|[May 05, 2014]
Fitch Rates White Settlement ISD, TX's ULT Rfdg Bonds 'AAA' PSF/'A+' Underlying; Outlook Stable
AUSTIN, Texas --(Business Wire)--
Fitch Ratings has assigned an 'AAA' rating to the following White
Settlement Independent School District (ISD), Texas' bonds:
--$50.3 million unlimited tax (ULT) refunding bonds, series 2014.
The 'AAA' long-term rating is based on a guaranty provided by the Texas
Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA'
The bonds are scheduled for negotiated sale the week of May 5, 2014.
Proceeds from the sale will be used to restructure debt for tax-rate
In addition, Fitch assigns an 'A+' underlying rating to the bonds and
affirms the 'A+' rating on the district's $165.7 million in outstanding
The Rating Outlook is Stable.
The bonds are payable and secured by an unlimited property tax levied
against all taxable property within the district. The bonds are also
insured as to principal and interest repayment from a guaranty provided
by the Texas PSF.
KEY RATING DRIVERS
LIMITED DEBT FLEXIBILITY: The district's debt profile is Fitch's key
credit concern. Overall debt levels are high, amortization is slow, and
the annual debt cost on the budget is growing. Absent continued healthy
tax base growth, the district will need to restructure outstanding debt
to avoid transferring general fund revenues to subsidize debt service
prior to raising the debt service tax rate above the state's statutory
maximum for new issues, where it currently stands.
SOUND FISCAL CUSHION MAINTAINED: Conservative budgeting of
attendance-based state aid, attention to spending levels, and previous
debt restructurings have facilitated consecutive years of general fund
surpluses that have improved fund balance. The district's high level of
reserves is the primary mitigant to Fitch's concerns regarding the debt
profile and limited ability to raise revenues.
ENROLLMENT GROWTH COOLING: Previously rapid enrollment growth has
subsided to a moderate pace, resulting in sufficient facility capacity
for the near term.
DECREASE IN TAX BASE: Two years of strong taxable assessed valuation
(TAV) growth were erased when a major taxpayer moved a portion of its
operations from the district. Residential growth is stable.
LOCATION IN FORT WORTH MSA: The district benefits from its location
within the broad economic base of Fort Worth. The area employment
picture is favorable but remains vulnerable to federal defense spending
cuts given the prominence of the sector in the local economy.
DETERIORATION OF FINANCIAL FLEXIBILITY: Due to the district's high tax
rate, growing fixed cost burden, revenue inflexibility, and need to
restructure current debt service to mitigate pressure on the general
fund, any deterioration of the district's ample operating reserves or
further material TAV weakness will put negative pressure on the rating.
White Settlement ISD is located 11 miles due west of Fort Worth and
serves a student population of approximately 6,700 in the primarily
residential communities of west Tarrant County.
HIGHLY LEVERAGED, NEGLIGIBLE DEBT FLEXIBILITY
A key credit concern is the district's ascending debt service schedule
and high debt service tax rate, which at $0.50 per $100 of TAV is at the
maximum allowed by state law for the purposes of issuing new money debt.
While the bonds still carry an unlimited tax pledge, the district has a
strong incentive to ensure that debt service can be met with a debt
service tax rate no higher than $0.50, as the difference must be made
whole with general fund moneys per an agreement made with the state
The agreement was made in 2008 at the time of the last new money debt
issuance in order to meet the state's tax rate capacity test. The
district agreed to dedicate $5.1 million (equal to 10.9% of fiscal 2013
revenues) of general fund moneys annually to make whole the projected
gap between the debt service revenue yield from the $0.50 tax rate and
maximum annual debt service.
Recent debt restructurings, together with this refunding, provide
near-term flexibility as to the tax rate. Officials project that
revenues from the $0.50 tax rate, state debt service aid, and existing
debt service fund balance will adequately cover debt service through
fiscal 2024 without the use of general fund resources. These projections
include what appear to be fairly reasonable assumptions for tax
collections and TAV growth.
However, absent a change to state law and even with modestly positive
tax base prospects, the district will need to further restructure its
debt to address annual increases in debt service after 2024. The
district has no near-term debt needs due to excess facility capacity.
