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Fitch Affirms Little Elm ISD, TX at 'AA-'; Outlook Stable
[February 03, 2016]

Fitch Affirms Little Elm ISD, TX at 'AA-'; Outlook Stable


Fitch Ratings has affirmed the rating on the following Little Elm Independent School District, Texas obligations at 'AA-':

--$127.9 million unlimited tax (ULT) bonds;

--$4.4 million maintenance tax notes.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy of the district, and also carry the Texas PSF bond guarantee (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014). The maintenance tax notes are payable from a limited (operating) ad valorem tax pledge levied against all taxable property within the district, which cannot exceed $1.17 per $100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

STRONG REGIONAL ECONOMY; RAPID GROWTH: The district benefits from its proximity to the larger and diverse Dallas Fort-Worth metropolitan statistical area (MSA). Rapid population growth within the district is of some concern, but wealth levels are above average and county unemployment is low.

POSITIVE TAX PERFORMANCE: TAV has rebounded strongly due primarily to increased levels of residential construction since the recession.

STRONG AND STABLE FINANCES: Positive financial performance enabled by management's conservative budgeting practices and annual enrollment growth has allowed the district to maintain its solid financial position. Liquidity and reserve levels remain high.

HIGH DEBT LEVELS: Debt levels are high due to ongoing capital needs associated with rapid enrollment growth. Amortization of principal is slow reflecting the use of capital appreciation bonds (CABs). Carrying costs are moderate given state support for the district's debt and pension plan.

TAX RATE SWAP: The voter-approved tax ratification election (TRE) in September 2015 alleviated pressure on the debt service tax rate to remain at or below the state required $0.50 per $100 TAV. The district is using the additional $0.13 to lower the debt service tax rate, thus providing the district with margin to address capital needs.

NO RATING DIFFERENTIAL: Fitch does not distinguish between the unlimited and limited tax ratings due to the district's significant financial flexibility.

RATING SENSITIVITIES

HEALTHY FINANCIAL PROFILE: The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability.

CREDIT PROFILE

GROWING SUBURBAN COMMUNITY ON (News - Alert) LAKE LEWISVILLE

Little Elm ISD is located about 30 miles north of Dallas in the broader Dallas-Fort Worth MSA in Denton County. Portions of the district and the city of Little Elm are favorably located along developable land near Lake Lewisville. Population gains since 2000 have been rapid. Income and wealth levels generally exceed state and national averages; the county's 2014 median household income of $74,200 was about 40% higher than the state and U.S.

NORTHERN EXPANSION OF DFW MSA

The ongoing expansion of the MSA produced accelerated growth in Denton County with the district recording double-digit annual gains in TAV for over a decade until fiscal 2010. Recessionary pressures led to moderating TAV trends that quickly rebounded, averaging almost 10% annual growth since fiscal 2012. Certified values for fiscal 2016 show another year of strong growth at 13% due primarily to new residential properties, bringing the tax base to $2.7 billion.

Fitch believes management's expectations of additional TAV growth over the near term due to the ongoing development of high-end residential properties appear reasonable. In tandem with TAV, district enrollment (which presently totals about 7,000 students) also experienced rapid growth over the past decade, but has since moderated to a more manageable pace. Enrollment growth averaged a healthy 2.6% over fiscal years 2009-2015 and comparable 3% - 5% annual increases are projected in the near- to mid-term.

In addition to participating in the larger MSA employment base, the Denton County economy continues to experience growth. Major employment sectors include higher education, healthcare, manufacturing, and retail trade. County unemployment rates remain below state and national averages; as of November 2015, the rate stood at 3.5%, compared to the state (4.2%) and U.S. (5.0%).

TAX RATE SWAP

The district's maintenance & operation (M&O) tax rate increased to the maximum rate of $1.17 per $100 of TAV in fiscal 2016 following a voter-approved transfer of $0.13 from the debt service fund, lowering the I&S rate to $0.37 per $100 TAV. The tax rate swap provides the district with approximately $1 million in additional state aid for operations, which flows to the general fund balance each fiscal year for subsequent transfer to the debt service fund. Fitch views the tax rate structure as unconventional, but notes a number of Texas school districts have instituted similar swaps and also recognizes the debt service tax rate could be raised without voter authorization to repay outstanding debt or reversed if needed.

STRONG FINANCIAL PROFILE

The district maintains a strong financial profile and significant financial flexibility despite operating pressures associated with enrollment growth. Conservative budgeting practices have enabled actual year-end results that typically outperform budgeted expectations.



The district's fiscal 2014 and 2015 year-end financial positions were solid, adding $3 million and $1.6 million to fund balance, respectively. Unrestricted general fund reserves totaled $23.2 million or 43.6% of spending at fiscal 2015 year-end, which remained well above the district's adopted fund balance policy requiring an unrestricted balance equal to a prudent 24% of spending. Liquidity remained strong with fiscal 2015 cash and investments at $27.5 million or over six months of the year's operating expenditures.

The fiscal 2016 $61 million operating budget was adopted with a slight deficit ($584,000) and reflects an increase of nearly 15% from the prior year, largely bolstered by the TRE. Management reports year-to-date operations comparable to budget with enrollment trends slightly ahead.


HIGH DEBT RATIOS

The district's debt levels remain high but have moderated in recent years. Debt ratios include currently accreted interest from outstanding CABs, which minimize near-term tax rate impacts and shift debt burden to future taxpayers. The overall debt ratio totals a high 9.4% of market value or $8,065 per capita once overlapping debt is considered. Amortization is slow with 26% retired in 10 years.

Annual debt service is projected to remain fairly level at about $11 million throughout most of the amortization schedule (MADS occurs in fiscal 2017 at $11.5 million). The district plans to issue the remaining $21 million in ULT bond authorization this spring for renovations at the high school. The district is currently conducting a facilities study that will determine the amount and timing of additional bond issuance and will be contingent upon tax base and enrollment growth.

LIMITED PENSION/OPEB OBLIGATIONS

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, it is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS's ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $6.8 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 3/10ths of 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pension and OPEB are moderate at 19% of fiscal 2015 governmental spending, although composed almost entirely of debt service.

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 statewide 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 changes 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.

Additional information is available at 'www.fitchratings.com'.

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 less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 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.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and the Municipal Advisory Council of Texas.

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=998981

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998981

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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