TEXT - Fitch affirms Presidio, Texas bonds

Thu Feb 21, 2013 3:45pm EST

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Feb 21 - Fitch Ratings takes the following rating action on Presidio
Independent School District, Texas (the district) unlimited tax bonds:

--$6.3 million outstanding unlimited tax refunding bonds, series 2006 affirmed 
at 'A'.

The Rating Outlook is Stable.

SECURITY 

The bonds are direct obligations of the district payable from an unlimited ad 
valorem tax levied against all taxable property located within the district.

The bonds are additionally secured by a guarantee provided by the Texas 
Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by 
Fitch.

KEY RATING DRIVERS

SOLID FINANCES; STATE DEPENDENCE: The district's financial condition is sound, 
with ample fund balances supported by conservative budgeting despite significant
reserve draws for one-time capital projects.  As a property poor district, 
reliance on state funding is substantial.  

WEAK ECONOMIC INDICATORS:  The district's wealth and income indicators are well 
below average. Area unemployment, while declining, still exceeds state and 
national rates.  The district's tax base is very concentrated but stable, and 
has seen recent strong growth.

MANAGEABLE DEBT LEVELS SUPPORTED BY STATE FUNDING: District debt levels are 
generally moderate, but high relative to the tax base.  However, district debt 
service is supported by significant state funding, reducing the associated 
budget burden considerably.  Amortization is rapid and no additional near-term 
debt issuance is planned. Combined debt service, pension, and other 
post-employment (OPEB) costs are low.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: Fitch expects the district to retain its high reserve 
position to counterbalance concerns over the weak economy, a credit factor that 
Fitch believes limits the rating to its current level. 

CREDIT PROFILE

The district is located in Presidio County, 287 miles southeast of El Paso on 
the Texas - Mexico border and encompasses 806 square miles.  The district's 
population (about 5,100 in 2011) grew by about 8% since 2000. Enrollment, about 
1,350 in 2012, has fluctuated in recent years, but modest annual growth is 
projected in the next few years.

STRONG STATE SUPPORT OF OPERATIONS

As a property poor district, the district receives significant state support for
both operations and debt service. State aid made up over 80% of general and debt
service fund revenues in fiscal 2012.  Given its strong dependence on state 
revenues, the district strengthened reserve levels as a cushion against recent 
years' state funding uncertainties.  In addition, reserves were built up for 
anticipated capital spending needs.  

The district's other general fund revenues include property taxes (9.3%) and 
federal revenues (5.9%). State aid declined by 3.6% in fiscal 2012, and is 
budgeted to be essentially flat for fiscal 2013.  Property tax collections, 
budgeted to increase in fiscal 2013, have seen prior year annual fluctuations 
due to delinquencies and subsequent collections, including major settlements in 
certain years. The district currently projects that overall fiscal 2013 revenues
should meet budget targets, which Fitch views as reasonable given the district's
strong budgeting track record.   

CAPITAL INVESTMENT DRIVES RECENT SPENDING GROWTH

Instructional expenses in recent years have increased as part of the district's 
efforts toward teacher recruitment and improving academic performance. Capital 
spending has also grown with a significant increase in fiscal 2011 ($4.3 
million) driving expenditure growth of 44.5% over the prior year. Capital 
spending held essentially steady in fiscal 2012 but is budgeted to decline in 
fiscal 2013 ($4.8 million) resulting in a budgeted decrease in expenditures of 
10.8%.

The district is projecting flat state aid levels in the next fiscal year.  It 
has identified areas for potential fiscal 2014 cost reductions, if needed, such 
as pupil transportation. Student-teacher ratios are currently below state 
mandated levels, offering additional financial flexibility.

SOLID FINANCES FEATURE STRONG ENDING BALANCES

The district's general fund unreserved ending balance was a very high $22.1 
million (143.5% of spending) in fiscal 2010. Balances have remained strong, 
though at lower levels due primarily to capital spending.  The district ended 
fiscal years 2011 and 2012 with unrestricted balances of $16.6 million (74.6%) 
and $10,873 (49.4%), respectively.  

The fiscal 2013 budget includes a deficit of about $3 million ($2 million less 
capital spending), which would decrease the unrestricted balance to 39.6% of 
spending.  However, this may be a conservative estimate, as expenditures are 
currently projected to come in under budget.  The district's fiscal 2012 initial
budget also called for an operating deficit, which was ultimately eliminated due
to lower actual spending. Fitch expects the district to maintain high balances; 
a key credit driver and important mitigant to the credit risk associated with 
its limited economy.

WEAK ECONOMIC INDICATORS

The local economy is supported by government employment, ranching and some 
border trade.  The economy also benefits from some tourism with Big Bend 
National Park and other attractions located nearby.  Major employers are limited
to the school district and the federal government.  An international bridge 
crossing into Mexico, which generates some commercial activity, is being 
expanded to allow for additional commercial traffic.  In addition, recent 
business expansions include the opening of the Shafter silver mine in 2012, and 
the construction of a new solar energy facility expected to result in 150 
construction jobs. 

Presidio County's high unemployment rate (12% in December 2012) is reflective of
the area's limited economy, agricultural/ranching nature and immigration from 
Mexico. The unemployment rate has been declining, but is still above state (6%) 
and national (7.6%) levels.  Area wealth and income levels remain well below 
state and national averages. 

SMALL CONCENTRATED BASE

The district's tax base is small.  While it has been experiencing growth, it 
remains concentrated, with the top taxpayer (electric utility) at 13% of taxable
assessed value (TAV), the second highest (telephone company) at 9.5%, and the 
top 10 at 34%.  TAV has seen robust investment and growth recently with the 
opening of the Shafter silver mine, which led to 49.5% growth in TAV for fiscal 
2013. 

Additional growth is expected for fiscal 2014 with the addition of the solar 
facility and other new business openings.  District tax collections have been 
improving, and a large tax amount was collected in fiscal year 2012 under a 
court-ordered taxpayer settlement. The district's total direct property tax rate
is $1.41 per $100 of valuation, with the O&M tax levy set at the state's maximum
permitted rate of $1.17 per $100 of TAV. Fitch expresses concern about the 
district's lack of rate raising flexibility but recognizes its significant 
capital investment from operating funds and low carrying costs. Debt service, 
pension and OPEB contributions were just 1.5% of fiscal 2012 governmental (net 
of capital) spending, including the benefit of state support for debt service.

DISTRICT DEBT SUPPORTED BY STATE FUNDING

The district's debt levels are generally moderate, with debt service as a 
percentage of fiscal 2012 spending at about 4.1% and debt per capita at $2,143. 
Debt as a percentage of full value, however, is high at about 7.8%.  District 
debt is additionally supported by state funding allocations, which lower the 
district's debt burden. Including state support, debt service as a percentage of
spending is about 0.8%. Direct debt outstanding is rapidly amortized, with about
68.5% of principal retired within 10 years. The district currently has no plans 
for additional debt issuance, relying instead on pay go spending for capital 
needs. 

The district provides retirement benefits through the Teacher Retirement System 
of Texas (TRS).  Pension costs are modest (about 0.5% 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 (excluding state debt support) 
and pension costs are manageable at about 4.8% of expenditures.
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