TEXT-Fitch affirms Lafayette Parish School Board, La. rfdg bonds at 'AA'
Feb 8 - Fitch Ratings takes the following action on Lafayette Parish School Board, Louisiana (LPSB, or the board) refunding bonds: --$36.2 million public school refunding bonds, series 2008, affirmed at 'AA'; --Assigns implied unlimited tax GO rating of 'AA'; The Rating Outlook is Stable. SECURITY The bonds are special and limited obligations secured by a first lien on a 1% sales and use tax levied on each item of tangible personal property sold in the parish. The sales tax is an irrevocable pledge approved by voters in 1965, and revenues after payment of debt service are available for operations. Bondholders benefit from a cash-funded debt service reserve fund equal to maximum annual debt service (MADS). KEY RATING DRIVERS STRONG COVERAGE; RATING CAPPED: The 'AA' rating on the sales tax bonds reflects the very strong coverage provided by the pledged revenues, which are also a key source of operating revenues, as well as the bonds' solid legal provisions and general creditworthiness of the board. Fitch caps most special tax ratings, including this sales tax rating, at the GO rating. UNFUNDED CAPITAL NEEDS: Significant capital needs remain and funding sources are uncertain following voter rejection of a major bond proposition. Fitch is concerned that funding these needs with debt would weaken the currently moderate debt profile, but funding them on an operating basis could weaken the sound financial position. STRONG RESULTS AND BALANCE SHEET: Consistently positive operating margins have yielded solid reserves and liquidity. Operating revenues are diverse and have demonstrated annual growth while budgets are typically conservative. DIVERSIFYING ECONOMY: Lafayette is a regional economic hub with an oil and gas based economy that is complemented by growing retail trade and healthcare sectors. Population, wealth, and taxable assessed value (TAV) continue to register moderate growth and the housing market is healthy. PENSION/OPEB PRESSURES: Pension costs are increasing and may present near-term budget pressure. The board is addressing a significant unfunded other post-employment benefit (OPEB) liability. RATING SENSITIVITIES CAPITAL PRESSURES: Inability of the board to resolve major capital needs without pressuring the currently sound fiscal cushion or key debt measures, particularly given the pressure from other long-term pension and OPEB liabilities, could weaken the district's credit profile. CREDIT PROFILE Lafayette Parish is located in south central Louisiana, roughly 60 miles west of Baton Rouge at the intersection of Interstate Highways 10 and 49. The school board serves 30,000 students and is seeing modest enrollment growth. AMPLE COVERAGE OF SPECIAL TAX BONDS Pledged sales tax receipts have historically registered moderate annual increases, supported by Lafayette's growth and position as a regional retail center. Pledged revenues did decline in fiscal years 2009 and 2010 due to the national recession but have since rebounded measurably. Fiscal year 2011 and 2012 revenues increased by 9% and 8%, respectively, with audited fiscal 2012 receipts rising to $56.7 million or 105% of the pre-recession peak and covering MADS 7.6x. Bondholders also benefit from the strength of the 2.0x additional bonds test. POSITIVE MARGINS AIDED BY REVENUE GROWTH AND CONSERVATIVE BUDGETING The board's revenue base is diverse, with around 50% provided by state aid and the remaining split between local property tax revenues and net sales tax revenues after debt service. Consecutive years of significant operating surpluses (1%-7% of spending) have enabled the board to more than double its general fund balance since 2007. The fiscal 2012 unrestricted general fund balance grew to $67.7 million or a strong 28% of spending and year-end cash and investments represented over five months of operating costs. Positive margins have been aided by revenue growth as well as conservative budgeting reflected in consistent under-spending of adopted budgets and appropriation of 75% of economically sensitive sales taxes in excess of the budget for non-recurring expenditures. The board also made recent adjustments to its health insurance plan that produced moderate net income for the general fund in fiscal 2012. Budget pressures were slightly more pronounced in fiscal 2013, leading to an adopted budget deficit of $4.8 million (1.9% of spending). Spending was increased by 3.5% from the prior-year budget to fund new student-achievement initiatives. On the revenue side, per-pupil state funding remained frozen for the fourth consecutive year while the state's new voucher program was expected to reduce operating revenues by re-directing some of the district's funds to private or charter schools. However, year-to-date performance is favorable, with management reporting that