(The following statement was released by the rating agency)
Nov 29 - Fitch Ratings assigns an 'AAA' rating to the following Forney
Independent School District, Texas' (the district) bonds:
--$5.5 million unlimited tax (ULT) refunding bonds, series 2013.
The rating is based on a guaranty provided by the Texas Permanent School Fund,
whose bond guaranty program is rated 'AAA' by Fitch.
In addition, Fitch assigns an underlying 'BBB' rating to the series 2013 bonds.
The bonds are expected to price via negotiated sale on Dec. 12. Proceeds will be
used to refund certain outstanding bonds for interest cost savings.
Fitch also affirms its 'BBB' underlying rating on approximately $283.7 million
in outstanding ULT bonds.
The Rating Outlook is revised to Stable from Negative.
The bonds carry the guaranty of the Texas PSF and are secured by an unlimited ad
valorem tax pledge of the district.
KEY RATING DRIVERS
MEASURABLE ONE-YEAR BUDGET IMPROVEMENT: The Stable Outlook reflects the new
management team's demonstrated ability to return the general fund to balanced
operations despite reduced operating cashflow. District finances remain weak due
to the state's identification in 2011 of several years of state aid overpayment
based on inflated attendance figures not reconciled by the prior management
LONG TERM FISCAL PRESSURE: The 'BBB' underlying rating reflects Fitch's concern
about this fast-growth district's willingness and ability to sufficiently raise
revenue to cover financial obligations. The district's tax rate is at the
state's $0.50 tax rate cap for new money debt issuance due to a large and
growing debt service burden on the budget, tax base stasis and reduced state
debt service aid. Fitch is concerned about the district's agreement to subsidize
debt service from general fund operations prior to raising the tax rate above
$0.50 which has prompted the district to plan for multiple debt restructurings
over the next 10 years and creates long-term fiscal pressure.
DEBT FLEXIBILITY HAS DISAPPEARED: A debt service tax rate at the state's new
debt cap coupled with the district's ascending debt service schedule will likely
preclude the district from issuing new money debt in the near term. While
management cites no pressing capital needs, Fitch views the lack of future debt
issuance flexibility as a long-term risk.
MODEST TAX BASE GROWTH: Taxable assessed valuation (TAV) gained modestly in
fiscal 2013 after a period of slight contraction. The rate of TAV growth remains
well below the rapid appreciation seen pre-2009, though long-term growth
prospects remain positive given the transportation improvements underway,
proximity to the Dallas-Fort Worth (DFW) metro area, and availability of
CONCENTRATED TAX BASE: Taxpayer concentration persists, with the largest payer,
a power plant, representing 17% of TAV and the top 10 payers representing an
WHAT COULD TRIGGER A RATING ACTION
FINANCIAL DETERIORATION: A reversal of the positive momentum in financial
performance, including budget imbalance beyond fiscal 2013 or material weakening
of the district's liquidity position, could prompt negative rating action.
Forney ISD is located approximately 20 miles east of Dallas in Kaufman County
and encompasses 84 square miles that includes the city of Forney. The district
serves 8,565 students.
LARGE LIABILITY TO THE STATE
Forney ISD's restoration of financial flexibility since fiscal 2009 was
artificially enhanced by state aid payments for overstated attendance not
reconciled by the prior management team, uncovered by the auditor in September
2011. The state discovered the discrepancy which resulted in a $17.4 million
aggregate liability to the state in September 2011. The fund balance was
restated in fiscal 2011 showing a negative unrestricted fund balance (the sum of
committed, assigned, and unassigned per GASB 54) of 7.1% of spending at the end
of fiscal 2011, down from the overstated positive 10.2% of spending in fiscal
A new management team took charge in fall 2011 and, with the help of a state
appointed financial monitor, developed a financial solvency plan. The plan
returns the overpaid funds to the state over a five-year period via a reduction
in the district's annual formula funding. The annualized loss is $2.7 million
for operations and $750,000 for debt service, each to be repaid in fiscal years
2012-2016. The fiscal 2013 repayment represents 5% of the $68.7 million combined
general and debt service fund budget.
POSITIVE VARIANCE FROM 2012 BUDGET
The adopted 2012 general and debt service fund budget of $72.9 million, prepared
by the prior staff, appeared to close a $3 million revenue shortfall caused by
state budget cuts and the lower, corrected attendance figures. However, the new
management team identified significant understatement of expenditures, which
when coupled with the first year of the $2.7 million repayment to the state,
produced a $5.1 million budget deficit (8.5% of spending). Additionally, while
the repayment plan was pending approval, the district's fiscal 2012 state aid
payments were reduced by the total amount of the liability, prompting officials
to draw $3 million from a line of credit for cashflow purposes. Following
approval of the plan, state aid was adjusted and the line was fully repaid.
