Fitch Ratings has affirmed the following underlying ratings of Crystal
City Independent School District, Texas at 'A':
--$50.6 million in outstanding unlimited tax bonds;
--Issuer Default Rating (IDR).
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied against
all taxable property within the district.
KEY RATING DRIVERS
The district's reserves provide solid financial flexibility in spite of
limited revenue raising ability and oil and gas price variability.
Spending is pressured by a heightened mandate to meet state
accountability standards. Fitch expects the district's conservative
financial management practices to maintain operational balance through a
typical economic downturn, as well as a temporary reduction in revenues
related to a projected decline in mineral property values. The rating
reflects the inherent volatility of oil and gas prices and Fitch's
uncertainty regarding the viability of oil reserve levels over time; a
material decline in the tax base will likely pressure both the
district's tax rate and reserve levels. Given the current low oil price
environment and significantly slowed drilling activity in the district,
TAV is expected to contract over the near term.
The Negative Outlook reflects the risk of a steep, sustained tax base
decline that would significantly pressure financial operations and
expenditure framework. The Outlook also reflects operational risk
related to the district's probationary accreditation status and the
potential for loss of accreditation.
Economic Resource Base
The district serves a large and sparsely populated area in Zavala
County, which is 100 miles southwest of San Antonio, and includes the
commercial center and county seat of Crystal City. District enrollment
has been fairly flat at around 1,800 students and is expected to remain
so. The tax base was historically primarily composed of farming and
ranching land.
The district experienced significantly increased oil exploration from
2011-2015 due to drilling activity in the Eagle Ford Shale formation.
This activity did not generate notable population growth. TAV registered
remarkable average annual growth of 21% for the 10 years through fiscal
2016, driven largely by increased oil and gas mineral values. Tax base
concentration is very high, with the top 10 taxpayers representing over
60% of fiscal 2016 TAV. The top payers are led by oil production company
EXCO Operating (43% of total TAV), and include mostly oil and gas
companies. Valuation losses among top taxpayers will shift a portion of
the debt service burden to residential properties.
Revenue Framework: 'a' factor assessment
Fitch expects solid revenue growth over the medium to longer term based
on the flat enrollment trend. The district's independent ability to
raise operating revenues is severely limited by state law.
Expenditure Framework: 'a' factor assessment
Fitch expects that expenditure growth is likely to continue outpacing
revenue growth given accreditation pressure from the state to improve
accountability metrics. Carrying costs for debt and pensions are low,
and the district has strong control over workforce spending.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is elevated but moderate in relation to
personal income. The burden is primarily in the form of direct debt.
Fitch expects that this metric will likely remain in this range during
the medium term given the slow pace of amortization and limited capital
needs.
Operating Performance: 'aaa' factor assessment
Solid operating reserves provide a notable degree of gap-closing
capacity throughout the average economic cycle. The district
historically budgets conservatively, maintaining a fiscal cushion while
addressing capital needs.
RATING SENSITIVITIES
Ability to Absorb Tax Base Declines: The combination of state support
and solid reserves should enable the district to withstand operational
pressures from energy-related TAV swings. Fitch expects that management
will continue its strong financial management practices to endure
temporary revenue swings. However, severe TAV declines will result in a
higher debt service tax rate, limiting future borrowing capacity. Rapid
and sustained TAV declines that result in erosion of the district's
financial reserves would pressure the rating.
Instructional Deficiencies: The district is implementing a three-year
plan to address instructional deficiencies identified by the state.
Failure by the district to make required changes within this timeframe
and avoid revocation of its accreditation would cease operational
funding from the state and would result in a rating downgrade.
CREDIT PROFILE
District wealth levels are low in relation to state and U.S. averages.
The county's unemployment and poverty rates are high, driven primarily
by the large presence of migrant workers.
Revenue Framework
State sources comprise about one-half of operating revenues, followed by
property taxes at 40%. Revenue growth is primarily a function of
enrollment as the state seeks to ensure a certain level of per pupil
spending for all state school districts and the district's revenue
raising ability is limited. Enrollment has been relatively flat in
recent years, though the revenue mix has shifted more heavily to local
property taxes in response to rapid TAV growth.
