TEXT-Fitch affirms Harlandale ISD, Texas ULT bonds at 'AA-'
Feb 15 - Fitch Ratings takes the following rating action on Harlandale Independent School District, Texas' (the district) unlimited tax bonds: --$18.2 million outstanding unlimited tax refunding bonds, series 2009 affirmed at 'AA-'. The Rating Outlook is Stable. KEY RATING DRIVERS SOLID FINANCES: The district's financial condition has improved significantly in recent years. Reserves are expected to be maintained at strong levels given management's conservative budgeting. ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO: The district benefits from its location within the city of San Antonio, TX, the second largest city in the state. Area employment has shown recent annual growth and unemployment remains lower than county, state, and national levels. Concerns regarding a declining tax base are mitigated by a state aid formula that compensates property-poor districts for tax base declines. MANAGEABLE DEBT LEVELS REFLECT STATE SUPPORT: District debt levels are manageable due to significant state funding support for debt service, though amortization of debt is very slow. No additional near-term debt issuance is planned. Combined debt service, pension, and other post-employment (OPEB) costs are also manageable. LOW INCOME AND WEALTH INDICATORS: The district's wealth and income indicators are well below average. RATING SENSITIVITIES FINANCIAL DETERIORATION: Financial deterioration leading to significantly reduced reserves below the district's policy level could result in a downgrade. SECURITY The bonds are secured by and payable from the levy of a continuing direct annual ad valorem tax without limit as to rate or amount on all taxable property within the district. CREDIT PROFILE Encompassing 13.7 square miles, the district is located within San Antonio, about three miles south of the downtown center. The urban area is mostly residential interspersed with a limited number of commercial establishments. District population fell nearly 3% between 2000 and 2011. Enrollment saw declines in the 2000s, but recent performance has been positive, averaging about 1.4% annual growth since 2008. Improved student counts reflect the initiation and expansion of a district Pre-K program, as well as the district's efforts to increase attendance rates. SIGNIFICANT STATE SUPPORT As a property poor district under the Texas Education Code, the district receives significant state support for both operations and debt service. State aid constituted about 76% of general and debt service fund revenues in fiscal year 2012. Like other Texas school districts, the district had initially budgeted for over $1 million in annual reductions in state funding for fiscal years 2012 and 2013. Growth in average daily attendance (ADA) above budgeted levels in both years, however, mitigated funding reductions. The district saw overall state aid growth in fiscal year 2012, which is expected to continue in fiscal year 2013. Total fiscal year 2013 general fund revenues are budgeted to increase by about 2%, reflecting growth in state revenues and property tax collections. SOLID FINANCES FEATURE STRONG ENDING BALANCES The district has dramatically increased general fund ending balances in recent years, with consistently large annual operating surpluses since increasing the O&M millage rate in fiscal 2009. The general fund unreserved ending balance increased from a weak $3 million (2.8% of spending) in fiscal year 2008 to a high $53.7 million (51.2% of spending) at the end of fiscal year 2012. The fiscal year 2012 $56.9 million total ending balance included an assigned balance of $9.7 million to cushion against potential state funding reductions and a $12 million committed balance set aside for one-time capital spending initiatives. District finances were bolstered by the voter approved O&M tax increase together with spending reductions and receipt of federal stimulus funds. With the tax increase, the district's O&M tax levy is at the state's maximum permitted rate of $1.17 per $100 of TAV. FISCAL YEAR 2013 BALANCE DRAWDOWN EXPECTED The district's fiscal year 2013 general fund budget assumes a total deficit of about $6.8 million. This reflects a budgeted $1.8 million operating deficit, with the remainder resulting from planned one-time capital spending from the $12 million committed balance set-aside. Actual performance is expected to be better, however, as revenues are projected to be over budget by about $2 million. This results primarily from higher than budgeted average daily attendance (ADA) levels that will increase state funding, but also from federal revenue figures coming in higher than budgeted. Even assuming an unrestricted balance reduction of $6.8 million for fiscal year 2013, the ending balance would still be strong at about 37% of expenditures. The district expects to continue spending down the $12 million committed balance set-aside for capital needs over the next two years. Fitch expects the district will continue to adhere to its policy of maintaining a general fund balance of two months' spending. ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO The district is small but benefits from its location within the broader city of San Antonio economy (city limited tax bonds rated 'AAA' with a Stable Outlook by Fitch), which is primarily composed of military and government, domestic and international trade, tourism, health care, financial services, and telecommunications sectors. City employment has shown recent annual growth and unemployment remains lower than county, state, and national levels. The city's unemployment rate was 5.5% as of November 2012, down from 6.8% a year prior and below county (5.7%) state (5.8%) and national (7.4%) rates. However, district wealth indices are below average and poverty rates are well in excess of state and national levels. Taxable assessed value (TAV) has seen annual declines since fiscal year 2009, following prior years' growth. The downturn has been related to the high number of foreclosure sales which have lowered overall residential values. TAV dropped 14% from fiscal 2009 to fiscal 2013. Annual declines have lessened (3% in fiscal year 2012 and 1.5% in fiscal year 2013) and continued moderation is expected in fiscal year 2014 as the district is seeing housing improvement, with increased sales and fewer foreclosures. Concerns regarding declines in TAV are somewhat mitigated by a state aid formula that compensates districts for tax base declines, although the district's voted levy makes them more vulnerable to declines than other districts. The district's tax base is fairly diverse, with the top 10 taxpayers representing about 11% of total valuations. MANAGEABLE DEBT LEVELS INCLUDING STATE SUPPORT The district's debt levels are very high relative to the tax base but more manageable taking into account state funding allocations. On a gross basis debt burden is 17.1% of market value and $4,169 per capita. Including this support, debt burden is still high relative to market value (7.8%) but low on a per capita basis at $1,887. Direct debt outstanding is slowly amortized with only about 39% of principal retired within 10 years. Proceeds from recent bond issues have been used to refund prior district bonds for savings. The district currently has no plans for additional debt issuance. The district provides pension and retirement health benefits through the Teacher Retirement System of Texas (TRS). Pension and OPEB costs are modest (about 1.6% of spending). As of Aug. 31, 2012, the TRS funded ratio was 81.9% or 73.8% using Fitch's more conservative 7% discount. Combined debt service (including state support), pension, and OPEB costs are low at about 5% of expenditures. 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, 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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