TEXT-Fitch affirms Eagle Pass ISD, Texas ULTs at 'A+'
Jan 31 - Fitch Ratings takes the following rating action on Eagle Pass Independent School District, Texas' (the district) unlimited tax (ULT) bonds: --$65.6 million of ULT bonds affirmed at 'A+'. The Rating Outlook is Stable. SECURITY: The bonds are direct obligations of the district, secured by an unlimited tax pledge levied against all taxable property within its boundaries. The bonds also carry the Texas Permanent School Fund guaranty, which Fitch rates 'AAA'. SENSITIVITY/RATING DRIVERS: IMPROVED FISCAL CUSHION: Sound reserves and liquidity have improved as a result of several years of operating surpluses. Budget balance has been largely preserved amid state funding reductions. EXPANDING RESOURCE BASE: The local economy centers on trade with Mexico and oil and gas production and services. Top taxpayer concentration is slightly elevated while population and tax base growth continues, spurred by oil and gas activity and development underway. SUBPAR SOCIO-ECONOMIC PROFILE: Area wealth measures are low and unemployment and poverty rates are elevated. MODEST DEBT BURDEN: Fitch considers key debt burden ratios to be low. The fixed-cost for debt and pensions is quite affordable due to state subsidies. Amortization is average. 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), serves as the port of entry into Mexico at Piedras Negras, Coahuila. LOCAL ECONOMY LINKED TO MEXICO & OIL/GAS ACTIVITY 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. Increased economic activity in the latter sector is tied to drilling in the Eagleford Shale, a large natural gas play spanning southern Texas and underlying portions of the district's tax base. The drilling activity has spurred residential and commercial development, which, together with positive re-appraisals and the favorable resolution of an appeal by the district's top taxpayer (Conoco Phillips; long-term Issuer Default Rating of 'A' with Stable Outlook), produced a nearly 8% gain in fiscal 2013 TAV to $1.8 billion. Average annual TAV growth since fiscal 2009 has been more moderate at 3% and the economic activity noted above supports projections for continued near-term TAV growth. The top 10 taxpayers comprise a slightly elevated 16% of fiscal 2013 TAV, with Conoco Phillips alone representing 6% followed by a medical facility at 2.2%. There is some energy-industry concentration amongst the top payers (four out of 10), and Fitch believes the tax base overall is likely fairly concentrated 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 an average per-capita market value of $61,000. Enrollment, on which state aid is largely based, has steadily and moderately increased at 1.7% average annual rate since 2009, with current-year enrollment up 1% from last year. Similar growth is expected to continue in the near term. PERSISTENTLY HIGH UNEMPLOYMENT AND 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. Unemployment trended upward in Maverick County from 2009-2011, reaching 14.2%, and while the November 2012 unemployment rate dropped to 10.5% from 12.1% year-over-year, this was due to contraction in both the labor force and employment. Residents' income levels are below average, with per capita income at 47% of the national average and the poverty rate at 220% of the nation's. PRUDENT BUDGETING AND RESULTS ADD TO OPERATING RESERVES Conservative budgeting practices yielded consecutive years of operating surplus after transfers from fiscal years 2006-2011, increasing operating reserves and liquidity. The fiscal 2011 surplus was particularly significant at 4.8% of spending and was aided by under-spending of the balanced budget (spending-to-budget ratio of 93%) due in part to the receipt of $2.5 million of non-recurring federal aid that funded some general fund salaries out of a federal revenue fund for one-year. State budget cuts and the expiry of non-recurring federal aid in fiscal 2012 prompted management to reduce budgeted spending. Reductions included the elimination of positions via attrition as well as a hiring freeze and discretionary cuts for overtime, incentive pay, and athletics. Fiscal 2012 unrestricted general fund balance totaled $13.6 million or a solid 11% of spending, down slightly from fiscal 2011 but well above the 7.8% unreserved fund balance at the end of fiscal 2010. Liquid general fund assets remained adequate, covering current liabilities 1.1x. The fiscal 2013 budget increases spending by 2.5% from the 2012 budget, with the addition of nine FTEs supported by modest gains in local and state revenues. Officials presently expect to outperform the budgeted deficit of $472,000 (0.4% of spending) given positive year-to-date attendance figures and continued expenditure monitoring. Fitch expects reserves and liquidity will remain solid given management's demonstrated ability to narrow prior-year deficits. Fitch also notes that the district retains a degree of expenditure flexibility through its ability to further increase class-size ratios, which are currently below the state's maximum. LOW DEBT BURDEN DUE TO STATE DEBT SERVICE SUBSIDIES Overall debt ratios, including direct and overlapping debt, are low at $1,240 per capita and 2% of market value. Direct debt is heavily subsidized by state funds totaling 65% of annual debt service, which Fitch considers to be self-supporting debt. Net of state subsidies debt service is only 1.5% of governmental expenditures (excluding capital projects fund spending). The rate of amortization is average at 45% retired in 10 years. The district does not maintain a formal capital improvement plan but anticipates seeking additional debt authorization to fund new campus construction sometime within the next five years. Officials have indicated debt authorization would be sought in conjunction with available state debt service aid, which Fitch notes would temper increases to the debt burden and tax rate impact. The current tax rate for debt service is $0.13 per $100 of TAV, which is very competitive with other districts. PENSION COSTS EASILY MANAGED Pension and other post-employment benefits (OPEB) are provided through the state's Teacher Retirement System, a cost-sharing multiple employer plan. The state pays the bulk of the required contributions on behalf of the district and currently adequately funds TRS at 74.5% using an adjusted 7% investment return rate. The district's annual required contribution to TRS was $500,000 in fiscal 2012 or a marginal 0.4% of governmental spending. Combined carrying costs for debt service and pensions totaled less than 2% of spending. 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-Schiller Home Price Index, IHS Global Insight, National Association of Realtors, and the Texas Municipal Advisory Council. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria