TEXT-Fitch rates Canutillo ISD, Texas ULTs 'AAA' PSF

Tue Nov 13, 2012 3:51pm EST

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Nov 13 - Fitch Ratings has assigned an 'AAA' PSF rating and an 'AA-'
underlying rating to the following Canutillo Independent School District, Texas
(the district) unlimited tax (ULT) bonds: 

--$6.2 million ULT refunding bonds, series 2012.

The 'AAA' rating is based on a guarantee provided by the Texas Permanent School 
Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to 
price via negotiated sale the week of Nov. 19, 2012 (pending market conditions).
Proceeds will be used to refund a portion of the district's outstanding 
obligations.  

In addition, Fitch affirms the following ratings for the district:

--Approximately $86.6 million (pre-refunding) of unlimited tax bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY 

The bonds are secured by revenues from an unlimited tax levied against all 
taxable property within the district. The PSF guaranty applies to all 
outstanding series except 2006. 

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Ample general fund reserves reflect conservative 
budgeting and cost management, supplemented by a reduction in fiscal 2011 summer
accruals associated with the district's shift of their fiscal year end 
coincident with the school year cycle. Enrollment based revenue gains and a 
maintenance & operations (M&O) tax rate increase offset fiscal 2012/2013 state 
funding cuts to maintain balance. 

STEADY ECONOMIC GROWTH:  Rapid residential and commercial development continues 
to expand westward from El Paso, creating healthy gains in the district's 
taxable assessed valuation (TAV). Continuing regional development throughout the
recession reflected the economic impact of the Fort Bliss military expansion, a 
growing health care sector, and strong international investment. 

STRONG VOTER SUPPORT:  Approval of a combined tax ratification election (TRE) 
and bond authorization in May 2011 were approved by a wide margin, supporting 
facility expansion and infrastructure improvements.  

ABOVE-AVERAGE DEBT: Overall debt levels are moderately high, and will be 
pressured by ongoing facility needs based on current enrollment projections, 
with a new debt issue anticipated in early 2013. A moderate interest & sinking 
(I&S) fund tax rate provides adequate debt capacity over the medium term. 

CREDIT PROFILE

The district is located in the less developed northwestern corner of El Paso 
County (rated 'AA' with a Stable Outlook by Fitch), serving a population of 
about 27,000 over 67 square miles which include portions of the City of El Paso 
and neighboring rural areas.

HIGH-GROWTH BI NATIONAL DISTRICT

The district receives residual growth from El Paso and nearby Santa Teresa, New 
Mexico, a significant commercial hub and port of entry into Juarez, Mexico. 
Officials expect current average daily attendance of nearly 5,800 students to 
grow considerably in the next five years due to the availability of affordable 
land, the extensive transportation network traversing the district, and master 
planned development projects currently underway.  

The district's $1.8 billion tax base increased more than 9% annually between 
fiscal 2007 and 2013 reflecting the economic impact of the $5 billion Fort Bliss
military base expansion and influx of international investment which muted the 
effects of the recession. Expectations for additional near term growth are 
supported by extensive commercial and residential development underway in the 
Paseo Del Norte region of the district, and a widely anticipated deployment of 
at least 9,000 additional troops to Fort Bliss during fiscal 2013. 

The district has some exposure with top ten taxpayers totaling 15.7 % of taxable
value in fiscal 2012 and a retail center, the El Paso Outlet Center Holding LLC,
at 5.6%. Hoover, Inc. (2.2%) is the second largest with companies such as ADP 
Inc., B Steel Properties I Ltd., and Leviton MFG Co Inc. rounding out the list.

    

IHS Global Insights points to the region's younger-than-average population as a 
key strength, supporting strong service sector growth; however, relatively low 
skill levels limit high-paying job growth. The latest unemployment rate of 8.8% 
for August 2012 is improved from the prior year supported by 2.7% job growth, 
but remains above the state (7.0%) and national (8.2%) averages for the same 
period. 

SOUND GENERAL FUND BALANCE

The district generally outperforms the budget and maintains adequate fund 
balance levels.  State funding comprises 60% of total revenues, supported by 
strong enrollment growth and reflecting the district's property poor 
classification.  

A fiscal year 2011 operating surplus of $7.8 million includes the effects of 
attrition-based cost savings ($2.7 million) and a decrease in summer accruals 
associated with shifting the district's fiscal year end from August to June 
($5.0 million). The resulting unrestricted general fund balance of $11.4 million
represents a strong 29.8% of spending and transfers out.  

REVENUE GROWTH BOLSTER/SUPPORTS OPERATIONS

Fiscal 2012 operations benefited from enrollment based revenue growth, recurring
cost savings, and $3.5 million of revenues associated with the M&O tax rate 
increase from $1.04 to $1.17 per $100 of TAV, which offset operating costs of an
expanding student population and $2.1 million in state funding cuts. The 
district expects to add an estimated $1.5 million to general fund balance for 
fiscal 2012.  Officials report a balanced fiscal 2013 budget which includes 
modest pay increases and an additional $900,000 of state funding cuts.  

The M&O tax rate is at the statutory cap, subsequent to the TRE election, 
limiting further ad valorem tax revenue growth aside from TAV appreciation. In 
light of continuing enrollment growth and school funding uncertainty, officials 
report that the district is identifying further cost savings and prioritizing 
programs and capital needs. The district has been able to manage growth to date 
without resorting to portable facilities or materially larger class sizes.  

    

ABOVE AVERAGE DEBT / CONTINUING CAPITAL NEEDS

The district's overall debt, reflecting the benefit of state support, is 
above-average at 7.2% of market value. Principal amortization is slow at 39% in 
10 years. School building bonds to be issued in the first half of 2013 will fund
a K-8 facility in the growing Paseo Del Norte region of the district and 
infrastructure improvements throughout the district, bringing the overall debt 
to 8.1% of fiscal 2012 market value.  

The new $21 million issue is projected to bring the district's I&S tax rate to a
maximum of $.36 per $100 of TAV over the next several years, based on reasonable
TAV and enrollment growth assumptions. The district retains adequate debt 
capacity in relation to the attorney general's tax rate cap of $0.50 for new 
debt issuance.   

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 $700,000 or 
a modest 1.8% of general fund spending. Carrying costs including debt service 
are manageable at 15.9% of general and debt service fund spending (reported for 
fiscal 2010 given an irregular 2011 reporting period), with a similar metric 
expected for fiscal 2012.
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