|[May 13, 2014]
Fitch Rates Denton ISD, TX Series 2014 A&B ULT Bonds 'AAA' TX PSF/'AA' Underlying; Outlook Stable
AUSTIN, Texas --(Business Wire)--
Fitch Ratings assigns an 'AAA' rating to Denton Independent School
District, Texas' (the district) unlimited tax (ULT) bonds as follows:
--$76.7 million ULT school building bonds, series 2014-A;
--$67.1 million variable-rate ULT school building bonds, series 2014-B.
The 'AAA' rating on the bonds is based on a guaranty provided by the
Texas Permanent School Fund (PSF), whose bond guaranty program is rated
'AAA' by Fitch. Fitch also assigns an 'AA' underlying rating to the
series 2014A and 2014B bonds and affirms the 'AA' underlying rating on
the district's approximately $632 million (non-accreted) outstanding
The bonds are scheduled to sell May 14 via negotiated sale. Proceeds
will be used to construct a new high school and elementary school,
purchase land, and to pay issuance costs.
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 PSF.
KEY RATING DRIVERS
ROBUST FINANCIAL CUSHION: The district maintains ample reserves and
liquidity despite some recent use of fund balance for non-recurring
outlays. Strong financial performance has been aided by conservative
budgeting practices and annual enrollment growth.
PART OF STRONG REGIONAL ECONOMY: The district's solid and diverse tax
base benefits from its proximity to the Dallas-Fort Worth (DFW)
metropolitan area, which continues to outpace the nation in total
employment, population, and income growth. District residents enjoy
access to employment opportunities in the DFW metro area as well as
local employment opportunities anchored in the education, healthcare,
and manufacturing sectors.
EXPANDING TAX BASE: Taxable assessed valuation (TAV) growth continues to
strengthen after a modest, one-year contraction during the recession.
Fitch believes further expansion over the near-term is reasonable given
the ongoing pace of commercial and residential development underway and
ample land available in the district.
MINIMAL DEBT FLEXIBILITY: The district is highly leveraged as a result
of the rapid enrollment growth that occurred over the past decade. Key
debt ratios are high, amortization is slow, and a high debt service tax
rate - which is presently very close to the statutory $0.50 per $100 TAV
test for new debt issuance - limits capital flexibility. The district is
largely reliant on realizing solid TAV growth in excess of enrollment to
provide additional debt capacity under the statutory test.
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental
credit characteristics including the district's strong financial
position. The district's history of maintaining solid reserves while
addressing operating and capital needs indicates continued rating
FUTURE ENROLLMENT GROWTH PRESSURES: Fitch believes the district
presently maintains a modest level of capacity its school facilities.
The district may experience capital pressures if enrollment growth
substantially outpaces tax base growth.
DIVERSE & GROWING LOCAL ECONOMY ENHANCED BY PROXIMITY TO DFW METRO AREA
Denton ISD is located approximately 35 miles north of Dallas and Fort
Worth in Denton County, at the convergence of Interstate Highways 35
East and 35 West, and encompasses nearly 169,000 residents. Proximity to
the DFW metro area and the access provided by major highway, air, and
rail transportation have attracted a variety of industry and business to
the area as well as an expanding service sector and manufacturing
development that continues to diversify the district's mostly
residential tax base.
Education and health services top the list of major area employers,
which provided a measure of stability during the recession. The
University of North Texas and Texas Woman's University are located in
the city of Denton. Area employment indicators are strong, evidenced by
continuing employment and labor force gains in the city and county. The
Denton County unemployment rate improved to 5% from 5.7% for the
12-month period ending March 2013 despite a solid 2.3% gain in labor
force and has continued to trend below area, state, and national rates.
TAX BASE GAINS STRENGTHENS
TAV grew at an average annual growth rate of 3.1% from 2008-2014,
reflective of a strengthened 5.5% increase in fiscal 2014. Fitch
believes prospects for continuing TAV gains are positive and a return to
double-digit rates seen prior to 2009 may be realized over the near-term
due to development occurring within the district, the expanding housing
market, and growing regional economy. Build-out of the district is
presently estimated at roughly 30%.
Population and enrollment gains, which were significant over the past
decade, are also continuing. Enrollment totaled approximately 26,300
students in fiscal 2014, which reflected a more moderate 2%
year-over-year gain after a period of enrollment growth at 4%-5% or
about 1,000 students annually over fiscals 2011-2013. Nonetheless, a
steady uptick in students is projected by the district's demographer
with annual enrollment growth of 2.5%-3% anticipated over the next five
SOLID FINANCIAL PERFORMANCE, RESERVES, & LIQUIDITY
Financial performance has remained strong despite the continuing capital
and operating pressures associated with rapid enrollment growth.
Unreserved/unrestricted general fund reserves have been no less than 27%
over the last five fiscal years (fiscals 2009-2013). Historically
conservative budgeting and spending practices have typically enabled
actual operting performance in excess of expectations. The district
posted positive results in three of the last five fiscal years, adding
$23 million (roughly 12% of fiscal 2013 spending) to total general fund
balance from fiscal 2009 to fiscal 2013. These results were notable
given changes in funding formula and sizeable state budget cuts that
occurred over the last biennium (fiscals 2012-2013). In addition,
management favorably funds most of its non-facility capital needs
(buses, technology, etc) with pay-as-you-go capital spending from
operating reserves maintained well above the district's formal reserve
policy floor (no less than two months or roughly 17% of spending) .
About $17 million was set aside to be spent down over fiscal 2013 and
2014 for this purpose.
Fiscal 2013 year-end results improved upon budgeted expectations.
