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Fitch Rates Lewisville ISD, Texas' Ser 2014A ULTs 'AAA'/TX PSF; 'AA+' Underlying; Outlook StableAUSTIN, Texas --(Business Wire)-- Fitch Ratings assigns an 'AAA' rating to the following Lewisville Independent School District, Texas' (LISD or the district) unlimited tax (ULT) bonds: --$99.6 million ULT school building bonds, series 2014A. The 'AAA' rating is based on the guarantee 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 bonds and to the $54.3 million series 2014B ULT refunding bonds and affirms the 'AA+' underlying rating on the district's $1.2 billion (on a non-accreted basis) in outstanding ULT bonds. The bonds are scheduled to sell as early as Sept. 29th via negotiated sale. Proceeds will be used to construct and renovate various school facilities, refund certain outstanding maturities for savings, and to pay related costs of issuance. The Rating Outlook is Stable. SECURITY The series 2014A and 2014B bonds are payable from and secured by an unlimited property tax levied against all taxable property within the district. The series 2014A ULT bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF. KEY RATING DRIVERS STRONG FINANCIAL POSITION MAINTAINED: General fund reserves and liquidity remain solid, enhancing the district's financial flexibility. Conservative and prudent fiscal management typically facilitates outperformance of the sizeable operating deficits budgeted annually. FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in the broad Dallas-Fort Worth metro area and employment base along major transportation corridors. Population trends exceed those of the state. Income and wealth levels also are above average. TAV STRENGTHENS: Positive taxable assessed value (TAV) trends have continued to strengthen and prospects for further tax base expansion appear favorable. HIGH DEBT LEVELS: Steady enrollment growth trends will continue to drive the district's capital plans and already elevated debt ratios. Strong voter support for bond programs mitigates some concern over debt levels. AFFORDABLE RETIREE COSTS: The state continues to fund the bulk of pension and healthcare costs on behalf of districts, resulting in an affordable fixed cost burden to the district. RATING SENSITIVITIES The rating is sensitive to material changes in the solid reserve levels that provide a level of financial flexibility consistent with the district's high-grade rating and/or any deterioration in its debt profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. CREDIT PROFILE LISD encompasses 127 square miles and is located about 20 miles northwest of Dallas in Denton County. The district serves all or portions of 13 residential communities, including the cities of Lewisville, Flower Mound, Carrollton, and The Colony. Unemployment rates in Denton County are consistently below regional, state, and national averages and local wealth measures exceed state and national levels by 10%-60%, depending on the community within the district's boundaries. STRONG FINANCES Property taxes continue to provide the largest portion of the district's operating revenues at about 65% in fiscal 2013. The district generated strong net operating surpluses in three of the past six fiscal years despite realizing reduced state aid over fiscals 2012-2013, assisted by management's multi-year efforts in reducing staffing costs. Management historically outperforms the year's adopted operating budget that usually includes a large deficit under conservative revenue and expenditure assumptions. Receipt of additional federal and state revenue from higher actual enrollment as well as salary savings from budgeting full staffing costs in total contribute to the predictably improved financial performance by year-end. Fiscal 2013 was no exception as the year's moderately-sized gap ($23 million or 6% of budgeted spending) narrowed to a more modest $5.6 million drawdown on reserves. Unrestricted fund balance remained stout at $141.2 million or 36.5% of spending at fiscal 2013 year-end. This amount includes $45 million (equivalent to slightly under 12% of fiscal 2013 general operational spending) held as a minimum reserve according to the district's formal fund balance policy. The district's liquidity position also remained robust. General fund cash and investments totaled $164.3 million or slightly more than five months of operational spending. General fund operations in fiscal years 2014 and 2015 are supported by a partial restoration of state funding levels. Management expects fiscal 2014 year-end results to again outperform budget and generate roughly break-even results after closing a budget gap comparable to fiscal 2013's. The $427.3 million fiscal 2015 adopted operating budget is up about 8% year-over-year (actual to budget) and includes another moderately-sized $18.7 million (4.4% of budgeted spending) drawdown on reserves, which Fitch expects will again narrow throughout the year. District officials provided a 3% pay increase to staff, which is estimated to have a recurring cost of about $9.1 