|[January 09, 2014]
Fitch Affirms Frenship ISD, TX's $122.2MM ULTs at 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the following underlying rating on Frenship
Independent School District, Texas (the district):
--$122.2 million unlimited tax (ULT) bonds, series 2006, 2007, 2008,
2009, and 2010, at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by ad valorem taxes levied against all taxable
property within the district, without limitation as to rate or amount.
In addition, series 2006, 2007, 2009, and 2010 bonds are secured by the
Texas Permanent School Fund (PSF), whose bond guarantee program is rated
'AAA' by Fitch.
KEY RATING DRIVERS
ELEVATED DEBT LEVELS TO INCREASE: Debt ratios are high and are likely to
increase further given the slow repayment of outstanding principal and
potential approval of a new money bond authorization this spring.
CONTINUED POSITIVE FINANCIAL PERFORMANCE: The district has consistently
posted positive operating results and maintained solid reserve levels
despite reductions in state aid and cost pressures from enrollment
STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014
and 2015 will reestablish a significant source of revenue for the
district after several years of reductions in state support.
STRONG TAX BASE & AREA ECONOMY: The district tax base is growing at an
increased rate after a moderate slowdown post-recession, while the area
unemployment rate continues to trend below state and national averages.
A high and growing debt burden likely precludes positive rating action
over the near term, however, expectations for continued tax base growth
combined with the district's history of sound financial management,
positive operating performance, and strong reserve levels are important
credit strengths that moderate this risk.
The 128-square mile district is located immediately to the west and
southwest of Lubbock (rated 'AA+' by Fitch, Stable Outlook), a regional
economic hub in west Texas. A portion of the district lies within the
city limits, population 236,065, and the district itself has a
population of 43,102.
HIGH DEBT BURDEN
Overall debt ratios are high at $5,022 per capita and 7.5% of full
value, and amortization is below average with 30% retired within 10
years. The district currently levies $0.46 per $100 of taxable assessed
value (TAV) of the $0.50 statutorily permitted debt service tax rate for
new money issuances.
BOND ELECTION TO BE HELD IN MAY 2014
Debt levels will rise pending voter approval of a bond election to be
held in May. The district will seek an additional $85 million of bond
authorization to build a 9th grade center and an elementary school. In
addition to addressing school capacity pressures, the district will use
the funds for renovations at the high school, general school facility
maintenance, athletic facilities, and technological infrastructure.
Prior bond authorizations have received favorable approval rates, and
community responsiveness to the current proposition appears favorable.
Fitch expects the issuance of additional voter approved bonds would
require an increase in the tax rate to the new debt issuance statutory
cap of $0.50, which subsequently limits flexibility regarding the timing
and size of new money borrowings. Inclusive of the projects associated
with the upcoming bond referendum management estimates sufficient school
capacity for approximately 10 years based on current enrollment trends.
In Fitch's view, this lessens risk associated with the high debt service
Furthermore, the district's tax base performance has recently improved.
TAV increased 6.0% and 6.2% in fiscals 2013 and 2014 following several
years of more moderate growth following the recession. Assumptions for
continued yet moderate growth going forward are reasonable, which will
improve the district's capacity to incur debt over time.
CONSISTENT POSITIVE OPERATING RESULTS
Audited reslts for fiscal 2013 depict a modest $61,449 operating
surplus (after transfers) in the general fund. The general fund has
recorded positive year-end results in consecutive years dating back to
at least fiscal 2002. The fiscal 2013 unrestricted fund balance of $16.5
million equates to a strong 30.9% of spending. Balance sheet liquidity
is likewise strong, with year-end cash and investments totaling $20.9
million or nearly 8x total liabilities.
State aid declined slightly in fiscals 2012 and 2013 as a result of an
adjustment in previous years' lower than projected average daily
attendance (ADA) and a legislative reduction in school support at the
state level. State aid is projected to increase 8.1% in fiscal 2014 and
4.9% in fiscal 2015 due to an increase in school funding at the state
level and enrollment gains within the district.
CONSERVATIVE FISCAL 2014 BUDGET
In fiscal 2014, the district has budgeted a one-time capital expenditure
of $1.4 million for technology, as well as increases in salaries and
additions to staff to reduce class sizes to pre-recession levels. The
district historically budgets conservatively, and the budget for 2014
includes a slight deficit of $413,400.
STABLE AREA ECONOMY
The district benefits from its location near Lubbock, where health care,
education, and government comprise the area's largest non-agricultural
employment sectors. Largest area employers include Texas Tech University
(TTU), Covenant Health System, and TTU Health Sciences Center. The area
unemployment rate has remained consistently lower than the state and
national rates and improved to a favorable 4.6% in October 2013. Wealth
and income levels for the district fall above state levels and slightly
below national levels.
OTHER LONG-TERM LIABILITIES MANAGEABLE
Retiree pension and healthcare benefits are provided through the Teacher
Retirement System of Texas (TRS), a cost-sharing multiple employer plan.
TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch
estimates the funded position to be lower at 73.8% 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 districts cost for pension and other post-employment benefits
(OPEB) represented less than 1% of governmental fund expenditures in
fiscal 2013, as plan contribution amounts are principally paid by the
state and district employees.
The state's payment of district pension costs is an important credit
strength as it keeps overall carrying costs manageable in the face of a
high and growing debt burden. Carrying costs for the district (debt
service in addition to pension and OPEB costs net of state support)
remain very manageable, consuming 13.2% of governmental fund spending in
fiscal 2013. Fitch will continue to monitor the level of state support
for school district pension payments, noting pension contributions for
all districts in the state will increase modestly to 1.5% on the
statutory minimum portion of payroll from 0% beginning fiscal 2015.
TEXAS SCHOOL FINANCE LITIGATION
In February 2013, a district judge ruled 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 unsuitable and
arbitrarily funds districts at different levels'. The judge also cited
inadequate funding as a constitutional flaw in the current system.
The judge reopened the lawsuit in June 2013 after state legislative
action that partially restored state funding levels and made other
program changes. A new trial date of Jan. 6, 2014 has been set. 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 a positive credit consideration.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, and the National
Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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