29% of spending.
The adopted fiscal 2016 budget is balanced, despite the $1.5 capital carryover. Management currently projects that bottom-line results will reflect a modest general fund surplus of about $1.5 million, as indicated by year-to-date outperformance of conservative budget assumptions.
Fitch expects that the district will maintain reserves above its informal fund balance target of three months of operating expenditures, which Fitch considers adequate.
TAX RATE SWAP
Waxahachie ISD voters approved a tax rate restructure in 2014 that maintained the total tax rate while shifting a portion ($0.13) of the debt service tax rate to the general fund. The net effect is approximately $1.5 million in additional operating revenues beginning in fiscal 2015 because the state funding formula more heavily subsidizes local operating taxing effort.
Approximately $3.9 million of ULT debt service will be repaid via annual transfers from the general fund. Revenue generated from future TAV growth beyond the district's projections of flat valuation would be used to retire outstanding debt and reduce this transfer.
Fitch recognizes the revenue advantage to the district from the tax rate swap, but this unconventional taxing structure could be subject to legislative or statutory changes. Credit concerns are mitigated by management's ability to reverse the tax rates if necessary and by sound financial operations. However, a reversal of the full $0.13 would raise the debt service rate above the state's tax rate cap of $0.50 per $100 of TAV for new debt, limiting borrowing capacity. The current rate is $0.38, providing significant margin below the cap.
ELEVATED DEBT BURDEN
Inclusive of the series 2016 bonds, overall debt on a current accretion basis is high at 8.4% of market value and $7,184 per capita. Annual debt service charges are manageable at 12.5% of fiscal 2015 governmental fund expenditures. Amortization remains very slow with only 17% retiring in 10 years, which Fitch views as a credit negative. The slow debt retirement is largely due to the prior use of CABs in the district's borrowing program.
This offering concludes the district's May 2015 authorization, which was approved by a very high 75% of voters. Proceeds from the 2015 and 2016 bond issues are being used to finance a replacement high school and the renovation of an existing school, as well as a career and technology education facility. The district adopted a tax rate increase of roughly $0.13 per $100 of TAV for this project, matching the rate amount transferred from debt service to operations with the 2014 tax rate swap.
AFFORDABLE POST-RETIREMENT BENEFITS
The district participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using Fitch's more conservative 7% return assumption. Contributions are determined by state statute, rather than actuarially, and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.
The state assumes the majority of TRS' employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts?as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.
The district's proportionate share of the system's net pension liability represents a manageable 0.3% of fiscal 2015 market value, and the district's contributions were $1.3 million. Carrying costs for debt service, pensions, and other postemployment benefits were modest at 14% of fiscal 2015 governmental fund spending.
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. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.