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Fitch Rates Frenship ISD, TX, ULT Refunding Bonds 'AAA' TX PSF; 'AA-' Underlying; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings assigns an 'AAA' rating to Frenship Independent School District, Texas' (the district) unlimited tax (ULT) refunding bonds as follows: --$67.7 million ULT refunding bonds, series 2014. 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 underlying rating of 'AA-' to the series 2014 refunding bonds. The bonds are scheduled for a negotiated sale the week of Sept. 22. Proceeds will be used to refund certain outstanding obligations for interest savings. In addition, Fitch affirms the following ratings: --$157.1 million ULT bonds, series 2006, 2007, 2008, 2009, 2010, and 2014 at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, series 2006, 2007, 2009, 2010, and 2014 bonds are secured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch. KEY RATING DRIVERS POSITIVE FINANCIAL PERFORMANCE: The district has consistently posted positive operating results and maintained solid reserve levels despite reductions in state aid and cost pressures from enrollment growth. ELEVATED DEBT LEVELS TO INCREASE: High debt ratios are expected to increase further given the slow repayment of outstanding principal and near term borrowing plans. The elongated repayment structure of proposed debt raises questions about its affordability. STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014 and 2015 will reestablish growth in a significant source of operating revenue for the district after several years of reductions to state support, despite increasing property wealth. STRONG TAX BASE & AREA ECONOMY: The district tax base is growing at an increased rate after a moderate slowdown post-recession, while the area unemployment rate continues to trend below state and national averages. RATING SENSITIVITIES HIGH DEBT CAPS RATING: A high and growing debt burden likely precludes positive rating action over the near term. However, Fitch's expectations for continued tax base growth combined with the district's history of sound financial management, positive operating performance, and strong reserve levels are important credit strengths that moderate this risk. CREDIT PROFILE The 128-square mile district is located immediately to the west and southwest of Lubbock (rated 'AA+', Outlook Stable by Fitch), a regional economic hub in west Texas. A portion of the district lies within the city limits, population 289,324. The district itself has a population of 43,383. HIGH DEBT BURDEN Debt ratios are high at $8,653 per capita and 11.6% of full value, and amortization is slow with 35% retired within 10 years. The district currently levies a high $0.48 per $100 of taxable assessed value (TAV) of the $0.50 statutorily permitted debt service tax rate for new money issuance. In May 2014, voters approved $85 million of bond authorization to build a 9th grade center and an elementary school. In addition to addressing school capacity pressures, the district will use the funds for renovations at the high school, general school facility maintenance, athletic facilities, and technological infrastructure. The 2014 new money issuance is the first from this authorization, and the district plans to issue the remaining $40 million in early 2016. The district projects to increase its tax rate to $0.49 to service the 2014 new money bonds, drawing on strong reserves in the debt service fund as needed to maintain the rate below the statutory cap for new issuance. Inclusive of the projects associated with the recent bond referendum, management estimates sufficient school capacity through 2020 based on current enrollment trends. The elongated principal structure and slow amortization planned for the 2014 bond authorization places some limitations on the district's future borrowing capacity. Affordability of current and planned debt is dependent upon district tax base performance, which has recently improved. TAV increased 6.2% and 7% in fiscals 2014 and 2015 following several years of more moderat growth after the recession. Fitch believes assumptions for continued yet moderate growth going forward are reasonable. CONSISTENT POSITIVE OPERATING RESULTS Audited results for fiscal 2013 depict a modest $61,449 general fund operating surplus (after transfers). The general fund has recorded positive year-end results each year dating back to at least fiscal 2002. The fiscal 2013 unrestricted fund balance of $16.5 million equates to a strong 30.9% of spending. Balance sheet liquidity is likewise strong, with year-end cash and investments totaling $20.9 million or 141 days of general fund spending. State aid declined slightly in fiscals 2012 and 2013 as a result of an adjustment in previous years' lower than projected average daily attendance (ADA) and a legislative reduction in school support at the state level. State aid is projected to increase 8.1% in fiscal 2014 and 4.9% in fiscal 2015 due to increased school funding at the state level and enrollment gains within the district. Enrollment growth has recently trended approximately 300 students per year, and the district projects similar growth in the medium term based on a recent demographic study. CONSERVATIVE FISCAL 2014 BUDGET The district generally budgets conservatively. In fiscal 2014, the district budgeted a one-time capital expenditure of $1.4 million for technology, as well as increases in salaries and additions to staff to reduce class sizes to pre-recession levels. In line with historical trends, unaudited fiscal 2014 results are break-even compared to the budgeted deficit of $413,000. STABLE AREA ECONOMY The district benefits from its location near Lubbock, where health care, education, and government comprise the area's largest non-agricultural employment sectors. Largest area employers include Texas Tech University (TTU), Covenant Health System, and TTU Health Sciences Center. The metropolitan statistical area (MSA) unemployment rate has remained consistently lower than the state and national rates and improved to a favorable 4.7% in July 2014 from 5.7% just 12 months prior. Income levels for the district are above state averages and slightly below national averages. OTHER LONG-TERM LIABILITIES MANAGEABLE The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers 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 postemployment benefit healthcare plan. The district's cost for pension and other postemployment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2013, as plan contribution amounts are principally paid by the state and district employees. 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, and OPEB costs net of state support) remain very manageable, consuming 14.7% of governmental fund spending in fiscal 2013. Total carrying costs rise to a high 26.31%, inclusive of maximum annual debt service after issuance of the series 2014 and planned 2016 bonds. Fitch will continue to monitor the level of state support for school district pension payments, noting pension contributions for all districts in the state will increase modestly to 1.5% on the statutory minimum portion of payroll from 0% beginning in fiscal 2015. TEXAS SCHOOL FUNDING LITIGATION For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional. Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. Fitch expects the state will appeal the latest ruling to the state supreme court. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates. 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, the Municipal Advisory Council of Texas, 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=874854 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. |
