Dec 18 - Fitch Ratings takes the following rating action on Edna Independent
School District, Texas' (the district) unlimited tax (ULT) bonds:
--$21.7 million of ULT bonds affirmed at 'AA-'.
The Rating Outlook is Stable.
The bonds are direct obligations of the district, secured by an unlimited tax
pledge levied against all taxable property within its boundaries.
KEY RATING DRIVERS
VERY HIGH RESERVES: Unrestricted fund balance is expected to remain at 60% of
spending or higher through fiscal 2013, even after cash-funding major capital
improvements. State budget cuts have been successfully-managed.
OIL & GAS CONCENTRATION: Local economic activity centers on oil and gas
exploration and agriculture. The district's proximity to the broader economy of
the city of Victoria coupled with the addition of two new gas processing plants
somewhat mitigates concerns over the narrow economic base.
MIXED SOCIOECONOMIC INDICATORS: Per capita income levels are below average,
while market value per capita is high due to highly-valued farmland. The
unemployment rate is low and the area continues to add jobs.
AFFORDABLE DEBT BURDEN: Key debt ratios are considered moderate by Fitch and the
annual carrying cost is affordable. The district has no future borrowing plans
and remaining capital needs will be funded with resources on-hand.
Edna ISD sits approximately 90 miles southwest of Houston (general obligation
(GO) bonds rated 'AA'; Stable outlook) and 25 miles northeast of Victoria (GO
bonds rated 'AA'; Stable Outlook) in Jackson County. The primary population
center of this rural district is the city of Edna (2010 population of 5,500) and
the district serves approximately 1,400 students.
ECONOMY BASED IN OIL & GAS ACTIVITY AND AGRICULTURE
This small district has a limited economy based predominantly in agriculture
(rice, soybeans, and corn) and oil and gas interests. The district's proximity
to the Eagleford Shale, one of the largest shale plays in the U.S., has spurred
recent employment and enrollment gains within the district, though the
district's own mineral values have declined markedly due to lower well
productivity and weak natural gas prices from increased drilling activity and
Mineral values have fallen to 8% of the district's fiscal 2012 taxable assessed
value (TAV) from 27% in fiscal 2007. The district's $372.1 million fiscal 2013
tax roll has contracted by a cumulative 15.7% from its peak valuation in fiscal
2009, with gains in residential and land values offsetting some of the mineral
declines. Fitch notes importantly that budget exposure to TAV volatility is
mitigated by the state's target revenue funding system that subsidizes declines
in local revenue with additional state aid.
A positive consequence of the declining mineral values has been moderation in
top taxpayer concentration; the top 10 payers now comprise a moderate 11% of
TAV, down from very high 32% in fiscal 2007. Industry concentration persists,
with seven of the top 10 payers oil and gas companies.
The addition of two new gas processing plants (DCP and Boardwalk) is expected to
add significantly to the district's fiscal 2014 tax roll. Portions of the
plants' values will be abated for general fund taxing purposes over a 10-year
period while the full values will be taxable for debt service, as allowed under
state-authorized economic incentive agreements.
EMPLOYMENT & ENROLLMENT GAINS ASSOCIATED WITH OIL/GAS ACTIVITY
Area employment indicators, available at the county level, are positive.
Employment in Jackson County grew 4.5% from 2009 to 2011 and 2.8% during the
12-month period ending October 2012. The corresponding unemployment rate
declined to a relatively low 4.9% from 6.4% year-over-year. Income levels are
below average but the district's market value per capita is a high $105,000.
Enrollment has recently and unexpectedly increased, up 2% in fiscal 2012 and 8%
in fiscal 2013. Management notes the increase is in large part due to increases
in the oil and gas labor force, which suggests that some of the enrollment
upswing may be temporary given the finite life of the wells and drilling
activity. Management expects additional but less significant enrollment gains in
the near term. Fitch views management's conservative budgeting of
enrollment-driven state aid as key to maintaining budgetary balance and
long-term credit quality.
HISTORY OF FAVORABLE OPERATING RESULTS & ROBUST RESERVES
A $2 million operating surplus after transfers in fiscal 2011 marks the fourth
of the last five fiscal years with positive operating results. The unrestricted
general fund balance improved to $10.7 million or a very robust 102% of
spending, although $4 million remains committed for construction costs currently
Fitch notes that the district has preserved its solid operating reserves despite
annual pay-as-you-go capital outlays from the general fund to subsidize bond
program costs; capital outlays have totaled $8.8 million since fiscal 2007.
SUCCESSFUL NAVIGATION OF STATE AID CUTS IN 2012
State budget cuts moderately reduced the district's operating revenues in the
2012-2013 fiscal biennium but were offset by savings from an early resignation
incentive program, cuts to campus and other discretionary budgets, and $260,000
of one-time federal aid. Close-monitoring of the budget and increased
attendance-based state aid yielded a $1.2 million estimated increase to fund
balance in fiscal 2012 (unaudited; Aug. 31 fiscal year).
MAINTENANCE OF HIGH RESERVES CRITICAL TO RATING STABILITY
The current-year fiscal 2013 $16 million general fund budget includes a $4
million appropriation of committed fund balance to subsidize construction costs
of a new high school. Officials also plan to use an additional $580,000 to add
classrooms to the elementary campus to accommodate enrollment gains. Net of
these one-time appropriations, the recurring expenditure budget is up only 1.5%
from the 2012 adopted budget to include raises for staff and some new personnel.
Operating reserves would decline to an estimated $7.3 million after the planned
capital outlays, equal to approximately 61% of budgeted 2013 recurring
expenditures and comfortably above the district's formal fund balance floor of
three months (25%) of operating expenditures. District reserves have been
maintained well above the policy level for some time, and Fitch views this as a
critical offset to concerns over the modest, volatile resource base and
heightened enrollment volatility.
MANAGEABLE DEBT BURDEN
The district's debt burden is moderate with net direct and overlapping debt
equal to $2,671 per capita and 2.5% of market value. The annual carrying cost is
affordable at 9% of budgeted fiscal 2013 general fund and debt service
expenditures. Fitch considers the rate of debt retirement to be just below
average at 44% retired in 10 years.
The district does not have any remaining debt authorization and has no current
plans to seek authorization. Remaining capital needs are manageable and consist
of parking lot and roof repairs, likely to be funded with available general fund
resources in the near term.
PENSION & OPEB LIABILITIES NOT A CREDIT PRESSURE
The district fully-funds it's statutorily required contributions for pension and
other post-employment benefits (OPEB), both of which are provided through the
Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan.
TRS remains well funded at 74.5% utilizing Fitch's more conservative 7%
investment rate of return assumption.
Audited pension and OPEB contributions in fiscal 2011 totaled $150,000 or a
modest 1.4% of general fund spending. This nominal annual required pension and
OPEB contribution is a result of the state's significant contributions made
on-behalf of districts.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria