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Fitch Rates Alvin ISD, TX Series 2015 ULT Rfdg Bonds 'AAA' PSF/'AA' UnderlyingFitch Ratings has assigned an 'AAA' rating to the following Alvin Independent School District, TX (the district) bonds: --$9.4 million unlimited tax (ULT) refunding bonds series 2015. 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 has also assigned an 'AA' underlying rating to the series 2015 bonds and affirmed the 'AA' underlying rating on the district's approximately $482.5 million outstanding parity bonds (pre-refunding). The series 2015 bonds are scheduled for a competitive sale Dec. 1. Proceeds will be used to refund certain outstanding maturities for economic savings and to pay related costs of issuance. The Rating Outlook is Stable. SECURITY The bonds are payable by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment by the PSF guaranty. KEY RATING DRIVERS STRONG FINANCIAL POSITION: The district's strong financial profile is characterized by conservative budgeting, proactive forecasting, and consistently large financial reserves. Reserves remain healthy despite periodic pay-go capital spending and operating pressures associated with rapid enrollment growth trends. ELEVATED DEBT BURDEN: Overall debt ratios are very high, especially relative to the district's market value. Fitch believes ratios will remain elevated given growth-related capital needs that will necessitate future borrowings. Carrying costs are low and are expected to remain manageable despite an ascending debt service schedule. STRONG REGIONAL ECONOMY: The district benefits from its close proximity and improved transportation corridors to the Houston metropolitan statistical area (MSA). Residents have easy access to a large employment market that while slowed, has historically outperformed the nation in terms of population, employment, and income growth. CONTINUED TAX BASE EXPANSION: Some of Fitch's concerns about the district's increasing debt load are mitigated by a trend of taxable assessed value (TAV) growth since fiscal 2012 from a broadening tax base. A mix of residential, attendant retail and commercial development, and the district's own growing energy sector have contributed to the TAV gains, which have generally outpaced enrollment gains. Taxpayer concentration is moderate. RAPID ENROLLMENT GROWTH: Fitch believes that ample developable land and affordable home prices will facilitate additional enrollment growth, demonstrating the need for continued strong financial and debt management practices. RATING SENSITIVITIES GROWTH-RELATED PRESSURES: Fitch does not expect any positive rating action over at least the near to intermediate term given the district's already very high overall debt levels. The maintenance of budgetary balance and solid reserve levels despite ongoing growth-related spending pressure mitigates credit concerns over the large debt load, slow amortization, and some taxpayer concentration. CREDIT PROFILE PROXIMITY TO HOUSTON SUPPORTS LONG-TERM GROWTH PROSPECTS The district is located 25 miles southeast of Houston in the northern portion of Brazoria County (GO bonds rated 'AA+', Stable Outlook by Fitch) and within proximity to the expansive Houston Medical Center. Aided by its easy access to Houston's employment base, particularly to the nearby and growing health care sector, ample developable land and affordable home prices have combined to rapidly expand the district's population base by 5% annually since 2000. These gains exceeded population gains made by the county and Houston MSA for the same time period; the district's current population is estimated at about 135,000. Data indicate that the district's housing market continues to perform well, with ongoing new starts and housing prices continuing to trend up. Nonetheless, only about one-third of the district is currently built-out. Wealth/income and educational attainment metrics in the district are generally comparable to those of the MSA, state & U.S. Annual enrollment growth over the last five fiscal years (fiscals 2010 - 2015) has been steady, averaging about 5%. District enrollment currently totals about 21,500 and management anticipates full build-out to occur over the next 25-30 years at roughly 57,000 - 60,000 students. ENERGY SECTOR AND CHEMICALS DOMINATE COUNTY ECONOMY The Houston MSA economy made a robust post-recessionary recovery due in part to the strength of the energy sector. However, Fitch believes the recent plunge in oil prices may dampen the pace of growth over the near term. As it is one of the state's petrochemical centers, the positive impact of lower energy prices on that activity may serve as a partial offset to any economic softening (see Fitch's report, 'How Will Local Oil Patch Governments Fare? (Financial and Economic Impacts of Fluctuating Energy Prices)' dated August 2015). As a complement to the strong metro economy, activity in the