Fitch Rates Northside ISD, TX ULTs 'AAA' PSF/'AA+' Underlying; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA+' underlying rating to the following Northside Independent School District, Texas unlimited tax bonds (the bonds or ULTs):
--$75 million unlimited tax school building bonds series 2016;
--$75 million variable rate unlimited tax school building bonds series 2016.
The bonds are expected to price via negotiation the week of April 18. Proceeds will be used to acquire, construct, renovate, and equip school facilities and for issuance costs.
Fitch currently rates the district's $2.1 billion in outstanding ULTs 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).
KEY RATING DRIVERS
STRONG FINANCES: The district's financial profile is characterized by consistently strong operating performance and healthy reserves. Establishment of sizable reserves provides a cushion for enrollment growth and state funding uncertainties.
HEALTHY GROWTH PROSPECTS: The district's taxable assessed valuation (TAV) continues to realize solid growth in excess of enrollment gains. The tax base has no material concentration.
GROWING ECONOMY; STRONG METRICS: Taxable assessed valuation (TAV) is without concentration and continues to realize solid growth in excess of enrollment gains. Unemployment and median household income metrics are favorable.
ELEVATED BUT MANAGEABLE DEBT: Fitch expects the district's debt to remain elevated based on new issuance plans. Moderate carrying costs for annual debt service, pension and other post-employment contributions (OPEB) reflect state support for pension and OPEB costs.
STABLE FINANCIAL POSITION: The rating is sensitive to the district's continued stable financial performance and maintenance of reserves that temper risks associated with a high debt burden and growth-related pressures.
The district is located in the larger San Antonio metropolitan area and serves the rapidly growing northwest portion of Bexar County and surrounding areas, with a fiscal 2016 population of about 608,000.
STRONG FINANCIAL PROFILE
Northside ISD has maintained strong financial performance and an adequate financial cushion despite the pressures associated with sustained enrollment growth and state funding cuts during fiscal years 2012/2013. The district completed fiscal 2015 with a sound $19.8 million operating surplus after transfers (2.5% of spending) and $232.2 million of unrestricted reserves (29.6% of spending). Operating surpluses of $30 million were recorded in both fiscal 2014 and 2013. The district estimates fiscal 2016 unrestricted reserves at a similarly strong level which Fitch considers reasonable based on year-to-date performance. Fitch anticipates the district's fiscal 2017 budget will benefit from ongoing tax base and enrollment growth; operations are structurally balanced.
Financial flexibility is evidenced by sizable funds committed to technology deployments, new school openings and contingencies. Consistent with current levels, the district anticipates maintaining at least $165 million in 'funds available for appropriation' over the next several years, defined by the district as the combination of unassigned funds and long-term investments.
GROWING NORTHWEST SAN ANTONIO BEDROOM COMMUNITY
The district's fiscal 2016 TAV of $40.8 billion reflects a solid four-year average growth rate of 6% and an even stronger gain of 7.5% in fiscal 2016. Preliminary valuations for fiscal 2017 indicate the continuation of sound growth due to appreciation of existing property and new residential and commercial development. Given that the district is only about 65% built-out, and much of the major road infrastructure in the district is in place, the prospects for continued growth are favorable.
Job growth continues to support a favorable county unemployment rate of 3.5% as of January 2016, below the state rate of 4.3% for the same period. The district's income level trends moderately above that of the state.
ELEVATED BUT AFFORDABLE DEBT; ONGOING CAPITAL NEEDS
Northside ISD has a history of voter support for its bond programs. The district is currently finishing up two projects funded with savings from its 2010 authorization, including a new elementary school. District voters authorized $648 million in unlimited tax school building bonds in May of 2014. These issues represent the third and fourth installments of this authorization; $373.3 remains post issuance.
Fitch expects Northside ISD to maintain an elevated debt burden (currently 7.3% of market value), based on the district's plans to issue the remaining authorization over the next three years, and depending on the growth of overlapping debt and market value. Furthermore, the district anticipates seeking additional bond authorization as early as fiscal 2018.
Northside ISD's interest and sinking fund (I&S) tax rate of $0.3355 per $100 of TAV is below that communicated to voters at the 2014 referendum and well below the statutory new-issuance test ceiling of $0.50. Fitch considers the district's projections of modest I&S tax rate growth of up to $0.39 per $100 of TAV as reasonable based on regional growth trends.
The district's debt service burden consumes 11.3% of fiscal 2015 governmental expenditures. The district historically maintains a moderate amount of its debt portfolio in variable-rate unlimited tax bonds, estimated no higher than 27% of total debt outstanding as of Aug. 31, 2016, slightly below the district's policy ceiling of 30%. Terms of the variable-rate bonds include a three-to-five-year initial fixed-rate term, a soft put-back to bondholders in lieu of liquidity support, and the option to periodically reset the rate. Fitch considers the risks associated with a failed remarketing, which would result in an elevated interest rate of up to 8%, minimal. The district's rating indicates strong market access and the ability to refinance its variable rate debt, if necessary.
LIMITED PENSION/OPEB OBLIGATIONS
The district participates in the Texas Teachers Retirement System (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 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 proportionate share of the system's net pension liability paid by the district is minimal, representing less than 0.5% of fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB were 13.3% of fiscal 2015 governmental spending, comprised nearly entirely of debt service. The moderate burden reflects strong state pension support and a slow 10-year amortization rate of 38%.
TEXAS SCHOOL DISTRICT 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.