The district's general fund revenues grew at a compound annual rate of
3.2% over the 10 years through fiscal 2014, marginally slower than U.S.
GDP but faster than CPI. A projected TAV decline of 28% for fiscal 2017
(which was roughly the amount of tax base growth for fiscal 2016) will
reduce revenues temporarily, but Fitch expects long-term revenue growth
to continue above inflation based on the state's current funding
formula, which would increase aid to meet target revenue per student in
response to decreased local taxes in a flat enrollment environment.
The district's operating tax rate is at the legal limit of $1.17 per
$100 of TAV. In 2006, voters approved an increase to the maximum allowed
rate from the previous cap of $1.04.
The district's debt service tax rate increased in fiscal 2015 to $0.36
per $100 of TAV from $0.17 due to a 2015 bond issuance. Severe declines
in TAV would pressure the rate closer to the state's statutory new
issuance cap of $0.50, limiting the district's capacity for future
borrowing. However, the debt service tax rate is unlimited.
Expenditure Framework
The district's spending profile is led by instruction at nearly one-half
of general fund expenditures, and the district occasionally funds
capital maintenance items from the general fund. In February 2016 the
Texas Education Agency (TEA) assigned to the district a probationary
accreditation status following three years at the status of 'Improvement
Required'. The district will implement new instructional initiatives
over the next two years under the guidance of a state-appointed monitor
in order to address deficiencies identified by TEA.
Fitch expects the district's natural spending pace will likely trend
above revenues in the near to medium term, given the state mandate to
improve educational performance. Management projects a budget impact of
up to $600,000 (3% of fiscal 2015 expenditures) for these initiatives.
The district will likely be required to maintain certain expenditures in
order to keep its TEA accreditation. However, labor costs are not
subject to collective bargaining and individual employment contracts are
short. Carrying costs for debt service and postemployment benefits are
affordable at 9% of governmental fund spending in fiscal 2015, providing
a degree of expenditure flexibility. These costs are further reduced to
7% after factoring in state support for debt service, but management
anticipates no debt service support in fiscal 2017 due to the high
fiscal 2016 TAV used in state aid calculations.
Long-Term Liability Burden
Long-term liabilities are elevated at 33% of personal income, but still
within the moderate range. The 2015 bond issuance met essentially all of
the district's major capital needs, and the district has no plans for
additional borrowing.
The district participates in the Teacher Retirement System of Texas
(TRS), a cost-sharing multiple employer pension system. Under GASB 67
and 68, TRS's assets cover a reported 83% of liabilities as of fiscal
2015, a ratio that falls to 75% using a more conservative 7% return
assumption. Contributions are determined by state statute, rather than
actuarially, and historically have fallen short of the actuarial level.
Recent reforms have lowered benefits and increased statutory
contributions to improve plan sustainability over time.
The proportionate share of the system's net pension liability paid by
the district is modest, representing less than 2% of personal income.
The district's contributions are currently limited to 1.5% of salaries
and the pension costs for salaries above the statutory maximum (total
contribution of $187,000 in fiscal 2015).
Operating Performance
The district has grown its financial cushion to a high level despite
flat enrollment and state funding cuts, and has solid expenditure
flexibility to manage well through economic downturns. The unrestricted
general fund balance grew to $9.9 million during fiscal 2015, or 43% of
spending. Management projects a modest surplus in fiscal 2016, marking
the seventh consecutive year of additions to fund balance. Preliminary
budget estimates for fiscal 2017 point to a general fund deficit of
about $5 million based on projected tax base decline, which would still
maintain reserves above the safety margin that Fitch would look for
under the moderate economic downturn stress evaluated using the Fitch
Analytical Sensitivity Tool (FAST).
The district has demonstrated a commitment to supporting financial
flexibility by building reserves during the most recent economic
recovery. This includes an increase to the operating tax rate for fiscal
2016 in anticipation of a tax base decline the following year.
Management's willingness to continue its conservative budget practices
and make necessary spending adjustments in light of anticipated TAV
declines will be integral to long-term credit quality.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis, InvestorTools, and the Municipal Advisory
Council of Texas.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1007815
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007815
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 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/20160621006500/en/
Copyright Business Wire 2016