However, Fitch views the severely limited debt flexibility negatively
and expects district capital needs to grow over the intermediate term.
Overall debt on a current accretion basis is high at $7,533 per capita
and 15.03% of market value without consideration of state support.
Annual debt service charges net of state debt aid are manageable at
11.6% of governmental spending in fiscal 2013 but will rise given the
escalating debt service structure. Amortization slows with this offering
to only 16% retired in 10 years. Fitch views as a credit negative the
escalating debt service and slow amortization rate, which is exacerbated
by the district's reliance on capital appreciation bonds (CABs).
SOUND FISCAL CUSHION
The district's stable operating performance has been aided by
management's continued conservative budget of enrollment growth, on
which state aid for operations is largely based, and more recently,
management's decision to restructure debt rather than budget general
fund moneys to make up the tax rate-debt service shortfall. Per-pupil
state funding was restored to prior levels following budget cuts in the
2011-2012 biennium, producing fiscal 2013 revenues in excess of budget.
The district concluded fiscal 2013 with a $2 million operating surplus
after transfers (4.2% of spending), marking the fourth consecutive year
of positive margins. Net fiscal 2013 results also reflect capital
outlays of $4.4 million for district-wide technology upgrades, which
were paid from accrued natural gas royalty payments. These funds were
prudently earmarked for one-time capital items. Unrestricted fund
balance grew to $15.2 million or 31% of spending, up from 22% to close
MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY
The current fiscal 2014 $49.2 million general fund budget includes a 4%
increase in payroll following a district-wide salary study and
adjustment. The district plans to complete its technology improvements
using approximately $4 million of unrestricted fund balance in fiscal
2014. The total drawdown for the 2013/2014 project is expected to
decrease fund balance by a net $2 million, rather than the $4.3 million
approved by the board. The district anticipates a closing general fund
balance of $11.3 million, or 23% of spending.
Management does not have a formal fund balance target but has expressed
the goal of maintaining general fund reserves between 2.5 and 3 months
of operating costs. Fitch views the presence of this sound fiscal
cushion as critical to stability in the underlying 'A+' rating given the
debt profile, limitation in revenue raising capacity, and taxpayer
concentration risk factors.
TAX BASE CONCENTRATION
The district's primarily residential tax base experienced a 9% increase
in fiscal 2013, primarily due to the robust TAV growth of the largest
taxpayer, SPM Flow Control (SPM), an oil and gas equipment manufacturer.
SPM's TAV increased 170% in fiscal 2013 due to the relocation of its
corporate headquarters into the district and the large amount of
business personal property held on-site. SPM subsequently moved its
manufacturing plant out of the district, contributing to a 10% fiscal
2014 tax base decrease. SPM makes up a large 6% of district fiscal 2014
TAV (down from 17% in 2013) and the top 10 taxpayers comprise a high
20%. Market value per capita, a measure of tax base wealth, also remains
below average at $50,000 in fiscal 2014.
BEDROOM COMMUNITY IN FORT WORTH MSA
The district benefits from its location in the extensive Fort Worth
labor market. Military-related spending still accounts for an estimated
one-quarter of the Fort Worth MSA economy, but recent gains in other
sectors, such as services, construction, and trade have helped diversify
the labor market. In addition, mining (natural gas), ranching,
manufacturing, technology, education, and aerospace are significant
economic sectors and add a measure of diversity.
The area has maintained an overall positive employment profile despite
recent layoffs at major employer Lockheed Martin (News - Alert), whose headquarters sit
just north of the district. Tarrant County, which encompasses the
district and city of Fort Worth, continues to add jobs at a faster rate
than both the state and nation since the recession ended in 2009.
County-wide unemployment improved to 5.3% in December 2013 from 5.7% in
2012, just below the state (5.6%) and national rates (6.5%).
The level of residential development activity has slowed in the
district, and consequently enrollment growth is at a more moderate pace
than in prior years. Previously rapid annual enrollment gains of between
4%-6% have moderated to a more manageable 3% per year and officials
expect this more moderate level of growth to continue in the next few
TEXAS SCHOOL DISTRICT LITIGATION
In February 2013 a district judge ruled that the state's school finance
system was 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. The trial began January 2014. 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, Zillow.com, and
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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