TEXT - Fitch rates Texas' Cedar Hill ISD bonds
Feb 15 - Fitch Ratings assigns an enhanced 'AAA' rating and 'AA-' underlying rating to the following unlimited tax (ULT) bonds for the Cedar Hill Independent School District, Texas (the district): --$8.9 million ULT qualified school construction bonds (QSCBs), taxable series 2013 (direct-pay subsidy); --$34.3 million ULT school building bonds, series 2013; --$27.1 million ULT refunding bonds, series 2013-A. The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF; rated 'AAA' by Fitch). The series 2013 QSCBs will sell competitively and the series 2013 ULT school building and 2013-A ULT refunding bonds will sell via negotiation during the week of Feb. 25. Proceeds of the QSCBs and school building bonds will be used to expand and improve facilities. Proceeds of the refunding bonds will be used for refund a portion of the district's outstanding debt for interest cost savings. In addition, Fitch affirms the 'AA-' underlying rating on $74.8 million of outstanding ULT bonds, series 2002, 2004, 2005, 2011, 2012, and 2012-A. The Rating Outlook is Stable. SECURITY The bonds carry the guaranty of the Texas PSF and additionally are secured by an unlimited ad valorem tax pledge of the district. KEY RATING DRIVERS STABLE FINANCIAL OPERATIONS: Operating results are generally positive and recent state budget cuts have been well-managed to preserve a sound level of reserves and liquidity. STRONG REGIONAL ECONOMY: The district benefits from its location in the broad and diverse economy of the Dallas-Fort Worth (DFW) metro area. Residents have easy access to a large employment market that continues to outperform the nation in terms of population, employment, and income growth. SLUGGISH HOUSING MARKET: Declining home values have applied downward pressure on the district's taxable assessed value (TAV). Fitch considers the cumulative TAV decline as fairly moderate. As such, Fitch believes TAV will likely stabilize in the near-term based on local and regional home price indicators. WEAK DEBT PROFILE: The district's high debt ratios and slow amortization due to capital appreciation bonds are key credit concerns. However fixed costs remain manageable and pension and other post-employment benefit (OPEB) liabilities are modest. STRONG COMMUNITY SUPPORT: Concerns over the above average debt burden are eased in part by the strong voter support for the most recent bond proposition. RATING SENSITIVITIES MAINTENANCE OF STRONG FINANCES: The preservation of the currently strong financial position is key to credit quality and an important mitigant to the high debt and narrow debt capacity risk factors. CREDIT PROFILE This mature, suburban district is located 19 miles south of downtown Dallas and serves a 42 square-mile area with a population of about 45,000. Current enrollment of 8,284 is up slightly from last year and has fluctuated mildly since 2007. BUDGETING FLEXIBILITY PRESERVES SOLID FISCAL CUSHION General fund operations have been essentially balanced over the fiscal 2007-2012 period and available fund balance has remained at or above the district's prudent fund balance policy floor of 25% of spending. Management reduced spending in fiscals 2011 and 2012 to offset lower revenues from slight enrollment declines, on which state aid is largely based, and state budget cuts in fiscal 2012. Spending cuts in the last two years have included personnel reductions through attrition and layoffs, a salary freeze, and other departmental reductions. The budget actions yielded a small fiscal 2011 operating surplus that was followed with a similarly sized operating deficit in fiscal 2012 due to a mid-year budget amendment to provide a one-time bonus payment to staff. This was the first pay increase of any sort in two years. A modest prior-period accounting adjustment further reduced fiscal 2012 fund balance, with the unrestricted portion declining 4% to $14.1 million or a still solid 25.2% of spending. Year-end cash and investment balances adequately covered current liabilities 1.8x. Modest improvement in state revenues supported a 1.6% spending increase in the fiscal 2013 $57.1 million budget. The balanced budget funds additional staff and an expanded pre-K program that is designed to mitigate enrollment competition from an area charter-school and also draw additional state funds. Officials report that year-to-date operations are tracking slightly better than the budget and enrollment is up 1.4%, in contrast to the no-growth enrollment forecast. MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY The state's school funding outlook for the 