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Fitch Rates Laredo ISD, Texas' ULT Bonds 'AAA' PSF/'AA-' Underlying; Outlook StableFitch Ratings assigns an 'AAA' rating to the following Laredo Independent School District, Texas' unlimited tax (ULT) bonds: --$74.9 million ULT refunding bonds, series 2015. The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (For more information on the Texas Permanent School Fund, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable' dated Sept. 4, 2014.) The bonds are expected to price via negotiated sale the week of May 25. Proceeds will be used to refund outstanding debt for interest cost savings. Fitch also assigns an underlying rating of 'AA-' to the series 2015 bonds and affirms the 'AA-' underlying rating on the district's $192 million ULT bonds outstanding (pre-refunding). The Rating Outlook is Stable. SECURITY The unlimited tax bonds are payable from an annual property tax levy imposed on all taxable property within the district. The bonds are further secured by the Texas Permanent School fund guarantee. KEY RATING DRIVERS PRUDENT FINANCIAL MANAGEMENT: Management's implementation of budget cuts and stringent procurement requirements has enabled the district to grow fund balance reserves to solid levels, providing financial flexibility. MATURE TAX BASE: After a long period of healthy growth, taxable valuations have remained sluggish in recent years. Prospects for future growth are limited as the district's tax base is relatively mature and built out. STATE AID REVENUES DOMINANT: The district is considered property poor, thus it receives a substantial amount of state aid for operations and maintenance. Prudent budget adjustments allowed the district to absorb state aid cuts in the last biennium. HIGH DEBT; LARGE OFFSETS: The district's overall debt relative to its market value is high, but substantial debt service support from the state keep carrying costs modest. FLAT ENROLLMENT TRENDS: The district has experienced nearly flat enrollment trends due to its maturity. Such trends relieve the district of growth pressures, allowing it to address the extensive renovation or replacement of its aging facilities. RATING SENSITIVITIES SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the districts healthy financial profile. CREDIT PROFILE POSITIVE FINANCIAL PERFORMANCE The district has posted annual net operating surpluses in seven out of the last eight years and planned pay-go outlays caused the single drawdown during this period. This performance positioned the district well for the budgetary challenges faced by all school districts in the state during the fiscal 2012-2013 biennium. State funding cuts during this period led the district to eliminate additional positions by adjusting its student to teacher ratio, moving to a traditional school schedule, and offering an early retirement incentive. As a result, the district maintained structural budgetary balance during these years. Increased state aid for the fiscal 2014-2015 biennium enabled management to provide salary increases and a one-time bonus to teachers, as well as contribute more to the district's health insurance program. The additional revenue and overall positive financial position also enabled the district to supplement its capital program with general fund outlays averaging 2% of spending. The fiscal 2014 audit posted a $4.2 million net operating surplus (equal to 1.8% of spending). As a result, the unrestricted fund balance increased to a strong $75.3 million or 33.2% of spending. The district's liquidity is ample, totaling more than four months of operating expenses at fiscal 2014 year-end. Due to its low wealth per student, the district receives a substantial 77% of its general fund revenues as state aid. Given the district's maturity, management prudently budgets flat enrollment annually. The fiscal 2015 operating budget is balanced with level tax rates and flat enrollment. Due partly to the availability of $0.04 for O&M that was previously used for debt service on now refunded lease revenue bonds, the district projects a net operating surplus of $2.4 million or 1.2% of spending. The budget funds $1.5 million for pay-go capital outlays and pay hikes for teachers, administrators, and paraprofessionals totaling $10 million (5.1% of spending). The proposed fiscal 2016 budget will be balanced and includes $5.7 million for pay hikes. MATURE TAX BASE The tax base has remained flat or declined modestly since fiscal 2010, due partly to an increase in exempt properties and disabled veteran xemptions. Future prospects for growth are limited, as the district is relatively mature and mostly built-out. A developer is in final negotiations with the city of Laredo to build an $80 million retail shop complex within the district's boundaries. The top 10 taxpayers account for a moderate 9.8% of fiscal 2015 total taxable assessed value (TAV). Property tax collection rates are below average on a current basis and typical for the border region, but adequate on a total collections basis. HIGH DEBT; LARGE STATE DEBT SERVICE OFFSET In November 2013, a strong 72% of voters approved a $125 million GO bond authorization comprised of $47 million to refund outstanding lease revenue bonds and $77 million for school facility improvements. This authorization has been fully issued and increased the debt service tax rate by a notable 67% in fiscal 2015. However, at $0.37 per $100 TAV the debt service tax rate is still well below the $0.50 threshold required by the Attorney General for new bond issuance. To mitigate the fiscal 2015 tax rate increase, the district contributed $1.3 million in cash from its debt service fund. Principal payout for direct debt is rapid at 71% in 10 years, which Fitch views favorably. The district's overall debt levels are moderate on a debt per capita basis at $3,754 but very high relative to market value at 15.8%. However, debt service carrying costs are moderate at 11% of fiscal 2014 governmental spending. Due to the district's very low property wealth per student, the state currently supports a substantial 72% of the district's ULT debt service. Adjusting for this substantial offset to debt service, carrying costs are a modest 1.5% of governmental spending in fiscal 2014. AFFORDABLE PENSION BENEFITS The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan; other-post employment benefits (TRS-Care) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled a modest 1.2% of fiscal 2014 governmental spending. Fitch will continue to monitor the level of state support for school district pension payments, noting the required 1.5% local contributions that have recently been imposed by the state. INTERNATIONAL TRADE BASED ECONOMY Located on the Rio Grande, the border city of Laredo (GO debt rated 'AA' by Fitch) serves as the principal port of entry into Mexico and the largest inland port in the U.S. Over the past decade, Laredo has experienced substantial growth in population. However, the district's enrollment of approximately 24,700 has remained stagnant due to central Laredo's nearly complete development. The district's population is equal to about 41% of Laredo's total population. Laredo's proximity to Mexico and the city's trade based economy closely link its economic health to that of its southern neighbor. Fluctuations in the value of the peso and dependence on international policies create some economic uncertainty for the area. Integration of the U.S. and Mexican economies through free trade agreements and Laredo's essential transportation network add a measure of stability, partially offsetting these vulnerabilities. In recent years, economic activity has been further boosted by substantial oil and natural gas exploration and production in the nearby Eagle Ford (News - Alert) formation. However, due to the decline in oil prices, the rig count within the expansive Eagle Ford formation has declined by a significant 50% over the 12 months ending May 15, 2015. Due to the stability of its other employment sectors, Laredo's economic momentum has not yet been impacted. Aided by growing sectors in transportation/warehousing/utilities, leisure & hospitality, and professional/business services, the city's unemployment rate declined to 4.2% as of February 2015, down from 5.5% a year prior; this rate compares favorably with state and national averages. Despite the favorable economic trends, the district's market value per capita remains very low at $25,000. Income levels are also low but are growing faster than state or national averages. 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 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 the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and Texas Municipal Advisory Council. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria', dated Aug. 14, 2012; --'U.S. Local Government Tax-Supported Rating Criteria', dated 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=985167 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/20150521006378/en/ |