county centers on chemical manufacturing and petroleum processing. The county benefits from the Port of Freeport, the 16th largest port in the U.S. in terms of foreign tonnage, which provides critical shipping access for the region's industries. Dow Chemical Co is the largest employer in the county with 4,300 employees. Sizeable expansion plans were recently announced for its Freeport chemical complex, in addition to the construction of a research and development center in Lake Jackson. While the area economy is dominated by the chemical and energy sector, the essentiality of these industries and the ongoing diversification of the regional economy somewhat offsets concerns regarding economic concentration. The county's economic momentum has slowed only slightly year-over-year due to the stability of its other employment sectors and those of the larger Houston MSA. Unemployment levels declined to 4.6% in August 2015 from 5.3% a year ago due to a modest erosion (1%) of labor force rather than employment growth. The county's unemployment rate remained generally in line with the MSA (4.6%) and state (4.4%), and below the nation (5.2%). STRONG FINANCES MAINTAINED DESPITE ENROLLMENT PRESSURES The district's historically strong financial performance is notable for the consistent positive operating results realized in a high enrollment growth environment and despite previous state funding cuts. The district posted general fund operating surpluses in six of the last seven fiscal years (fiscals 2009-2015). Management's conservative approach to budgeting enrollment and operational spending as well as adherence to established financial policies have contributed to these results. Finances in fiscal 2015 remained strong, exceeding prior expectations of a moderate drawdown on reserves with an $8.8 million (about 5% of spending) operating surplus. The district benefitted from increased state per pupil funding levels in the biennium (fiscals 2014 - 2015) and expenditure savings. Unrestricted general fund reserves totaled $73.6 million or just under 40% of spending at fiscal 2015 year-end after a net $2.5 million drawdown for non-oprating spending. Reserves remained well above the district's formal fund balance policy of between 17% and 25% of spending. The year's surplus and size of reserves supported management's decision to fund various pay-go capital spending projects, contribute $3.2 million to modestly boost its debt service fund balance cushion, and eliminate the year's $2.2 million operating gap in its self-insured health care fund. The $190.2 million fiscal 2016 operating budget was adopted as structurally balanced. This was despite adding roughly 150 new employees, a 3% cost of living adjustment, and an increased employer healthcare contribution that in total drove most of the year's 7% budget growth. Management indicates year-to-date results are currently tracking budget, while actual enrollment trends and associated revenues are slightly higher. In addition, conservative expenditure budgeting and added state per pupil funding not factored into the adopted budget are currently projected to allow for roughly $11 million in pay-go capital spending with another $1.7 million planned to be contributed towards debt service reserves. A modest use of reserves ($2.5 million or 1.2% of budgeted spending) is projected while the general fund balance is expected to remain at no less than three months of spending (consistent with policy). Fitch believes that the district's policy of committing reserves above 25% of spending for pay-go capital funding is a credit positive and recognizes that reserves may be maintained at a level closer to the policy maximum going forward. The district prepares multi-year budget forecasts, which Fitch views as a favorable credit consideration. The district's current financial forecast projects modest annual drawdowns of reserves for capital projects (no more than 6% of budgeted spending) over the near term (fiscals 2016 - 2020), under what Fitch believes may be feasible but somewhat optimistic annual TAV growth assumptions of 8% - 9%. These assumptions factor in the various residential, retail and commercial projects underway or planned. Operating performance is assumed to tighten in fiscal 2017 given the opening of several new campuses, although these preliminary projections still anticipate a solid fund balance position of roughly $73 million or 37% of operational spending. TAX BASE EXPANSION The district's tax base is predominately residential. A growing population base largely in the western portion of the district continues to fuel residential development and TAV gains, due in part to close proximity and improved transportation corridors to the Houston MSA. Notably the district's tax base continued steady, albeit modest growth during the recession, and began to strengthen after fiscal 2012. A very strong 12% TAV gain was recorded in fiscal 