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Fitch Rates White Settlement ISD, TX's ULT Rfdg Bonds 'AAA' PSF/'A+' Underlying; Outlook StableAUSTIN, Texas --(Business Wire)-- Fitch Ratings has assigned an 'AAA' rating to the following White Settlement Independent School District (ISD), Texas' bonds: --$50.3 million unlimited tax (ULT) refunding bonds, series 2014. The 'AAA' long-term rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. The bonds are scheduled for negotiated sale the week of May 5, 2014. Proceeds from the sale will be used to restructure debt for tax-rate capacity purposes. In addition, Fitch assigns an 'A+' underlying rating to the bonds and affirms the 'A+' rating on the district's $165.7 million in outstanding ULT bonds. The Rating Outlook is Stable. SECURITY The bonds are payable and secured by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas PSF. KEY RATING DRIVERS LIMITED DEBT FLEXIBILITY: The district's debt profile is Fitch's key credit concern. Overall debt levels are high, amortization is slow, and the annual debt cost on the budget is growing. Absent continued healthy tax base growth, the district will need to restructure outstanding debt to avoid transferring general fund revenues to subsidize debt service prior to raising the debt service tax rate above the state's statutory maximum for new issues, where it currently stands. SOUND FISCAL CUSHION MAINTAINED: Conservative budgeting of attendance-based state aid, attention to spending levels, and previous debt restructurings have facilitated consecutive years of general fund surpluses that have improved fund balance. The district's high level of reserves is the primary mitigant to Fitch's concerns regarding the debt profile and limited ability to raise revenues. ENROLLMENT GROWTH COOLING: Previously rapid enrollment growth has subsided to a moderate pace, resulting in sufficient facility capacity for the near term. DECREASE IN TAX BASE: Two years of strong taxable assessed valuation (TAV) growth were erased when a major taxpayer moved a portion of its operations from the district. Residential growth is stable. LOCATION IN FORT WORTH MSA: The district benefits from its location within the broad economic base of Fort Worth. The area employment picture is favorable but remains vulnerable to federal defense spending cuts given the prominence of the sector in the local economy. RATING SENSITIVITIES DETERIORATION OF FINANCIAL FLEXIBILITY: Due to the district's high tax rate, growing fixed cost burden, revenue inflexibility, and need to restructure current debt service to mitigate pressure on the general fund, any deterioration of the district's ample operating reserves or further material TAV weakness will put negative pressure on the rating. CREDIT PROFILE White Settlement ISD is located 11 miles due west of Fort Worth and serves a student population of approximately 6,700 in the primarily residential communities of west Tarrant County. HIGHLY LEVERAGED, NEGLIGIBLE DEBT FLEXIBILITY A key credit concern is the district's ascending debt service schedule and high debt service tax rate, which at $0.50 per $100 of TAV is at the maximum allowed by state law for the purposes of issuing new money debt. While the bonds still carry an unlimited tax pledge, the district has a strong incentive to ensure that debt service can be met with a debt service tax rate no higher than $0.50, as the difference must be made whole with general fund moneys per an agreement made with the state attorney general. The agreement was made in 2008 at the time of the last new money debt issuance in order to meet the state's tax rate capacity test. The district agreed to dedicate $5.1 million (equal to 10.9% of fiscal 2013 revenues) of general fund moneys annually to make whole the projected gap between the debt service revenue yield from the $0.50 tax rate and maximum annual debt service. Recent debt restructurings, together with this refunding, provide near-term flexibility as to the tax rate. Officials project that revenues from the $0.50 tax rate, state debt service aid, and existing debt service fund balance will adequately cover debt service through fiscal 2024 without the use of general fund resources. These projections include what appear to be fairly reasonable assumptions for tax collections and TAV growth. However, absent a change to state law and even with modestly positive tax base prospects, the district will need to further restructure its debt to address annual increases in debt service after 2024. The district has no near-term debt needs due to excess facility capacity. However, Fitch views the severely limited debt flexibility negatively and expects district capital needs to grow over the intermediate term. Overall debt on a current accretion basis is high at $7,533 per capita and 15.03% of market value without consideration of state support. Annual debt service charges net of state debt aid are manageable at 11.6% of governmental spending in fiscal 2013 but will rise given the escalating debt service structure. Amortization