Jan 30 - Fitch Ratings takes the following rating action on South San
Antonio Independent School District, Texas' (the district) unlimited tax (ULT)
--$117.5 million ULT bonds affirmed at 'AA-'.
The Rating Outlook remains Negative.
The bonds are direct obligations of the district, secured by an unlimited tax
pledge levied against all taxable property within its boundaries.
NEGATIVE OUTLOOK: Operating reserves have declined due to recurring general fund
deficits. Management restored current-year budget balance through spending cuts,
and adequate fiscal cushion remains, but Fitch is concerned about the district's
ability and political willingness to eliminate out-year deficits that are
STRONG REGIONAL ECONOMY: The district's central location in the diverse economy
and broad employment base of the San Antonio metropolitan area is a credit
strength. The district's taxable assessed value (TAV) trend is positive and
long-term economic prospects are favorable.
LIMITED LOCAL RESOURCE BASE: Residents' income levels are below average and
poverty rates are elevated. The local tax base is concentrated and has a low
WEAK DEBT PROFILE: The debt to market value (MV) ratio is high, reflecting the
limited tax base. Debt levels will likely remain elevated given the slow debt
amortization and future capital needs.
WHAT COULD TRIGGER A RATING ACTION:
FUND BALANCE DECLINE: Fitch expects to resolve the Outlook within the next 12
months and views the district's ability to maintain balanced operations in the
short term and make structural adjustments to eliminate projected out-year
deficits as key to rating stability.
This primarily residential district comprises 21 square miles in in the
southwest part of San Antonio (GO bonds rated 'AAA' with a Stable Outlook by
Fitch). Annual enrollment has fluctuated slightly in recent years and 2013
enrollment is up 1% from last year to 9,840.
STRONG RESERVES HAVE DECLINED BUT REMAIN SOLID
Recurring operating deficits from fiscal years 2009-2012 resulted from
structural budget imbalance that was caused primarily by increases to staffing
levels in prior years that outpaced enrollment growth. The annual deficits
(2%-3% of spending) have typically been lower than the originally budgeted
deficits, but they have produced a cumulative 23% decline in operating reserves
during this four-year period.
In recognition of the negative fiscal trend, management commissioned an external
staffing study and local cost-savings committee and began implementing the
respective recommendations in fiscal 2011 to curb spending. Budget savings have
included a reduced FTE count (6%) through attrition and a hiring freeze, as well
as discretionary reductions to department and administrative budgets,
summer-school, overtime, and substitute usage.
Significant under-spending of the 2012 budget offset lost revenue from state
budget cuts and narrowed the operating deficit to $2.4 million (from $4.8
million budgeted). The unrestricted general fund balance declined to $18.3
million or a sound 24% of expenditures, just below the district's working fund
balance target of 25% of spending.
2013 BUDGET IS BALANCED; OUT-YEAR DEFICITS FORECAST
The district accelerated spending reductions for fiscal 2013 to adopt a balanced
budget, reducing appropriations by 3.3% ($2.6 million) from the prior-year
budget. Officials offered an early resignation stipend that yielded additional
personnel savings and were able to provide a non-recurring stipend for
employees. Interim results were not yet available but attendance is up 1%.
Fitch views positively the return to current-year budget balance, particularly
amid lower state funding levels, but remains concerned about the baseline
financial forecasts for continuing deficits (1%-2% of expenditures) through
fiscal 2016. The district does retain some budget flexibility, but Fitch
believes that some of the budget mechanisms on the table, including furlough
days, layoffs, and a voter-approved tax rate increase, will be politically
difficult to implement or altogether unlikely to occur.
The district's solid fund balances have historically been the key mitigant to
credit pressures from the below-average resource base and high debt levels.
Further budget imbalance and declines in reserves would likely cause a rating
LIMITED LOCAL RESOURCE BASE; SUBPAR SOCIO-ECONOMIC INDICES
District wealth indicators are well below average, with per capita income at 46%
of the national average, per-capita market value at a low $33,000, and a poverty
rate (20%) that exceeds the national average (14%). The district's tax base is
also concentrated, with the top 10 payers comprising an above-average 21% of
fiscal 2013 TAV. The top payer is Boeing Aerospace (long-term Issuer Default
Rating of 'A' with Stable Outlook) which alone comprises 6% of TAV.
The district's recent TAV trend has been positive, with stabilized housing
prices, positive re-appraisals, and development activity producing a nearly 12%
cumulative TAV gain since fiscal 2010. Prospects for further gains are favorable
given anticipated development adjacent to a Texas A&M University satellite
campus and regional growth prospects.
LOCATION IN STRONG SAN ANTONIO ECONOMY
The district's location in the broad and diverse San Antonio economy is also a
credit positive. San Antonio is the second largest city in the state and eighth
largest in the nation, with an estimated population of 1.8 million. Prominent
sectors include military and government, domestic and international trade,
convention and tourism, medical and health care, financial services, and
The San Antonio market shed jobs in 2010 as a result of the national recession
but has since recovered most of the job losses. Considerable growth in the
hospitality and energy sectors, the latter being driven by drilling activity in
the expansive Eagle Ford shale gas formation south of the city, improved the
unemployment rate to 5.9% from 7.2% for the 12-month period ending October 2012.
HIGH DEBT BURDEN MAY RISE FURTHER
Overall district debt is high at 8.5% of market value even after adjusting for
annual state debt service aid of about 60% of debt, reflecting the district's
low property wealth. The overall debt calculation includes the currently
accreted interest of outstanding capital appreciation bonds. Debt per capita is
moderate and the annual carrying cost is affordable at 5% of governmental
spending (excluding capital projects fund spending).
Debt levels will likely remain elevated due to slow principal amortization (34%
retired in 10 years) and future capital needs. Officials plan to seek debt
authorization from voters in the range of $30 million-$50 million as early as
November 2013. The proposed bond program would fund construction of a new
elementary school and major renovations to aging facilities. Management notes
that the debt issuance would be done in conjunction with approval of state debt
service aid. The current tax rate of $0.42 provides adequate capacity below the
state's $0.50 statutory tax ceiling for new debt issuance, but continued growth
in the tax base will be critical to supporting debt plans and mitigating any
impact to the tax rate.
PENSION AND OPEB LIABILITIES NOT A CREDIT PRESSURE
Pension and other post-employment benefits (OPEB) for retiree healthcare are
provided through the state's Teacher Retirement System, a cost-sharing multiple
employer plan. State subsidies pay the bulk of the required contributions on
behalf of school districts for both pension and OPEBs, resulting in an
affordable $1.1 million annual required contribution for the district in fiscal
2012 that equaled 1.1% of governmental spending. Combined debt service, pension,
and OPEB costs totaled an affordable 6.1% of governmental spending for the year.