Ongoing staff attrition yielded significant savings in fiscal 2012; management
reports an 11% reduction in employee headcount (133 positions) since fiscal
year-end 2011. These savings, together with a pay freeze, discretionary spending
cuts, and one-time federal revenues delivered a $564,000 operating surplus after
transfers. The fiscal 2012 unrestricted fund balance improved to a still
negative $3.6 million from $4.2 million. General fund liquidity remains low,
though improved, concluding fiscal 2012 with $7.3 million in cash and
investments or 47 days of operating costs.
BALANCED FISCAL 2013 BUDGET DESPITE CHALLENGES
The fiscal 2013 operating budget is balanced and absorbs a $3 million revenue
loss from additional state budget cuts and expiry of one-time federal funds with
continued attrition, pay freeze, and department spending cuts as well as revenue
gains from enrollment growth. Management expects to realize at least balanced
operating results and to improve the deficit fund balance position by $1.8
million using one-time proceeds from a land sale and excess insurance proceeds
from tornado damage to campuses. If the district is successful, the negative
fund balance totaling 6.5% of spending in fiscal 2012 should improve to 0 in
fiscal 2014, earlier than the 2016 date previously anticipated. Fitch views
these forecasts as reasonable given prudent management of the acute 2012 budget
LACK OF DEBT FLEXIBILITY A LONG-TERM CREDIT CONCERN
An ascending debt service schedule that was structured under what proved to be
aggressive assumptions for tax base growth and state debt service aid triggered
an increase in the district's fiscal 2013 debt service tax rate to the state's
cap for new debt issuance of $0.50, from $0.46, eliminating in the near term the
district's ULT debt capacity. While the district does not presently have
pressing capital needs due to the recent completion of several new campuses and
adequate facility capacity, Fitch views this growing district's inability to
borrow efficiently as a major credit weakness. Absent a surge in TAV growth or
legislative change to the tax rate cap, this limitation will be present for the
Fitch believes that the lower level of state debt service aid (resulting from
the corrected attendance figures) as well as slow tax base growth will continue
to pressure tax rates over the intermediate term. The total revenue yield from
the current tax levy and state debt service aid is sufficient to cover the
fiscal 2013 $13.7 million debt service payment but would only cover 60% of
maximum annual debt service ($23.1 million in 2020).
In addition, to comply with the tax rate test for prior new debt issuances, the
district agreed with the state attorney general to commit $11.7 million of
general fund moneys to pay debt service prior to levying a debt service tax rate
above $0.50. As a result, the district plans to implement multiple
restructurings over the next 10 years, rather than raise the debt service tax
rate sufficiently to cover.
Key debt ratios remain well above average in fiscal 2013 due to the lower level
of state debt service aid. Overall debt ratios are a very high 12.2% of full
market value (MV) and $8,485 per capita. This debt ratio calculation
incorporates the currently accreted interest of outstanding capital appreciation
bonds (CABs), representing 5.5% of direct debt. The high debt burden reflects
the district's growth-related capital spending and management's efforts to build
facilities slightly ahead of enrollment trends.
The 2012 refunding is for interest cost savings in fiscal years 2013-2037 and
does not delay repayment or extend maturities. Amortization remains slow at
29.5% of principal retired in 10 years, and future debt restructuring will
further extend the pace of debt retirement. With this refunding, the net debt
service burden on the budget is high at 17.6% of fiscal 2013 general fund and
debt service spending and will jump to 23% in fiscal 2014.
FAST-GROWTH DISTRICT LOCATED NEAR DFW METROPLEX
Housing affordability and the ongoing expansion of the DFW metro area led to
significant population growth in the district over the past decade, though less
than half of the district is currently built-out. Accompanying enrollment growth
was rapid but has moderated to a 3.9% average annual growth rate since fiscal
2009. Officials expect this more manageable rate of growth going forward.
The district's predominantly residential tax base expanded at a rapid pace
before slowing in fiscal 2009 as home construction cooled. A period of modest
contraction preceded the 1.5% gain in the fiscal 2013 TAV, spurred by some
continuing development. Fitch believes district projections for modest,
near-term TAV growth are reasonable given transportation improvements underway
and some residential development.
The county's September 2012 unemployment rate improved to 6.5% from 8.2%
year-over-year as employment gains outpaced nominal labor force growth,
mirroring the regional and statewide trend. The county unemployment rate remains
just above the state and MSA rates of 6.3% each, and below the nationwide rate
of 7.6%. Wealth indicators of district residents are average.
(Caryn Trokie, New York Ratings Unit)