|[February 04, 2014]
Fitch Affirms Port Arthur ISD (TX) ULT Bonds at 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the following ratings of Port Arthur Independent
School District, Texas (the district):
--$261.6 million unlimited tax (ULT) bonds at 'AA-'.
The Rating Outlook is Stable.
The ULT bonds are secured by an unlimited ad valorem tax pledge levied
against all taxable property within the district.
KEY RATING DRIVERS
HISTORICALLY STRONG RESERVES: The district's strong reserve levels are a
key credit strength given its highly concentrated tax base and
relatively flat enrollment growth.
HIGHLY CONCENTRATED TAX BASE: The district's tax base is highly
concentrated in terms of industry composition (oil, gas and chemicals)
and among individual taxpayers, resulting in a tax base inherently
susceptible to ongoing assessment appeal activity which can have a
magnified impact on revenue loss. The districts high reserves provide an
adequate cushion to partially offset these concerns.
WEAK SOCIO-ECONOMIC METRICS: The local economy is limited, evidenced by
stagnant employment levels and an unemployment rate significantly higher
than state and national averages. Wealth indices remain below average.
STRONG TAX BASE GAINS: Significant investments among some of the top
taxpayers led to strong tax base growth in fiscals 2013 and 2014. This
activity offsets the effects of the appeals to some extent but suggests
that the tax base will remain highly concentrated.
MIXED DEBT PROFILE: Elevated debt ratios and slow amortization are
partially balanced by manageable capital needs and moderate pension
costs. There are no immediate plans for additional debt issuance.
EROSION OF FINANCIAL FLEXIBILITY: Fitch views a healthy level of
reserves as the primary mitigating factor to the credit risks associated
with the district's highly concentrated tax base, settled and potential
future tax payer appeals, lack of revenue flexibility to address such
settlements, and high debt levels. Notable erosion in reserves could
result in negative rating action, but the risks make positive action
The district is part of the Beaumont-Port Arthur metropolitan
statistical area (MSA), a three-county region in southeast Texas whose
economy is primarily supported by petroleum-related industries. The
district's average daily attendance (ADA) was 8,179 students in 2013
across 15 schools. Management projects ADA will remain relatively flat
over the next several years.
SIZEABLE RESERVES PROVIDE AMPLE CUSHION
Fiscal 2012 results were bolstered by a $7.4 million state reimbursement
which was used to make a $4 million payment related to the Valero
lawsuit in fiscal 2012 and a $3 million payment in fiscal 2013,
resulting in a (net) $1 million general fund deficit (1.3% of spending)
in fiscal 2012 followed by a (net) $1 million general fund surplus (1.4%
of spending) in fiscal 2013, increasing the unrestricted general fund
balance to a very strong 44% of spending.
A property tax dispute settled in May 2011 between Valero Energy
(Valero; formerly Premcor)- the district's second largest taxpayer- and
the county appraisal district resulted in an adverse ruling for the
district and subsequent gross tax rebate of $18.5 million, payable over
six years through fiscal 2017. The district received a $7.4 million
reimbursement from the state in fiscal 2012 to replace state aid owed
under the revised tax base valuation, resulting in a net liability for
the district of $11.1 million. The district used the state reimbursement
to make its required payments in fiscals 2012 and 2013. The $3 million
payment due in fiscal 2014 is projected to result in a general fund
drawdown to a still strong $30 million, or 39% of spending. The
remaining $8.5 million liability will be paid over the next three fiscal
years ($3 million each in fiscal 2015 and 2016, and $2.5 million due in
ADDITIONAL PROPERTY TAX DISPUTE COULD PRESSURE FLEXIBILITY
An additional lawsuit filed by Valero with the county appraisl
district, could impact the district's local tax levy for the 2013 and
2014 fiscal years. The lawsuit is scheduled for trial in Jefferson
County on Feb. 3, 2014. Based on information provided to the district,
management estimates a negative outcome from the lawsuit could result in
potential revenue loss of $3 million (net of state equalization funding)
in fiscal 2013 and $6 million in fiscal 2014. The fiscal 2014 budget
does not include this contingency.
The uncertain effect of current and potential future appraisal
litigation on the district's budget is a key credit concern. Although
Fitch believes that the district's general fund reserve levels provide
an adequate cushion to absorb the tax rebate liability currently due,
recurring revenue losses arising from a negative outcome could rapidly
erode financial flexibility and result in negative rating action.
HEAVY TAX BASE CONCENTRATION IN THE OIL/GAS & CHEMICAL SECTORS
Taxpayer concentration is a credit concern; the top 10 payers comprise a
high 34% of fiscal 2013 TAV and are nearly all part of the oil, gas, and
chemical sectors. Motiva Enterprises LLC (Motiva) is the leading
taxpayer at 11.4% of fiscal 2013 TAV, followed by Valero at 10% of TAV.
Fitch believes the essentiality of oil and gas refining in the U.S. make
the closure of these plants unlikely but expects the exposure to TAV
volatility to continue.
Fiscals 2013 and 2014 experienced strong tax base growth of 26% and 16%,
respectively, driven by capital improvements and expansions of major
refineries. Due to the expansive industrial base, the district's market
value per capita is a high $150,000, making this a property-rich
district under the state's funding framework. While the district does
not currently make equalization payments to the state as a result of its
property-rich classification, local property taxes comprise over 50% of
total general fund revenue, making the district more susceptible to
revenue loss as a result of declining TAV not offset by state aid.
Wealth and income indices are below state and national averages.
MIXED DEBT PROFILE
The district's debt burden is elevated at $6,226 per capita and 5.2% of
full market value (MV). Amortization is slow with 32% or principal
retired within 10 years. The district's fiscal 2014-2018 capital plan
totals a manageable $6.2 million. Approximately $2.5 million of projects
will be funded with remaining bond proceeds. Management indicates there
are no immediate plans to issue additional debt.
The district's pension liabilities are limited to its participation in
the state pension plan administered by the Teachers Retirement System of
Texas (TRS). The district's modest annual required contribution is based
on salaries in excess of the statutory cap; however, the district is
expecting increases to pension contributions going forward as a result
of recently enacted legislation. Other post-employment benefits (OPEB)
are similarly provided through TRS and contributions are nominal. Total
carrying costs for debt service, pension and OPEB are moderate at 18% of
total governmental funds spending.
TEXAS SCHOOL DISTRICT 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 and districts' inability to exercise 'meaningful
discretion' in setting tax rates as constitutional flaws in the current
The judge agreed to reopen testimony after the Texas legislature
restored $4.5 billion in school funding in its 2013 session. The
increased funding levels apply to school district budgets in fiscal
years 2014 and 2015. The judge will determine if the additional funding
affected arguments made during the trial. The testimony, which began
Jan. 21, 2014, is expected to last roughly three weeks. It is
anticipated that the original ruling, if upheld, will ultimately be
appealed to the state supreme court.
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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