only half of the available 288 vouchers are in use, and sales taxes are trending 8% above prior-year receipts, well above the no-growth budget. Fitch expects the board will significantly out-perform the deficit forecast by year-end. Further impact to the budget from higher voucher utilization remains uncertain, as the constitutionality of this program is currently being litigated. RISING PENSION COSTS A POTENTIAL BUDGET PRESSURE; OPEB LIABILITY BEING ADDRESSED Pension costs have risen significantly in recent years and may limit budget flexibility if the trend persists. Fitch views this as a possibility given the under-funded position of the state-wide plans. The district's major pension plan is provided through the Teachers' Retirement System of Louisiana (TRSL), a cost-sharing multiple employer plan, and was poorly funded at 48% as of June 2011, using Fitch's adjusted 7% investment return rate. Previously low returns for both this and the smaller School Employees' Retirement System produced a 50% increase in the district's required contributions since fiscal 2010, with the contribution rate for TRSL rising to 24.5% of payroll from 15.5%. The board also has a significant $551.4 million unfunded liability for its OPEB, equal to 3.7% of the district's market value. Fitch views positively the board's establishment in fiscal 2010 of an irrevocable OPEB trust that totals $10 million. The board made contributions to the trust in fiscal years 2011 and 2012, and while no contribution was budgeted in fiscal 2013, management is also now weighing benefit adjustments to gradually reduce the OPEB UAAL. The combined pension ARC and OPEB pay-go totaled $52.6 million in fiscal 2012 or a sizable 16.7% of governmental spending (less capital projects funds spending). MODERATE DEBT BURDEN BUT CAPITAL NEEDS SIGNIFICANT The board's overall debt ratios are moderate at $2,663 per capita and 4.0% of market value. Amortization has slowed with recent debt issuance but is still above average with 63% of principal retired within 10 years. Future capital needs, as identified in a comprehensive facilities plan, remain quite significant. Moreover funding sources remain undefined given voters' decisive rejection of a $561 million bond proposition in October 2011. While not planned, the board has significant margin under the additional bonds test (ABT) to further leverage the 1% sales tax. Management plans to re-approach voters in fall 2013 to seek a 1% sales tax increase that would be dedicated for capital improvements. The tax would provide an estimated $47 million in annual revenues for the sole purpose of capital improvements. Absent approval of this tax, the board would likely need to continue pay-go funding its capital needs, which it currently does incrementally through a 1/2% sales tax as well as excess general fund sales taxes. The manner in which the district addresses its sizable capital needs, with particular attention to possible changes in the debt profile or fiscal cushion, will be key credit drivers over the medium term. OIL/GAS-CENTERED ECONOMIC BASE CONTINUES TO DIVERSIFY Lafayette's dominant economic sector is oil and gas operations, making it susceptible to the cyclicality associated with energy prices. However, the parish also serves as a regional center for retail trade and healthcare for the surrounding eight-parish area that is home to more than 600,000 residents, and also counts trade, transportation, and utilities, government, education, and business services as leading employment sectors. The city is home to the University of Louisiana at Lafayette, the second largest university in the state. Employment concentration in the oil/gas sector is above average, totaling 11% of the non-farm laborforce, and continues to climb as drilling activity in the Gulf resumes after the oil spill. There is some diversity amongst top employers, with growth in the healthcare and manufacturing sectors also playing a part in the robust employment gains seen recently. Parish employment has risen steadily since a recessionary contraction in 2009 and jumped 8.7% in 2012, improving the December unemployment rate to a low 3.5% from 4.7% year-over-year. The economic activity has also grown TAV and wealth levels. Per-capita income now approximates the national average and per-capita market value has risen to a still below-average $65,000 from $49,000 in fiscal 2008. Residential and commercial development coupled with a stable housing market have supported consistent and moderate annual TAV growth which accelerated in 2012, climbing 7.6% to $1.7 billion. Fitch expects moderate TAV growth to continue based on the area's economic indicators. 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, and National Association of Realtors. 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
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