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Fitch Affirms Cameron ISD, TX at 'A+' Underlying; Outlook Stable
[September 17, 2014]

Fitch Affirms Cameron ISD, TX at 'A+' Underlying; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the following Cameron Independent School District, Texas (the district) ratings:

--$16.4 million outstanding unlimited tax refunding bonds, series 2006 and 2010 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district, and are secured further by the Texas Permanent School Fund guarantee.

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: The district's financial profile is sound, characterized by healthy operating reserves and ample liquidity. Conservative budgeting and financial management practices have yielded surpluses in five of the last six audited fiscal years despite state funding volatility.

TAX BASE CONCENTRATION: The district's tax base is concentrated in oil and gas properties, with the top 10 taxpayers constituting 21% of taxable assessed value (TAV). However, the long-term capital intensive nature of the properties somewhat offsets these concerns.

MINIMAL GROWTH PRESSURES: The district is largely agricultural, seeing only moderate student enrollment increases and minimal growth pressures given ample capacity in existing facilities. Capital needs are limited and will be done using available resources.

MANAGEABLE DEBT AND CARRYING COSTS: Debt levels are manageable and amortization is about average. Retiree benefits do not pressure district finances and overall carrying costs remain low, aided by state support for school debt service.

RATING SENSITIVITIES

CHANGES TO FUNDAMENTALS NOT EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong reserve and liquidity levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in Milam County in central Texas with a 2013 population of 8,307. The district serves primarily the city of Cameron, which is the county seat. District enrollment has been fairly flat at about 1,600 students in recent years and facilities are limited, consisting of just two elementary schools as well as one junior and one senior high school.

CONCENTRATED ECONOMY

The county remains predominantly agricultural but has seen various industrial activities emerge in recent decades. The largest of these enterprises are Charlotte Pipe and Foundry and BNSF Railway. The June 2013 unemployment rate of 6% dropped from 7.5% during the same period last year, although the improvement in the unemployment rate was driven more from labor force losses than actual employment gains.

Gains in the tax base have been very modest historically, averaging less than 1% annually over the past decade. Values did increase by 15.4% in fiscal 2013 but declined 9.5% in fiscal 2014. Management reports that tax base volatility is the result of swings in agricultural productivity as assessed by the county appraisal district. Tax base and sector concentration has declined slightly but remains high, with the top 10 taxpayers at about 21% of TAV in fiscal 2014.

Area population trends have been stable over the last decade, showing a very modest decline of about 2% since 2000. District income levels are higher than the county average, but well below state and national averages. Median household income in 2010 was roughly 75% of the state and nation. The poverty rate is also high, with approximately 19% of district residents below the poverty line.

STABLE FINANCIAL POSITION A MITIGATING FACTOR

The district's financial condition is sound, with solid operating reserve levels. The district has added to general fund balance in five of the last six fiscal years, including a modest gain of $118,000 in fiscal 2013 (1% of general fund spending). The district's total fund balance was $4.6 million in fiscal 2013, of which all was unrestricted. Although small in absolute value, unrestricted reserves equaled a healthy 38.8% of general fund spending for fiscal 2013.

The district continues to mintain sound financial operations despite some pressures associated with state funding volatility. A trend of annual operating surpluses has contributed to growing reserve levels and ample liquidity. Enrollment growth has driven further state aid increases in fiscal 2014, but management expects to close the year with a modest fund balance draw of approximately $260,000 (2.1% of spending) for capital projects. Despite the draw unrestricted reserve levels are expected to remain healthy at $4.3 million or 34% of projected general fund spending.



The fiscal 2015 budget is balanced without the use of reserves and includes increases in both state aid and local revenue sources. The state aid increase is driven by projected enrollment growth of 1.5%, which Fitch considers reasonable given enrollment trends in recent years.

AFFORDABLE DEBT AND CARRYING COSTS


The operating tax rate currently is at the statutory cap of $1.04 per $100 of TAV. The rate can be increased by an additional $0.13 but only with voter approval. District officials report no plans to approach voters for a tax rate increase. The total tax rate for fiscal 2014 is $1.32 (including for debt service), which compares favorably with many other central Texas districts.

District debt levels are mixed, with overall debt at a manageable $3,316 per capita. However, debt is a high 5.2% of fiscal 2014 market value, indicative of the district's low market value per capita. The pace of debt retirement is about average at 48% of principal repaid in 10 years. Debt service costs remain very low at 5.2% of governmental fund spending, aided by state support for 48% of the districts debt service. The district recently issued $5.3 million of new general obligation debt for the repair and construction of athletic facilities. Management reports that all district facilities are in good condition, and as a result there are no large capital needs anticipated in the near term.

District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. The state historically has borne most of the costs, although districts will assume a higher share beginning in fiscal 2015. The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run other post-employment benefit (OPEB) healthcare plan. TRS is adequately funded at 81.9% as of Aug. 31, 2012, although 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 an elevated debt burden. Carrying costs, including debt service, pension and OPEB contributions were a very low 6% of fiscal 2013 governmental fund spending. Starting in fiscal 2015, pension contributions for all districts in the state will rise to 1.5% from 0% on the statutory minimum portion of payroll, increasing carrying costs further although pass-through state aid is projected to largely offset the increase. Further increases in district funding requirements beyond fiscal 2015 could create additional budget pressure.

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.

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=875034

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