million and plans to use about $5.4 million for one-time capital spending on student technology. Fitch does not foresee substantial chnges to the district's strong financial performance and position. Fitch recognizes the modest nature of the ongoing structural operating imbalance budgeted and management's history of maintaining reserves well above its stated minimum. Unreserved/unrestricted reserves have totaled no less than 20% of spending since fiscal 2008 and management anticipates reserves to be at least 25% or a still solid three months of spending going forward. Material widening of the structural imbalance or failure to meet the stated reserve target would be of concern to Fitch. STRONG TAV GAIN IN FISCAL 2015 The district's tax base is stable and primarily residential in character. Roughly 75% of the district is built-out. TAV gains prior to the recession were strong, averaging a compound annual growth rate of 6.5% from fiscal years 2003-2009. Enrollment trends followed at a fast-paced 5% average annual growth rate during the decade from fiscal 1997-2007. TAV and enrollment trends subsequently moderated given the recession and the district's maturing nature. Enrollment has grown at about 1% on average annually over the last five fiscal years (fiscals 2010-2015) to a total of about 53,100 students in fiscal 2015. A balanced mix of residential and retail/commercial gains saw TAV growth strengthen to 5% in fiscal 2014 and double to 10% in fiscal 2015. Stronger TAV gains have yet to be reflected in the district's enrollment trends however, although Fitch believes this is a possibility over the near term. Further TAV increases also appear reasonable to Fitch given development underway that includes a large retail store and distribution center (projected to contribute roughly $1 billion in value at completion) that is yet to be fully added to the tax rolls. HIGH DEBT/MANAGEABLE CARRYING COSTS Debt ratios are high, reflecting the district's prior fast-growth years. Overall debt levels approximate $4,800 per capita and 6.2% of fiscal 2015 market value on an accreted basis. Principal amortization remains slightly above average with roughly 57% of principal repaid within 10 years. Annual debt service (ADS) is projected to increase with this issuance from $109 million in fiscal 2014 to a maximum of $122.4 million (MADS) in fiscal 2021, although ADS remains fairly level beginning in fiscal 2016. Carrying costs for the district's debt totaled a moderate 14.8% of governmental fund spending in fiscal 2013; the fixed cost burden increases to 18.4% at MADS based on current spending, but remains manageable. The new money portion of this issuance is not anticipated to trigger a tax rate increase. Nevertheless, the interest and sinking (I&S) fund tax rate of just under $0.44 per $100 of TAV for fiscal 2015 remains near the statutory cap of $0.50 for new debt issuance. Management assumes strong TAV growth of 5%-10% over the next two years for tax rate planning purposes with modest 1%-2% TAV growth assumptions thereafter. Fitch believes the TAV growth assumptions are plausible given the development underway and recent TAV trends. Debt service savings from the series 2014B refunding and moderate use of debt service fund balance also support plans to maintain the tax rate. Some additional use of the district's roughly $25 million debt service fund balance at fiscal 2014 year-end is deemed likely according to management in order to manage the tax rate if near-term TAV trends fall below expectations. This issuance exhausts the district's outstanding 2008 bond authority. Management indicates future GO bond sizing and election plans are presently under consideration with an election not anticipated before 2016. The district maintains some capacity in its existing school facilities. Fitch believes capital needs should remain manageable in this fairly mature district. This should reduce the district's reliance on continual tax base growth to fund capital needs with debt. AFFORDABLE RETIREE COSTS Fitch's concern about the district's overall long-term liabilities is lessened by its low retiree cost burden. 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 funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at roughly 74% 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 for the district affordable, despite the high and growing debt burden. Starting in fiscal 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, although pass-through state aid is projected to largely offset the year's increase. Further increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor. 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's expectation is that 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. In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from CreditScope, Texas Municipal Advisory Council, and IHS (News - Alert) Global Insight. Additional information is available at 'www.fitchratings.com'. 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=881334 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. |
