Fitch Rates Eagle Pass ISD, TX ULT Rfdg Bonds 'AAA' PSF/'A+' Underlying; Outlook Stable
Fitch Ratings has assigned an 'AAA' rating to the following obligations
of Eagle Pass Independent School District, Texas (the district):
--$41.7 million unlimited tax (ULT) refunding bonds series 2016.
The 'AAA' Long-term rating on the bonds is based on a guarantee provided
by the Texas Permanent School Fund (PSF), whose bond guaranty program is
rated 'AAA' by Fitch. For additional information on the Texas Permanent
School Fund, see Fitch's Aug. 5, 2015 press release, 'Fitch Affirms
Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.
The bonds are scheduled to sell via negotiation February 17. Proceeds
from the bonds will be used to refund a portion of the district's
outstanding debt for interest cost savings.
In addition, Fitch assigns an 'A+' underlying rating to the series 2016
bonds and affirms the underlying 'A+' rating on $55.6 million in
outstanding ULT bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited tax levied against all taxable
property in the district.
KEY RATING DRIVERS
SATISFACTORY FINANCIAL RESERVES: Sound reserves have grown as a result
of several years of generally positive financial performance. Budget
balance has been largely preserved despite state funding reductions in
some years.
CONCENTRATED RESOURCE BASE: The local economy centers on trade with
Mexico and oil and gas production, and top taxpayer concentration is
moderately high. The rating recognizes the potential tax base volatility
driven by economic activity surrounding the Eagle Ford Shale formation,
particularly in light on ongoing oil price declines.
BELOW-AVERAGE DEMOGRAPHIC PROFILE: Growth in per capita income has
outpaced the state and U.S. but overall wealth indices and educational
attainment remain very weak.
AFFORDABLE DEBT BURDEN: Outstanding debt levels are moderately low and
the carrying costs for debt service and retiree benefits are modest due
to state subsidies. The rate of amortization is moderate and the
district's capital needs are limited.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: Continued growth in healthy reserve levels paired
with economic diversification would lead to positive rating
consideration.
CREDIT PROFILE
This 15,000-student district is located along the U.S.-Mexico border,
approximately 150 miles southwest of San Antonio. The county seat, Eagle
Pass (GO bonds rated 'A+' by Fitch with Stable Outlook), serves as the
port of entry into Mexico at Piedras Negras, Coahuila.
ECONOMY LINKED TO MEXICO, ENERGY
The population of the Eagle Pass and Piedras Negras metropolitan area
approximates 200,000, providing a solid base for trade and tourism that
is complemented by agriculture and oil/gas production in the surrounding
Maverick County. A portion of the district's tax base overlies the Eagle
Ford Shale, a large natural gas play spanning southern Texas. Strong
drilling activity spurred residential and commercial development in some
recent years, as demonstrated by average annual tax base growth of 5%
from fiscals 2010 - 2015.
However, changes in taxable assessed valuation (TAV) related to the
Eagle Ford Shale will likely be affected over at least the near term by
price declines in oil. Fitch's rating assumes some continued tax base
variability due to the district's participation in this volatile
economic sector.
Ongoing retail, hospitality, and gaming development helps diversify the
district's tax base to offset further declines in mineral values, which
represent 4% of the fiscal 2016 tax roll. TAV declined by 4.5% for
fiscal 2016 as a result of a new statewide exemption, but the resulting
revenue decline is expected to be offset by additional state funding.
The top 10 taxpayers comprise a slightly elevated 12.3% of fiscal 2016
TAV. There is some energy-industry concentration among the top payers
(three out of 10), which exposes the district to economic cyclicality in
that sector. The remaining top payers span healthcare, retail, real
estate, and utilities. The large amount of farm and ranch land in
Maverick County makes up the largest share of the tax roll and
contributes to a low per-capita market value of $61,000.
Enrollment, on which state aid is largely based, has flattened in recent
years, with fiscal 2016 enrollment up 0.3% from the prior year.
Officials project flat enrollment to continue in the near term.
PERSISTENTLY HIGH UNEMPLOYMENT, LOW WEALTH
Top employers include the school district, retail, healthcare, and a
casino, though the area's large migrant-worker labor force has
contributed to historically elevated unemployment rates. County
unemployment in November 2015 rose to 10.9% from 9.0% year-over-year and
remains well above the state (4.2%) and U.S. (4.8%) rates. Resident
wealth levels are below average, with per capita income at about half of
the state average and individual poverty at nearly twice the national
rate.
PRUDENT BUDGET PRACTICES ADD TO RESERVES
Conservative budgeting practices yielded operating surpluses in five of
the last six years despite relatively flat enrollment, with only a
modest deficit in fiscal 2012 due to state budget cuts. Increased local
and state revenues produced positive results in fiscals 2013 -2015, as
the district outperformed budget expectations each year. The general
fund produced a surplus of $2.6 million (1.9% of spending) in fiscal
2015, despite a $2.5 million transfer to the capital projects fund.
Unrestricted fund balance totaled $18.9 million or a solid 13.6% of
spending. Liquid general fund assets remained satisfactory.
The district's fiscal 2016 proposed budget includes a general fund
deficit of $998,000 (0.8% of spending) related to one-time spending
items. The district typically budgets conservatively for state funding
and maintains a degree of expenditure flexibility in its ability to
increase class sizes, which are currently below the state's maximum.
Fitch expects that reserves and liquidity will remain sound.
LOW DEBT SERVICE BURDEN
Overall debt ratios, including direct and overlapping debt, are low to
moderate at $1,984 per capita and 3.2% of market value. Debt service is
heavily subsidized by state funds totaling 63% of annual debt service.
Net of state subsidies, debt service is only 1.1% of governmental fund
spending. The rate of amortization is moderate, with 50% of principal
retiring in 10 years.
The district maintains a five-year facility plan that includes annual
cash funding of improvements as needed. Due to the district's flat
enrollment trend, officials indicate no near-term borrowing plans. The
current tax rate for debt service is $0.12 per $100 of TAV, which is
very competitive with other school districts and affords significant
capacity if debt needs were to arise.
AFFORDABLE PENSION OBLIGATIONS
The district participates in the Teacher Retirement System of Texas
(TRS), a cost-sharing multiple employer 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, the district is vulnerable to future policy changes by the
state as evidenced by a relatively modest 1.5% of salary contribution
requirement effective fiscal year 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 $13.5 million, with plan fiduciary assets covering
83.25% of total pension liabilities at the plan's 8% investment return
rate assumption (approximately 75% based on a more conservative 7% rate
assumption). The NPL represents approximately 0.4% of the district's
fiscal 2015 market value. Carrying costs for debt service and pension
costs totaled a low 5% of governmental fund spending in fiscal 2015,
largely reflective of state support.
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 change
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 exposure drafts of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S.
Local Tax-Supported Ratings). The drafts include 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 in 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
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, Lumesis, and the Municipal Advisory
Council of Texas.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local
Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
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=999272
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999272
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/20160209006686/en/
Copyright Business Wire 2016
