TEXT - Fitch rates Texas' Lewisville ISD bonds
Feb 8 - Fitch Ratings assigns an 'AAA' rating to the following Lewisville Independent School District, Texas' (LISD or the district) unlimited tax (ULT) bonds: --$61.5 million ULT refunding bonds, series 2013A. --$86.9 million ULT refunding bonds, taxable series 2013C. The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. Fitch assigns an 'AA+' underlying rating to the aforementioned 2013 A and C bonds and an 'AA+' rating to the following bonds that do not benefit from the PSF Guaranty: --$53.9 million ULT refunding bonds, series 2013B Fitch also affirms the 'AA+' underlying rating on the district's $1.1 billion (pre-refunding on a non-accreted basis) in outstanding ULT bonds The bonds are scheduled to sell the week of Feb. 11 via negotiation. Proceeds will be used to refund a portion of outstanding district debt for debt service savings and to pay related costs of issuance. The Rating Outlook is Stable. SECURITY The bonds are payable and secured by an unlimited property tax levied against all taxable property within the district. The series 2013A and 2013C bonds are further secured by the PSF Guaranty. SENSITIVITY/RATING DRIVERS STRONG FINANCIAL POSITION MAINTAINED: General fund reserves and liquidity are solid, enhancing the district's financial flexibility. Conservative and prudent fiscal management typically facilitates outperformance of the sizeable operating deficits budgeted annually. FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in the broad Dallas-Fort Worth metro area and employment base along major transportation corridors. Population trends exceed those of the state. Income and wealth levels also are above average. MODEST TAV TRENDS: Recently positive taxable assessed value (TAV) trends indicate the tax base has regained its footing from the modest, recessionary declines previously realized. The district's tax base is generally stable and has historically experienced healthy rates of growth. Prospects for further tax base expansion appear favorable. HIGH DEBT LEVELS: The district's capital improvement program will continue to drive already elevated debt ratios. Strong voter support for bond programs and an above-average pace of amortization mitigate some concern over debt levels. WHAT COULD TRIGGER RATING ACTION Material deterioration of solid reserve levels that provide a level of financial flexibility consistent with the district's high-grade rating and/or weaker debt profile could lead to negative rating action. CREDIT PROFILE FINANCIAL RESULTS AGAIN OUTPERFORM BUDGET The district has generated operating surpluses in three of the last five fiscal years. Audited fiscal 2012 results reflect management's repeated outperformance of the year's adopted operating budget that included a large deficit under conservative assumptions. Additional federal and state revenue and enrollment that was higher than budgeted contributed to the year's financial performance. Also, the district realized salary savings from budgeting full staffing costs and an incentivized 'early notice' program that has been offered in recent fiscal years, allowing the district to reduce or eliminate some of its more highly paid positions. The district closed the year's nearly $18 million budgeted operating gap and added a sizeable $14 million to general fund reserves. This brought the unrestricted fund balance up to a very strong $146.5 million or approximately 39% of spending. This amount includes $45 million (equivalent to about 12% of fiscal 2012 general operational spending) held as a minimum reserve according to the district's formal fund balance policy. MODEST SOFTENING OF CURRENT YEAR'S BUDGET GAP For fiscal 2013, the district's budget reflects a slightly larger $28 million state aid cut in the second year of reduced state funding levels to all Texas school districts over the biennium (fiscal 2012 and 2013) due to the state's own projected revenue shortfalls. The year's $394 million operating budget was adopted with a sizeable $23 million drawdown, consistent with budgeting practices over the past four fiscal years. Year-to-date operations are reportedly ahead of budget with a softened use of less than $20 million expected. Although management indicates there is the possibility of a drawdown on the district's solid financial cushion at fiscal 2013 year-end and a comparable drawdown anticipated in preliminary fiscal 2014 budget preparations, Fitch believes a reduction of reserves at the high level budgeted is unlikely given the district's historical operating performance. Fitch takes comfort from management's practice of maintaining reserves well above its stated minimum, noting unreserved/unrestricted reserves have been no less than roughly 20% of spending since fiscal 2008. HIGH DEBT/ MANAGEABLE CARRYING COSTS Debt ratios are high, reflecting the district's prior fast-growth years. Including near-term plans for the next new money issuance, overall debt levels approximate $6,000 on a per capita basis and 7% of market value on an accreted basis. Principal amortization is slightly above average with roughly 53% of principal maturing within 10 years. The district's debt profile is primarily comprised of fixed-rate debt with some use of capital appreciation bonds. Inclusive of the planned new money issuance, annual debt service is projected to rise to a maximum of $112 million (maximum annual debt service ) in fiscal 2021, up from $90.5 million in fiscal 2012. The MADS burden on the budget is high at 23% of fiscal 2012 general and MADS spending but mitigated by the district's overall financial flexibility reflected in ample reserves and some tax rate cushion. Approximately $254 million in authorized but unissued bonds remain from the nearly $700 million bond package approved by 58% of the voters in May 2008, the largest in the district's history. The next new money issuance of about $90 million will finish funding the construction of various ninth grade school facilities. Management reports issuances will also rely on further tax base expansion as plans are to stay at or below the maximum debt service tax rate promised voters of $0.45 per $100 of TAV as the borrowing continues. The district's fiscal 2013 interest and sinking (I&S) fund tax rate of $0.41 per $100 of TAV provides little margin under the promised rate but some capacity in relation to the statutory cap of $0.50 for new debt issuance, benefitting from TAV growth and some buy down with debt service fund balance. A recently completed facilities assessment has allowed management to sharpen its focus on district-wide facility needs. As a result, most of the outstanding bond authorization is planned for near-term use on prioritized school facility and technology needs while approximately $30 million will be set aside to provide a cushion towards facility contingency needs. Initial study of the district's capital needs to be addressed by a future bond election will begin in fall 2013 according to district officials. Although future capital needs exist, Fitch believes they should remain manageable in this fairly mature district. This should reduce the district's reliance on continual tax base growth to fund capital needs with debt. OTHER LONG-TERM LIABILITIES MODERATE The district's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the district provides the bulk of the employer's annual pension contribution. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a manageable 18% of governmental fund spending in fiscal 2012, reflective largely of the district's annual debt load. MODEST TAV GROWTH SUSTAINED The district's tax base is stable and primarily residential in character. Gains made in prior fiscal years have historically been strong, averaging a compound annual growth rate of 6.5% from fiscal years 2003-2009. After two years of moderate TAV decreases, the trend was reversed with a modest 2% TAV gain in fiscal 2012. Another 2% TAV gain was realized in fiscal 2013, which is in line with management's expectations for fiscal 2014. Fitch believes higher but still moderate TAV increases are likely over the intermediate term given the development underway on the first phase of a large retail store and distribution center that is anticipated to add about $1 billion in additional value at completion. LISD encompasses 127 square miles and is located about 20 miles northwest of Dallas in Denton County. The district serves all or portions of 13 residential communities, including the cities of Lewisville, Flower Mound, Carrollton, and The Colony. Roughly 75% of the district is built-out and both enrollment gains and growth in TAV have moderated as the district's service area has matured. Unemployment rates in Denton County are consistently below regional, state, and national averages and local wealth measures exceed state and national levels by 10%-60%, depending on the community within the district's boundaries. On average, enrollment has grown just over 1% annually over the last five fiscal years compared with a roughly 5% average annual growth rate during the prior decade from fiscal 1997-2007. District enrollment totaled 52,300 students in fiscal 2013. Full build-out of the district is estimated to top out at 65,000-70,000 students.