slows with this offering to only 16% retired in 10 years. Fitch views as a credit negative the escalating debt service and slow amortization rate, which is exacerbated by the district's reliance on capital appreciation bonds (CABs). SOUND FISCAL CUSHION The district's stable operating performance has been aided by management's continued conservative budget of enrollment growth, on which state aid for operations is largely based, and more recently, management's decision to restructure debt rather than budget general fund moneys to make up the tax rate-debt service shortfall. Per-pupil state funding was restored to prior levels following budget cuts in the 2011-2012 biennium, producing fiscal 2013 revenues in excess of budget. The district concluded fiscal 2013 with a $2 million operating surplus after transfers (4.2% of spending), marking the fourth consecutive year of positive margins. Net fiscal 2013 results also reflect capital outlays of $4.4 million for district-wide technology upgrades, which were paid from accrued natural gas royalty payments. These funds were prudently earmarked for one-time capital items. Unrestricted fund balance grew to $15.2 million or 31% of spending, up from 22% to close fiscal 2010. MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY The current fiscal 2014 $49.2 million general fund budget includes a 4% increase in payroll following a district-wide salary study and adjustment. The district plans to complete its technology improvements using approximately $4 million of unrestricted fund balance in fiscal 2014. The total drawdown for the 2013/2014 project is expected to decrease fund balance by a net $2 million, rather than the $4.3 million approved by the board. The district anticipates a closing general fund balance of $11.3 million, or 23% of spending. Management does not have a formal fund balance target but has expressed the goal of maintaining general fund reserves between 2.5 and 3 months of operating costs. Fitch views the presence of this sound fiscal cushion as critical to stability in the underlying 'A+' rating given the debt profile, limitation in revenue raising capacity, and taxpayer concentration risk factors. TAX BASE CONCENTRATION The district's primarily residential tax base experienced a 9% increase in fiscal 2013, primarily due to the robust TAV growth of the largest taxpayer, SPM Flow Control (SPM), an oil and gas equipment manufacturer. SPM's TAV increased 170% in fiscal 2013 due to the relocation of its corporate headquarters into the district and the large amount of business personal property held on-site. SPM subsequently moved its manufacturing plant out of the district, contributing to a 10% fiscal 2014 tax base decrease. SPM makes up a large 6% of district fiscal 2014 TAV (down from 17% in 2013) and the top 10 taxpayers comprise a high 20%. Market value per capita, a measure of tax base wealth, also remains below average at $50,000 in fiscal 2014. BEDROOM COMMUNITY IN FORT WORTH MSA The district benefits from its location in the extensive Fort Worth labor market. Military-related spending still accounts for an estimated one-quarter of the Fort Worth MSA economy, but recent gains in other sectors, such as services, construction, and trade have helped diversify the labor market. In addition, mining (natural gas), ranching, manufacturing, technology, education, and aerospace are significant economic sectors and add a measure of diversity. The area has maintained an overall positive employment profile despite recent layoffs at major employer Lockheed Martin (News - Alert), whose headquarters sit just north of the district. Tarrant County, which encompasses the district and city of Fort Worth, continues to add jobs at a faster rate than both the state and nation since the recession ended in 2009. County-wide unemployment improved to 5.3% in December 2013 from 5.7% in 2012, just below the state (5.6%) and national rates (6.5%). The level of residential development activity has slowed in the district, and consequently enrollment growth is at a more moderate pace than in prior years. Previously rapid annual enrollment gains of between 4%-6% have moderated to a more manageable 3% per year and officials expect this more moderate level of growth to continue in the next few years. TEXAS SCHOOL DISTRICT LITIGATION In February 2013 a district judge ruled that the state's school finance system was 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 unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding as a constitutional flaw in the current system. The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began January 2014. 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 consider any changes that include additional funding for schools a positive credit consideration. 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, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, Zillow.com, and National Association of Realtors. 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 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. |
