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TMCNet:  Fitch Rates Socorro ISD, Texas' ULT Refunding Bonds 'AA-'; Outlook Stable

[May 23, 2014]

Fitch Rates Socorro ISD, Texas' ULT Refunding Bonds 'AA-'; Outlook Stable

AUSTIN, Texas --(Business Wire)--

Fitch Ratings has assigned the following ratings to Socorro Independent School District, Texas' (the district) unlimited tax (ULT) bonds as follows:

--$52.9 million ULT refunding bonds, series 2014A 'AAA' enhanced / 'AA-' underlying.

The 'AAA' long-term rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF; rated 'AAA' by Fitch).

The bonds are scheduled for negotiated sale during the week of May 27. Proceeds from the sale of the bonds will be used to refund a portion of the district's outstanding ULT debt for debt service savings.

In addition, Fitch affirms the 'AA-' underlying rating on the district's $537 million in outstanding ULT bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district and are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the PSF guaranty.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial position remains sound as indicated by the maintenance of strong reserve levels. Flexibility is also derived from the comfortable margin on the operating and maintenance (O&M) tax rate.

SIGNIFICANT STATE SUPPORT: Due to its low wealth levels, the district receives considerable state aid for operations.

PROMISING GROWTH PROSPECTS: Ample and affordable land and location within the broader El Paso metropolitan statistical area (MSA) have fueled steady population and enrollment growth. Enrollment gains are projected to continue at a moderated pace given current development trends.

HIGH DEBT BURDEN: The district's debt levels rose rapidly with the issuance of the 2011 bond program over the last three years. Continued enrollment growth as projected will likely require additional debt issuance. Principal amortization of existing debt is slow.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's healthy financial profile. Maintenance of solid reserves while addressing its large and ongoing capital needs is a key credit consideration.

CREDIT PROFILE

The district is located east of the city of El Paso (general obligation bonds rated 'AA' with a Stable Outlook by Fitch) in an arid ranching area that includes a portion of the Fort Bliss military installation and the Briggs Army Airfield. The district includes the city of Socorro, Horizon City, a portion of the city of El Paso, and unincorporated areas of El Paso County.

SOLID RESERVES MAINTAINED

The district's financial profile remains sound, and operating results have shown surpluses in each of the last four years. General fund reserves are strong, boosted by a 2011 change in fiscal year end from Aug. 31 to June 30. The accounting change resulted in a shortened 10-month reporting period and pushed July and August expenditures into fiscal 2012, with the one-time surplus falling to the general fund balance.

Audited results for fiscal 2013 registered a large $10.7 million (4% of expenditures) surplus in the general fund. Slower than budgeted enrollment growth resulted in a revenue shortfall. However, prompt budgetary measures curbed spending to produce strong audited results. The district's unrestricted general fund balance at fiscal 2013 year-end was $85.9 million or a strong 29% of spending, which is well above the district's fund balance goal of two months of spending (17%). The district expects future reserve levels to be closer to the policy goal due to planned, non-recurring capital outlays.

The fiscal 2014 budget was balanced, but actual enrollment again trailed budgeted growth. The budget was built with aggressive expenditure assumptions, and management projects that unexpended budget items will offset the revenue shortfall for a projected surplus of over $10 million. Management expects to adopt a balanced budget for fiscal 2015.

HIGH DEBT LEVELS OFFSET BY PROSPECTS FOR CONTINUED GROWTH

Overall debt levels on an accreted basis are high at $5,168 per capita and 10% of market value. The pace of amortization is slow with 32% retired in 10 years. The debt service burden on the budget will likely rise with future debt issuance from 7% of government spending in fiscal 2013, a very manageable 4% when adjusted for state debt service support. The district benefits from substantial state support for debt service (47% in fiscal 2013) due to its low wealth levels.

During the years 2011 to 2013, the district issued $297 million in debt authorization approved by 55% of voters in May 2011. The entire bond program consisted of construction of three new campuses (including one combination elementary/middle school), completion or expansion of two existing campuses, and district-wide technology, classroom, and HVAC upgrades. Management expects that unspent bond proceeds will meet facility needs for the medium term.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple-employer defined benefit pension plan. The district's pension contribution, which is set by state law, was $3 million (a nominal 0.7% of government spending) in fiscal 2013. Other post-employment benefits are also provided through TRS and district contributions are minimal.

GROWING ECONOMY

Growth in the district's primarily residential tax base has moderated in recent years but continued even through the recession. The district's taxable assessed valuations grew by a compound annual average of 4.5% since fiscal 2009, aided by the ongoing residential development that is spurred by abundant affordable land within the district's boundaries.

Enrollment growth has been moderate, slowing from 4% in fiscal 2010 to 1.4% in fiscal 2013. The fiscal 2013 enrollment is just under 44,300 students. Much of the growth has been spurred by the arrival of additional troops and their dependents to Fort Bliss. Officials expect enrollment to grow to about 47,000 by fiscal 2016, continuing at a modest pace.

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, 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=831504

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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