TEXT - Fitch affirms Hitchcock, Texas bonds

Fri Feb 22, 2013 3:20pm EST

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Feb 22 - Fitch Ratings has affirmed its 'AA-'underlying rating on the
following Hitchcock Independent School District, Texas' (the district)
obligations:

--$20.3 million in outstanding ULT school building and refunding bonds, series 
2008. 

The Rating Outlook is Stable.

SECURITY 

The bonds are secured by an unlimited ad valorem tax pledge against all taxable 
property within the district. In addition, the bonds are secured by the Texas 
Permanent School Fund (PSF) whose bond guaranty program is rated 'AAA' by Fitch.
 

KEY RATING DRIVERS

RETURN TO BALANCED OPERATIONS: The district recorded a net surplus in fiscals 
2011 and 2012 following three years of deficits.  The favorable financial 
performance resulted from cost cutting, enrollment growth and the benefit of 
one-time grant monies.  

HIGH DEBT: The district's overall debt is high and the interest and sinking fund
(I&S) tax rate is at the state attorney general's cap for new debt issuance. 
However, future capital needs are expected to be minimal in the near term based 
on existing capacity and moderate enrollment projections.   

RESUMED HOUSING DEVELOPMENT: Tax base growth in the district has historically 
been strong, but was halted in 2009 due to the impact of Hurricane Ike combined 
with a weaker economy and depressed housing market.  Moderate fiscal 2013 
taxable assessed valuation (TAV) growth reflects commercial and industrial (C&I)
expansion and a pickup in residential construction activity.  

BELOW AVERAGE ECONOMIC INDICATORS: Income and wealth levels trend somewhat below
state and national averages.

RATING SENSITIVITY

FAVORABLE FINANCIAL PERFORMANCE: Fitch expects the district to retain sound 
reserve levels to counterbalance concerns over a small service area and revenue 
constraints, credit factors that Fitch believes combine with elevated debt to 
limit the rating to its current level over the foreseeable future.

CREDIT PROFILE

The district is located in Galveston County (the county, general obligation debt
rated 'AA+' with a Stable Outlook by Fitch) adjacent to Texas City and 10 miles 
northwest of the city of Galveston, serving a population of about 8,800 
including the City of Hitchcock. 

INDUSTRIAL BEDROOM COMMUNITY

The county's economy is centered on petrochemicals, port activities, tourism and
the University of Texas Medical Branch. District residents benefit from two 
major road systems that allow easy access to employment opportunities outside 
the district's borders, enabling many in the district to take advantage of the 
petrochemical job market in nearby Texas City. A December 2012 unemployment rate
of 6.8% is improved from 8.6% a year ago and compares favorably to the U.S. rate
of 7.6%, but remains elevated in relation to the state average of 6% for the 
same period.

New single family properties largely contributed to a more than doubling of the 
district's tax base in the decade leading up to 2010, mirroring growth of the 
region's economy. However, the destruction caused by Hurricane Ike in September 
2008 along with the subsequent recessionary pressures experienced nationwide 
contributed to a TAV loss of 10.3% between fiscal 2010 and 2012. C&I expansion 
and the resumption of residential development increased fiscal 2013 TAV by a 
sound 3.2%, with favorable prospects over the near term based on a reported 
increase in building permits.  

The district's fiscal 2012 TAV of $477 million is 68% residential and is without
tax base concentration.  Top taxpayers represent real estate, energy, retail, 
telecom, and rail concerns.     

IMPROVED FINANCIAL POSITION

The district strengthened its reserves in fiscals 2011 and 2012 through cost 
cutting, aided by enrollment growth and federal grant monies. A fiscal 2011 net 
operating surplus of $249,000 (2.2% of spending) reflects staff reductions, a 
salary freeze and the benefit of $362,704 in federal grant monies.  

Officials continued the salary freeze and eliminated further positions in fiscal
2012.  This, combined with an enrollment gain of 100, allowed the district to 
more than offset per-pupil state funding losses of about $388,000. The district 
completed the year with a $1.1 million (10.6% of spending) net surplus.  
Unrestricted general funds of $3.3 million (31.3% of spending and transfers out)
exceed the district's fund balance target for unassigned general funds equal to 
20% of spending. 

Officials report expected fiscal 2013 break-even results based on further 
enrollment gains and cost management. Revenue flexibility through tax rate 
adjustment is limited by the district's current maintenance and operations tax 
rate which resides at the cap of $1.04 per $100 of TAV, above which voter 
authorization is required. The district reports no immediate plan to pursue a 
tax ratification election.   

HIGH DEBT/MANAGEABLE CARRYING COSTS

Overall debt levels are high at 10.1% of market value, with an average 
amortization rate of 49% in 10 years.  Although the I&S tax rate of $0.50 per 
$100 of TAV is at the statutory cap for new debt issuance, the district does not
anticipate the need for significant new debt in the mid-term given the ample 
capacity provided by new facilities.  

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 district's 
combined pension and other post-employment benefits, which are set by state law,
totaled $208,400 or a low 1% of governmental spending in fiscal 2012. The 
district's debt and retirement carrying costs equate to a manageable 13.6% of 
governmental fund spending for fiscal 2012.
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