TEXT - Fitch rates Texas's United ISD bonds
Feb 8 - Fitch Ratings assigns an 'AAA' rating to the following United Independent School District, Texas (the district) unlimited tax (ULT) refunding bonds: --$21.6 million ULT refunding bonds, series 2013. The 'AAA' long-term rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. The bonds are expected to price via negotiation the week of Feb. 11, 2013. Proceeds will be used to refund a portion of the district's outstanding obligations. Fitch also assigns an 'AA-'underlying rating to the series 2013 bonds and affirms the 'AA-'rating on the following outstanding debt: --$190 million ULTs, excluding refunding series 2004 and 2008; --$2.8 million limited tax Public Property Finance Contractual Obligations, series 2004 and 2005. The Rating Outlook is Stable. SECURITY The series 2013 ULT refunding bonds and outstanding ULTs are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. In addition, the bonds are secured by the Texas PSF guarantee, whose bond guarantee program is rated 'AAA' by Fitch. The contractual obligations are secured by a limited ad valorem tax pledge levied on all taxable property within the district, limited to $1.04 per $100 TAV, unless district voters approve an increase up to the state maximum of $1.17 per $100 TAV. KEY RATING DRIVERS CONCENTRATED ECONOMIC GROWTH: The district's tax base has risen steadily over the past several years due to an increase in oil & gas values. Low unemployment rates reflect increased drilling activity, as well as a stable base of governmental, educational and health service providers. Fitch notes that the expanding oil & gas sector drives local economic development, but also exposes the district to increased economic cyclicality. MODERATE DEBT/SIZABLE NEEDS: The district's overall debt, reflecting state support, is moderate, although the district faces sizable capital needs resulting from projects that were deferred subsequent to a failed 2007 bond election. Fitch expects the district's debt burden to remain manageable even with anticipated debt issuance plans given current low levels. FINANCIAL PRESSURES/ADEQUATE RESERVES: Current general fund reserves are adequate, but have become increasingly pressured by facility maintenance and capital expenditures to keep up with a growing student body. The district is highly dependent on state funding for operations and capital and reduced state funding levels create additional pressure. NO RATING DIFFERENTIAL: Fitch currently makes no distinction between the unlimited and limited tax ratings due to the district's tax rate capacity relative to the cap and adequate financial flexibility. RATING SENSITIVITIES REDUCED FINANCIAL FLEXIBILITY: Inability to address capital needs while maintaining adequate financial flexibility will continue to pressure the district's operating budget and could lead to negative rating action. CREDIT PROFILE United ISD encompasses a sizeable 2,450 square miles in Webb County with the Rio Grande River forming a portion of its western boundary. The district serves an estimated population in excess of 165,000 which includes a portion of Laredo (GO bonds rated 'AA' with a Stable Outlook by Fitch), the third most populated city on the U.S.-Mexican border. GROWING CONCENTRATED ECONOMY Taxable assessed value (TAV) grew by an average rate of 6.7% since fiscal 2007 to $11.2 billion in fiscal 2013 reflecting an expanding oil & gas sector, as well as the region's extensive transportation network supporting international trade, warehousing and distribution businesses. Residential values comprise 34% of the base, followed by commercial/industrial (27%) and mineral (21%) properties. Fiscal 2013 TAV growth of 11.6% resulted largely from the reported addition of oil & gas wells in the Eagle Ford natural gas & oil field located in the northern part of the district which increased the oil & gas property values by 58%. Top ten taxpayers comprise a high 21% of TAV represented by oil & gas, refinery and utility companies. The city of Laredo's unemployment rate of 5.9% as of October 2012 compares favorably to state and national averages. A growing employment base is supported by drilling, oil field support services and a stable base of top employers representing government, education, medical and retail sectors of the economy. The district's income and wealth levels are steadily improving but continue to lag state and national averages. The region's lower cost of living mitigates the low wealth levels as a credit concern. As a property poor district under Chapter 42 of the Texas Education Code, the district receives state support for both operations (63% of general fund revenues) and debt service (28% of annual debt payments). OPERATING FUND PRESSURES The district typically generates favorable results despite enrollment-based and capital funding pressures. However, state funding cuts, one-time lump sum salary payments, capital expenditures, and transfers to the debt service fund resulted in a fiscal 2012 net deficit of $11.9 million (3.6% of spending and transfers out), the first in six years. Subsequent to a failed bond election in 2007, operations have funded more than $50 million of capital expenditures to support infrastructure improvement and growth needs. Officials anticipate absorbing additional fiscal 2013 state funding cuts with cost savings, to end the year break-even to the balanced budget, but caution that a further reserve draw could result from Board-directed capital expenditures. While the fiscal year-end 2012 unrestricted general fund balance of $77.3 million (23.6% of expenditures and transfers) is adequate, a material decline would represent a credit concern in light of the district's tax base concentration and ongoing growth related costs. MODERATE DEBT; SIZEABLE NEEDS Moderate overall debt of $2,591 per capita or 3.2% of market value reflects state funding and the district's history of pay-as-you-go capital spending. Amortization is above average with 60% of principal scheduled for repayment within 10 years. Capital needs are sizeable given the district's history of rapid enrollment growth and include elementary, middle, ninth grade and high school facility additions. Fitch expects the debt burden to remain manageable despite, as the district reports, the potential for a $250 million GO bond election within the next couple of years. The debt service tax rate would increase with the anticipated issuance, but the district retains flexibility given their low rate of $0.155 per $100 of TAV in relation to the state's statutory cap of $0.50 per $100 for new debt issuance. An unsuccessful GO bond election would pressure the operations budget as Fitch would expect costs associated with pay-go to rise, as a replacement for bond funding of capital needs. 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 $1.7 million, or a low 0.5% of governmental spending in fiscal 2012. The district's carrying costs, including debt service, pension and OPEB comprised a low 7.6% of governmental fund spending for the year.