2015, reaching $6.5 billion. The subsequent 2% gain in fiscal 2016 was uncharacteristically slim as growth in real estate was offset by modest loss in mineral values ($200 million) that had comprised about 6% of the prior year's TAV as well as a another modest $200 million TAV loss from an increased homeowner tax exemption recently approved by voters. Fitch views the latter loss of tax revenue as a credit neutral since the state is required to make whole any revenue shortfall for operations and outstanding debt service and the fiscal 2016-2017 state budget includes this additional funding amount. Nonetheless, the generally strong pace of expansion persisted as fiscal 2016 market value registered an 11% gain, largely from new homes and attendant retail/commercial development. Concentration among the top 10 taxpayers is moderate at 10% of TAV in fiscal 2016, led by top taxpayer Denbury Onshore LLC at roughly 4%. DEBT PROFILE TO REMAIN PRESSURE POINT Overall debt levels are down slightly, but remain high with debt to market value at 11.1% in fiscal 2016 (or about $6,300 on a per capita basis). These debt ratios do not consider state support. Despite unfavorable debt ratios, the district's fixed-cost burden for debt service is moderate at about 11% of general and debt service fund spending in fiscal 2015. The manageable burden is aided by state debt service support (about 23% of ULT debt service in fiscal 2015) received by the district due to its comparatively lower per pupil property wealth. Amortization is slow with about 42% of principal retired in 10 years, inclusive of this issuance. District voters recently approved by a solid 60% margin a new $245 million GO bond authorization given the district's growth-related facility needs. The authorization includes school facilities for all grade levels and is projected to last the district between 3-5 years, dependent on housing and enrollment trends. Projects to be included will incorporate use of the roughly $12 million of 2013 authorization that remains outstanding. The maximum debt service tax rate anticipated for the district's newly authorized bonds preserves modest tax rate cushion below the state's $0.50 TAV test for new money issuance. In support of the new bond program, the debt service tax rate is projected to increase to a maximum of just over $0.08 per $100 TAV to $0.46 per $100 TAV based on somewhat optimistic TAV annual gains of 8%-9%. Fitch believes that a trend of faster than anticipated enrollment growth in conjunction with slower than expected TAV growth could heighten the existing pressure on the district's debt profile. Fitch will continue to assess the district's capital needs and debt plans and their effect on the already high debt ratios, diminishing tax rate capacity for new debt, and overall budget flexibility. AFFORDABLE RETIREE COSTS Pension and other post-employment benefit (OPEB) liabilities (largely healthcare benefits) are limited because of the district's participation in the state pension program administered by the Teacher Retirement System of Texas (TRS). TRS is a cost-sharing multiple employer plan for which the state provides the bulk of the employer's annual pension contribution. Total pension and OPEB contributions made by the district in fiscal 2015 totaled less than 1% of governmental fund expenditures. TRS is funded at 80.5% as of its Aug. 31, 2014 valuation, although Fitch estimates it to be lower at 72.5% when a more conservative 7% return assumption is used. 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 contribution. Increases in pension funding requirements beyond the 1.5% increase for all districts in fiscal 2015, while not presently anticipated, could create additional budget pressure. 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, OPEB costs, net of state support) totaled a low 8% of total governmental fund spending in fiscal 2015 due in part to slow principal amortization, and they are expected to remain manageable despite an ascending debt service schedule. TEXAS SCHOOL FUNDING LITIGATION A Texas district judge ruled in August 2014 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 and was the second such ruling in the past two years, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a state-wide property tax due to lack of local discretion and therefore are unconstitutional. 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 would likely follow with change intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, Texas Municipal Advisory Council, and IHS (News - Alert) Global Insights. Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942 Tax-Supported Rating Criteria (pub. 14 Aug 2012) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015 U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994180 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994180 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20151116006444/en/ |
