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Fitch Affirms Frenship ISD, TX's ULTs at 'AA-'; Outlook Stable
Posted January 30, 2012
We Recommend...
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Frenship Independent School District, Texas' (the district):
--$166.5 million in unlimited tax (ULT) bonds affirmed at 'AA-';
The Rating Outlook is Stable.
SECURITY
The ULTs are secured by an ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
GOOD FINANCIAL PERFORMANCE: The district has continued to post positive operating results and maintain solid reserve levels despite the cost pressures from enrollment growth.
BUDGET CHALLENGES REMAIN: Reductions in state aid in fiscal years 2012 and 2013 will likely prompt some use of fund balance to close projected budget shortfalls, but anticipated reserves of at least 20% of expenditures would still provide a good financial cushion.
UNFAVORABLE DEBT PROFILE: Already high debt ratios will rise further with additional borrowing needs. The high annual debt carrying cost will also remain elevated given the slow pace of amortization. Fitch notes future debt flexibility may be limited by a debt service tax rate that could approach the state's statutory cap of $0.50 per $100 taxable assessed value (TAV) for new debt issuance.
CONTINUING TAX BASE GROWTH: Annual tax base growth remains positive but more moderate at just above 3% annually from fiscal years 2010-2012. Growth has been spurred by development westward from the city of Lubbock.
STABLE AREA ECONOMY: The Lubbock metropolitan economy is relatively stable and diverse. Continued gains in total employment and the labor force have kept the area's unemployment rate below the state and U.S. averages.
WHAT COULD TRIGGER A RATING ACTION
FURTHER LEVERAGE: Lower than projected tax base growth and/or state aid for debt service to support future borrowings could accelerate an increase both in debt ratios and the debt service tax rate, the latter of which could preclude the issuance of additional debt. Fitch believes there is presently sufficient debt, tax rate, and financial flexibility (provided by good general fund and debt service fund balances), but erosion of this flexibility could apply downward pressure on the rating.
CREDIT PROFILE
HIGH DEBT BURDEN & LIMITED FLEXIBILITY
Overall debt ratios are high at $4,379 per capita and 7.1% of full value even after adjusting for direct state aid at about 10% of debt service. Debt levels rose measurably following the issuance of most of the district's largest ever $128 million authorization in 2007, which was approved by a strong 70% of voters. The annual net debt burden on the budget is also high at 17% of fiscal 2011 expenditures and will remain elevated given the slow amortization and future borrowing plans.
Officials plan to issue the remaining $15.5 million of 2007 debt authorization in summer 2012 to fund construction of a new elementary school. Management forecasts a maximum debt service tax rate of $0.46 per $100 of TAV to support the bonds, which assumes annual TAV growth generally between 3% and 4% through 2025. Management plans to seek additional ULT authorization in the next few years for facility needs to accommodate continuing enrollment gains, which could require an increase in the tax rate to the new debt issuance statutory cap of $0.50. Fitch notes that under more conservative TAV growth, state aid and tax collection assumptions, the tax rate could reach the cap more quickly than presently forecast; reaching the cap would limit debt flexibility and be a negative credit consideration.
GOOD FINANCIAL PERFORMANCE/STATE FUNDING CHALLENGES
The district continues a history of positive operating results, having added to reserves each of the past ten fiscal years. Fiscal 2010 results included a $275,000 operating surplus (0.6% of spending), which reflected prudent mid-year cost reductions to close a budget shortfall caused by lower enrollment-based state aid. Fiscal 2011 results featured a moderate $530,000 operating surplus (1% of spending) and an additional $1.8 million boost to fund balance from the sale of a district-owned building. The fiscal 2011 unassigned general fund balance totaled $13.7 million or a solid 26% of spending, and liquidity was good at over 4 months of cash-on-hand.
State budget cuts to public education are affecting district operations in the fiscal 2012-13 biennium. The district experienced a $3 million loss in state aid for fiscal 2012 and will see $4.5 million reduction in fiscal 2013. Management responded by adopting a fiscal 2012 expenditure budget of $2.2 million (4.1%) less than the 2011 amended budget, with savings achieved primarily through attrition. The utilization of about $1.2 million in one-time federal education monies also helped reduce the shortfall, but the fiscal 2012 adopted budget still contains a $763,000 deficit or 1.5% of budgeted spending.
While management anticipates up to a $2 million aggregate decline in general fund reserves through fiscal 2013, the unassigned general fund balance would still be healthy at more than 20% of spending. Fitch views the maintenance of solid reserves as key to long-term credit quality given the high debt levels and ongoing fiscal pressures.
STABLE AREA ECONOMY & CONTINUING TAX BASE GROWTH
The 128-square mile district is located immediately to the west and southwest of Lubbock, a regional economic hub in west Texas. A portion of the district lies within the city limits. The availability of affordable land, proximity to the Lubbock employment base, and improved transportation corridors have spurred residential and accompanying retail /commercial development in this historically rural and agricultural area, although the pace of development slowed considerably with the economic downturn. Current enrollment is nearly 7,800 and has grown by 3% - 4% annually from fiscal years 2010 - 2012, slightly below the 5% - 6% gains seen in prior years.
Growth in the district's tax base has remained positive but also slowed considerably as both residential and commercial building cooled. TAV registered over 11% compound annual growth from fiscal years 2006 to 2010 before moderating to just above 3% annual gains in fiscal years 2011 and 2012; the fiscal 2012 TAV is $2.4 billion. Management expects continued TAV growth due to continued residential and commercial development currently underway, but Fitch believes growth will be more muted than in prior years.
The area economy is fairly diverse and stable and has seen continued gains in employment and the labor force. The area unemployment rate has remained consistently lower than the state and national rates and improved to a favorable 5.5% for Nov. 2011. Wealth levels are lower than the state and national levels, but they are affected by a large student population at Texas Tech University and are also somewhat mitigated by a lower cost of living in the region.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 Global Insight, Zillow.com, National Association of Realtors, Texas Municipal Advisory Council.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/report...
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/report...
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