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TMCNet:  Fitch Affirms Frenship ISD, TX's $122.2MM ULTs at 'AA-'; Outlook Stable

[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.

SECURITY

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 growth.

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.

RATING SENSITIVITY

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.

CREDIT PROFILE

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 tax rate.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813991

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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