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Fitch Affirms Hitchcock ISD, Texas' ULT Bonds at 'AA-'; Outlook StableFitch Ratings has affirmed its 'AA-'underlying rating on the following Hitchcock Independent School District, Texas' (the district) obligations: --$19.4 million in outstanding ULT school building and refunding bonds, series 2008. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited ad valorem tax pledge against all taxable property within the district. In addition, the bonds are supported by the Texas Permanent School Fund (PSF) whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014.) KEY RATING DRIVERS SOUND FINANCIAL OPERATIONS: The district has maintained balanced operations in recent years due to enrollment growth and cost control measures. A modest fund balance draw is projected for fiscal 2015 for capital; reserve levels are expected to remain sound. HIGH DEBT: The district's overall debt is high and the interest and sinking fund (I&S) tax rate will likely remain at the state attorney general's cap for the near to intermediate term. Low carrying costs reflect a combination of state support for retirement benefits and a debt profile dominated by capital appreciation bonds. INCREASED ECONOMIC ACTIVITY: Tax base growth has resumed following the recovery from Hurricane Ike and the recession reflecting ongoing residential and commercial expansion to the district's modest service area. MIXED SOCIOECONOMIC INDICATORS: Income and wealth levels trend somewhat below state and national averages, while employment metrics perform favorably, due to the growing regional economy. RATING SENSITIVITIES FAVORABLE FINANCIAL PERFORMANCE: Fitch expects the district to retain sound reserve levels to counterbalance concerns over a small service area and revenue constraints, credit factors that Fitch believes combine with elevated debt to limit the rating to its current level over the foreseeable future. CREDIT PROFILE The district is located in Galveston County ('AA+'; Outlook Stable) adjacent to Texas City and 10 miles northwest of the city of Galveston. The district serves a 2014 population of 9,056 with an enrollment of 1,530 students, which has grown at a moderate pace in recent years. INDUSTRIAL BEDROOM COMMUNITY The county's economy is centered on petrochemicals, port activities, tourism and the University of Texas Medical Branch. District residents benefit from two major road systems that allow easy access to employment opportunities outside the district's borders, including the petrochemical job market in nearby Texas City. Local employment has performed well relative to the nation, increasing in each of the last five years with 3.5% growth registered in November 2014 from one year prior. Additionally, the November 2014 unemployment rate of 5.2% compares favorably to the U.S. rate of 5.5%, but remains modestly elevated in relation to the state average of 4.6% for the same period. The district's tax base has largely recovered from the destruction caused by Hurricane Ike in September 2008 and subsequent recessionary pressures. Commercial and industrial expansion and the resumption of residential development increased fiscal 2015 TAV by a sound 4.3%. Near-term prospects are favorable based on a reported increase in building permits and further commercial developments currently underway. The district's fiscal 2014 TAV of $521 million is 65% residential and is without single taxpayer concentration, though natural resources and mining represent an elevated 4.8% of the regional economy compared to .7% nationwide. Any negative impact to local oil service companies from persistently lower oil prices likely would be offset by lower energy costs to the large petrochemical facilities in the area. Other top taxpayers include real estate, energy, retail, telecom,and rail concerns. IMPROVED FINANCIAL POSITION The district strengthened its reserves in fiscals 2011 to 2014 through cost control, aided by enrollment growth and one-time insurance proceeds. A fiscal 2013 net operating surplus (after transfers) of $911,000 (8.5% of general fund spending) was achieved despite the underperformance of state and federal revenues due to the reallocation of grant monies. General fund spending increased a substantial 24% in fiscal 2014 due to a combination of salary increases and deferred capital spending. Personnel increases in fiscal 2015 were largely offset by a substantial enrollment gain of 120 students (8.8%), increasing enrollment-driven state funding. Fitch expects historically volatile enrollment growth to stabilize, preserving flexibility through conservative revenue budgeting. Unaudited results were break-even and the district closed the year with an unrestricted general fund balance of $3.7 million (28.1% of general fund spending), exceeding the district's fund balance target for unassigned general funds equal to 20% of spending. Management expects a lower than budgeted fiscal 2015 operating deficit (after transfers) of approximately $300,000 after a capital contribution of equal value. Unrestricted fund balance would decline to a still sound $3.4 million, or 25.8% of general fund spending. Officials report that revenues are outperforming budgeted flat growth for the first half of the year due to conservative enrollment projections. Revenue flexibility is limited by the district's current maintenance and operations tax rate at the cap of $1.04 per $100 of TAV. Voter authorization is required to exceed the cap and the district reports no immediate plan to pursue a tax ratification election. HIGH DEBT Overall debt levels are high at $6,467 per capita and 9.9% of market value, with a moderate principal amortization rate of 46% in 10 years. CABs constitute the nearly all district debt, slowing amortization. Although the I&S tax rate of $0.50 per $100 of TAV is at the statutory cap for new debt issuance, the district's recent TAV growth allows for modest annual borrowing to remain at the cap. This, combined with pay-go spending, is expected to adequately fund the district's enrollment-driven capital needs in the intermediate term. The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan; OPEB is also provided through TRS. The district's annual combined pension and OPEB obligations, which are set by state law, totaled $213,000 or less than 1% of governmental spending in fiscal 2014, due in large part to state support of retiree benefits obligations. The district's low carrying costs equate to a manageable 13.2% of governmental fund spending for fiscal 2014. TEXAS SCHOOL FUNDING LITIGATION In August, for the second time in the past 18 months, a Texas district judge ruled 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 schoolchildren, 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. The Texas attorney general has appealed the judge's 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=979657 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. |