2014-2015 fiscal biennium is unclear and will not be resolved until after the district adopts its fiscal 2014 budget. The proposed budgets from the state government's house and senate only partially restore previous education cuts from the 2012-2013 biennium. However, it will likely be amended prior to adoption of the state's budget in June. Nonetheless, Fitch expects the district will maintain its solid financial profile given the modest degree of expenditure flexibility remaining and forecasts for modest revenue growth in fiscal 2014 under current funding formulas. LOCATION IN BROAD AND RESILIENT DFW ECONOMY A CREDIT POSITIVE The district's proximity to Dallas and location in the broader DFW metro area provides residents with easy access to a large and diverse labor market. Dallas is the second largest city in the state and ninth largest in the nation, with an estimated population of 1.2 million. The city is home to numerous corporate headquarters and prominent economic sectors include transportation, financial services, wholesale trade, manufacturing, oil/gas, and education and government. The area employment picture is positive, with the city of Cedar Hill and the surrounding DFW region adding jobs at a rate faster than the nation since the recession ended in 2009. Cedar Hill unemployment fell to 6.5% from 7.3% in December 2012, which remains slightly above the DFW region (5.9%) and state (6%) but below the national average (7.6%). Wealth levels are about average with higher median household income offset by average per capita income, a comparatively low per-capita market value of $61,000, and a larger share of students classified as economically disadvantaged (64%) than the statewide average (60%). PERSISTENT TAV LOSSES DUE TO SOFT HOUSING PRICES A weak local housing market has continued to drag on the district's TAV, which has declined 14% since the fiscal 2009 peak value. Zillow housing prices declined from a peak of $137,000 in 2007 to a low of $100,000 in 2011. Home prices have begun to show some improvement and year-over-year home prices in December were up 4.6%. This suggests TAV may have hit bottom and supporting management's projections for 1% TAV growth in fiscal 2014. Taxpayer concentration is minimal with the top 10 payers comprising 9% of fiscal 2013 TAV. Fitch's concerns about TAV declines, from a fiscal standpoint, are largely mitigated by the state's funding formulas. They generally ensure level per-pupil funding (absent the recent state budget cuts) by backfilling lost local revenues with additional state aid. The credit concern regarding further TAV declines is the district's reduced debt affordability and capacity. VERY HIGH DEBT WITH EXTENSIVE USE OF CABs Key debt ratios are high and rise to 10.4% of market value and $6,247 per capita with this issuance. Ratios include the current accretion of CABs, which represent 28% of outstanding debt, as well as debt from overlapping entities. Principal amortization is slow at just 23% of principal repaid in 10 years. The new money portion of this offering was overwhelmingly approved by 70% of voters in a November 2012 bond election. The tax rate impact conveyed to voters was a 6% increase and will push the debt service tax rate to $0.48 per $100 of TAV. This is just below the state's statutory ceiling for new debt issuance of $0.50. Annual debt service rises slightly from $12 million to $14 million from fiscals 2013-2032. As such, future borrowing capacity will depend on TAV gains. However management does not anticipate additional debt needs until 2020. The district will receive a federal subsidy to pay interest on the qualified school construction bonds. This subsidy could be potentially reduced by federal sequestration looming in March, although the increased cost to the district could be easily managed with a slight increase to the tax rate or use of the currently high debt service fund balance. MANAGEABLE FIXED COST BURDEN The district's pension and OPEB liabilities are limited to its participation in the state's Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The state pays the bulk of pension and OPEB costs on-behalf of school districts. The district's statutorily determined annual contribution rate (ARC) applied only to the portion of staff salaries exceeding the state's minimum pay scale. The district's fiscal 2012 ARC to TRS was a combined $696,000 (less than 1% of governmental fund spending). Aggregate fixed costs, including debt service and pension and OPEB ARCs consumed 16% of governmental fund spending in fiscal 2012 and will rise to a still manageable 18.3% in fiscal 2014.