Reduced expenditures, inclusive of slower than projected pay-go,
resulted in a $2.6 million operating surplus. A $6.4 million transfer
out primarily for future capital spending purposes resulted in the
year's $3.8 million drawdown on reserves. Nonetheless, unrestricted
reserves remained solid at $73.1 million or nearly 37% of spending by
fiscal 2013 year-end. Liquidity in fiscal 2013 totaled a strong $94
million or over five months of general operational spending as well.
Projections for fiscal 2014 include some catch-up in pay-go capital
spending with the expected use of fund balance widening from the $4
million budgeted to roughly $8 million. Salary increases and increased
staffing due to the opening of a new middle school drove most of the
original drawdown in the year's $208.6 million adopted budget. Fitch
views the operating imbalance with some concern, but recognizes its
modest nature and takes comfort from the district's history of
outperforming budget expectations. Management presently expects to close
fiscal 2014 with a reduced but still strong total general fund balance
of $65.1 million or 30.4% of spending, down from $73.6 million or 37% in
HIGH DEBT RATIOS STEM FROM ENROLLMENT-DRIVEN CAPITAL NEEDS
The district's debt profile is Fitch's key credit concern. Overall debt
ratios are high while the pace of principal amortization is slow at 33%
in 10 years, reflecting the district's fast-growth environment and the
related need to meet facility demands while attempting to limit the
effect on existing taxpayers.
Overall debt levels comprise a very high 11.7% of market value and
$8,614 per capita and are slightly higher when accreted interest from
capital appreciation bonds (CABs) is included. The high overall debt
load is a function of the direct debt and large amount of debt from the
city of Denton and various fresh water supply districts. Debt service
also consumes a high 18% of the fiscal 2013 operating and debt service
spending. Nonetheless, Fitch views the district's historically strong
voter support for its bond programs as mitigating some concern over
these debt levels.
Including this transaction, the district's debt portfolio contains about
30% of mostly hedged variable-rate debt, which is slightly over what
Fitch views as an acceptable range for the 'AA' rating category.
Although the high debt service burden somewhat elevates this concern,
the district maintains a policy to keep variable-rate debt issuance at a
maximum of 30%. Moreover, approximately 34% of the outstanding
variable-rate debt is currently synthetically fixed and all other
outstanding variable-rate debt presently carries a fixed interest rate
in its initial, three-year rate period.
The series 2014B ULT variable-rate issue is structured as a single term
bond. The bonds will bear interest at a fixed rate for the duration of
an initial, five-year rate period (ending Aug. 1, 2019), and therefore
no liquidity provider will be required for the initial period. The bonds
are subject to optional and mandatory redemption by the district
following the initial rate period and the district can change the
interest rate mode and rate period. Bondholders will be required to
tender their bonds under certain conditions on specific dates. In the
event of a failed remarketing, the tender will be rescinded, the bonds
will remain outstanding, and bondholders will receive a stepped interest
rate (projected at 7%) until the bonds are successfully remarketed or
TIGHT MARGIN ON (News - Alert) DEBT SERVICE TAX RATE LIMITS CAPITAL FLEXIBILITY
Of additional concern to Fitch is the district's limited flexibility in
meeting future capital needs due to a debt service tax rate ($0.49 per
$100 TAV in fiscal 2014) that is very near the statutory limit for new
debt issuance. The tax rate cap for new money debt somewhat mitigates
the risk of sharp increases in debt levels over the near term, but it
can also serve to constrain fast-growth districts' ability to meet
capital needs, absent sufficient tax base growth. The district presently
maintains a modest level of student capacity in its existing school
facilities, although student growth pressures persist. In order to
preserve even a slight debt service margin, management has proactively
prioritized its bond program on classroom space and is otherwise cash
funding or postponing additional capital needs. Subsequently, the
district does not expect to issue the remaining $31 million from the
2007 bond authorization for support facilities over the near to
The current issuance maintains the district's existing 30-year
amortization schedule and totals about half ($312 million in total) of
the bond authorization approved by a strong 68% of voters in November
2013 to address the classroom facility needs at all grades over the next
five years. Sale of the remaining authorization is contingent upon tax
base growth and the additional debt capacity provided against the
statutory $0.50 test. Management indicates issuance may be feasible
within the next two or three fiscal years given projections of strong
TAV growth in fiscal 2015 by the local appraisal district, which could
allow for a measure of added flexibility, inclusive of possibly a modest
reduction in the debt service tax rate in the near term.
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.
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 district consistently funds its annual required contributions.
District employees contribute to TRS for pensions at 6.4% of annual
payroll, and the state pays the local district's contributions (6.4% of
payroll in fiscal 2013), with the exception of district contributions
for probationary employees and for benefits on employees' salaries that
exceed the TRS statutory minimum. Other post-employment benefit (OPEB)
contributions paid by the district are nominal as the state and
employees also pay the bulk of these costs. Total pension and OPEB
contributions made by the district in fiscal 2013 totaled less than 1%
of governmental fund expenditures.
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 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, pension, OPEB
costs, net of state support) totaled a manageable 15.8% of governmental
fund spending in fiscal 2013 due largely to slow principal amortization
and they are expected to remain manageable despite a moderately
ascending debt service schedule through fiscal 2017. Starting next
fiscal year (2015), pension contributions for all districts in the state
will rise to 1.5% on the statutory minimum portion of payroll, from
zero, increasing carrying costs further. Increases in district funding
requirements beyond fiscal 2015 could create additional budget pressure.
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; a new ruling is expected
in the spring of 2014. After that, the case is expected to be appealed
to the Supreme Court of Texas. 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, IHS (News - Alert) Global Insight, National Association
of Realtors, and the Texas Municipal Advisory Council.
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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