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TMCNet:  Fitch Rates Northside ISD, TX ULTs 'AAA' PSF/'AA+' Underlying; Outlook Stable

[February 27, 2014]

Fitch Rates Northside ISD, TX ULTs 'AAA' PSF/'AA+' Underlying; Outlook Stable

AUSTIN, Texas --(Business Wire)--

Fitch Ratings has assigned an 'AAA' rating to the following Northside Independent School District, Texas (the district) unlimited tax bonds (ULTs):

--$73.11 million unlimited tax refunding bonds, series 2014.

The 'AAA' long-term rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

The bonds are expected to price via negotiation the week of March 3, 2014, subject to market conditions. Proceeds will be used to refund outstanding debt for interest savings.

In addition, Fitch assigns an 'AA+' underlying rating to the series 2014 bonds and affirms the 'AA+' rating on the district's $1.9 billion unlimited tax debt outstanding.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from and secured by an unlimited ad valorem tax levied against all taxable property in the district. The bonds are secured further by the PSF guaranty.

KEY RATING DRIVERS

FINANCIAL FLEXIBILITY: The district's financial profile is characterized by consistently strong operating performance and healthy reserves. Sound fiscal management and establishment of a budget stabilization fund position the district favorably for ongoing growth and the uncertainties of future state funding.

HEALTHY TAX BASE: The district's taxable assessed valuation (TAV) continues to realize solid growth following a recessionary lull. Benefitting from its location in the larger San Antonio metro area, the largely residential tax base continues to enjoy growth from both residential and commercial/industrial sectors. The tax base has no material concentration.

ONGOING ENROLLMENT GROWTH: The district is the fourth largest in the state, typically adding two to three schools a year, a rapid growth pattern which Fitch anticipates to continue based on the district's projected enrollment growth.

HIGH DEBT LEVELS: Overall debt is high in relation to the district's population and market value, not atypical for rapidly growing suburban districts in the state. Fitch expects debt levels to remain high as the district is only about two-thirds built-out. Ample interest and sinking fund (I&S) tax rate capacity remains to support future issuance.

RATING SENSITIVITIES

CHANGE IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

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 2014 population of about 578,000.

STRONG FINANCIAL FLEXIBILITY

The district has maintained strong financial performance despite the pressures associated with sustained enrollment growth and state funding cuts. The district completed fiscal 2013 with a sound $30 million operating surplus after transfers representing 4.5% of spending. Results were driven largely by enrollment-based revenues mitigating state funding cuts and supporting new school openings.

The district maintains a high degree of financial flexibility both in its unrestricted reserves of $185 million (a healthy 28% of spending in fiscal 2013) and its demonstrated ability to reduce spending as needed to meet its obligations. The district cut more than $60 million from its budget over fiscal 2011 and 2012, enabling it to maintain strong performance during the state's fiscal 2012/2013 funding cuts. Cost reduction measures included the elimination of close to 1,000 positions through attrition, a salary freeze, reduced starting pay for new teachers, and increased classroom sizes.

Officials project the district's fiscal 2014 unrestricted reserves to remain relatively constant at about 28% of spending. The reserves include $25 million committed to technology deployments and about $29 million for new school openings which the district anticipates drawing down in the next several years. The fiscal 2014 budget includes reinstatement of a portion of state funding cuts ($33 million, or 9% of total state support to the general fund) and the opening of two new schools. Budget assumptions include reasonable erollment and tax base growth.

GROWING NORTHWEST SAN ANTONIO BEDROOM COMMUNITY

The district's fiscal 2014 TAV of $35.4 billion has increased 85% since fiscal 2006, mirroring growth in the greater San Antonio area. After several years of modest growth, fiscal 2014 TAV posted a strong 6.4% gain, reflecting revaluation gains in addition to new construction. Based on new residential and commercial development underway, officials expect between 4.5% and 5.5% TAV growth in fiscal 2015, which Fitch considers consistent with current growth patterns and regional trends. 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 5.5% in Dec. 2013, below state (5.6%) and national (6.5%) averages for the same period. The district's income level trends moderately above state and national averages.

HIGH DEBT; ONGOING CAPITAL NEEDS

Overall debt ratios are high at about $5,800 per capita and 8.1% of market value, reflecting district and overlapping municipal infrastructure requirements over the past decade. A slow amortization rate of about 33% in ten years contributes to Fitch's expectation of high debt levels into the foreseeable future.

The district's debt service burden consumes 10.7% of fiscal 2013 governmental expenditures. The district historically maintains a moderate amount of its debt portfolio in variable rate demand obligations (VRDOs), currently 22%, within the district's policy ceiling of 30%. Terms of the VRDOs include a three-to-five year initial fixed rate term, a soft put back to bondholders in lieu of liquidity support and optionality to periodically reset the rate to a long-term fixed basis. The risk to the district is in the case of a failed remarketing whereby the district would pay an elevated interest rate, capped at a fixed rate currently ranging from 6% to 8% as applicable to the district's outstanding VRDOs.

District voters authorized $535 million in unlimited tax school building bonds in May of 2010. The district expects to issue the remaining $180 million by the close of fiscal 2014. The district's trustees have called a GO bond election in May 2014 for $648 million for upgrades and new facilities. Fitch anticipates that the new money authorization if passed, would have a potential moderate impact on overall debt in relation to market value over the next four years, dependent on growth of overlapping debt and the rate of the district's tax base growth.

The district's I&S rate ($0.336 per $100 of TAV) is well below the statutory new-issuance test ceiling of $0.50. The district conservatively projects that the new authorization could increase its I&S tax rate by as much as 12 cents to $0.456 per $100 of TAV. However, Fitch notes that similar conservative projections had not materialized in the district's recent past due to healthy tax base growth.

LIMITED PENSION/OPEB OBLIGATIONS

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 annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan. Including debt service, pension and OPEB contributions, carrying costs were a moderate 11.3% of fiscal 2013 governmental spending, benefitting from the state's strong pension funding system currently in place. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

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 system.

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. 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, CoreLogic/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, 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=821967

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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