Fitch Rates Grand Prairie ISD, TX's ULTs 'AAA' PSF; 'AA' Underlying; Outlook Stable
Fitch Ratings assigns an 'AAA' rating to the Grand Prairie Independent School District, Texas' (the district) unlimited tax (ULT) school building bonds:
--$9.1 million series 2012;
--$15.385 million series 2013.
The rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
In addition, Fitch assigns an underlying 'AA' rating to the series 2012 and series 2013 bonds.
The series 2012 bonds are expected to price via negotiated sale the week of Nov. 5. The series 2013 bonds will also price via negotiation the week of Dec. 3. Proceeds will be used to fund facility construction and renovation.
Fitch also affirms its 'AA' underlying rating on approximately $467 million in outstanding ULT bonds.
The Rating Outlook is Stable.
The bonds carry the Texas PSF guaranty and are secured by an unlimited ad valorem tax pledge of the district.
KEY RATING DRIVERS
COMMENDABLE FINANCIAL PERFORMANCE: The district's financial profile has improved markedly after significant unplanned one-time costs diminished operating reserves. Successful navigation of state funding cuts has improved fund balance and liquidity measures. Fitch views the district's ability to continue its positive financial performance as fundamental to rating stability.
FAVORABLE LOCATION; STABLE REGIONAL ECONOMY: The district has registered a moderate decline in taxable assessed value (TAV), though long-term growth prospects for the district are positive given its large and diversified tax base located in the center of the Dallas-Fort Worth (DFW) metroplex, recently completed highway improvements, and relative strength of the regional economy.
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Tax base wealth and income levels are relatively low and the poverty rate is above average.
ELEVATED DEBT BURDEN: Debt levels are high due to capital needs associated with aging infrastructure and consistent enrollment growth. Amortization is below average reflecting the use of capital appreciation bonds (CABs).
WHAT COULD TRIGGER A RATING ACTION
TAX RATE FLEXIBILITY: Inability to manage debt needs while maintaining an adequate debt margin, particularly given a declining AV trend and the already high debt service tax rate, could apply downward rating pressure.
CENTRALLY LOCATED IN DFW METROPLEX
The district's boundaries cover 58 square miles and include about 80% of the geographic area of the city of Grand Prairie (GO bonds rated 'AA+'). Grand Prairie is a mature city centrally located in the DFW metropolitan area, about 20 minutes west of downtown Dallas and just south of DFW International Airport. Encompassing Interstate Highways 20 and 30 and state highway 161 (which was recently expanded), access to major air and ground transportation routes has made the area a significant regional wholesale distribution center. Other dominant economic sectors include manufacturing, defense, and aerospace.
Total employment grew 2.5% in the 12-month period ending August 2012, mirroring the regional and state trend. The unemployment rate improved to 7.1% from 9% during this period, and remained lower than the national 8.2% unemployment rate. District enrollment climbed 2.2% to 26,912 in fiscal 2013, continuing the moderate growth trend seen in the past decade. Officials expect this manageable rate of growth to continue in the near term.
Residents' per capita money income is low for the region and only 71% of the nation, and the individual poverty rate has increased to 16.4% in 2010 from 13.1% in 2006. The district's per capita market value (MV) is also a low $45,000.
DECLINING AV TREND
The district's fiscal 2013 $4.7 billion tax base, comprised of 56% residential properties and 37% commercial/industrial properties, is 7% below the fiscal 2009 valuation. Fitch views the cumulative AV loss as relatively moderate, though the most recent 3.7% decline in 2013 is more pronounced than in prior years. The valuation loss initially resulted from declining residential values and more recently is the result of weakness in commercial/industrial values.
Triumph Group Vought Aircraft, a commercial and military aircraft component manufacturer, represents 2.5% of fiscal 2013 TAV, down from 3.9% in 2012. Recent media reports indicate a sale of the plant and risk of layoffs to employees, though this situation remains unresolved. Fitch will continue to monitor developments around the possible plant restructuring and any adverse impact to the district's tax base and overall credit profile.
District officials do expect stabilization of fiscal 2014 TAV based on anticipated commercial development along the expanded SH-161 corridor, though Fitch believes AV may remain slightly pressured over the near term. The district's longer-term economic prospects remain favorable given its location in the DFW metro area, which continues to outpace the nation in employment, income and population growth.
FINANCIAL PERFORMANCE A CREDIT POSITIVE
Roughly two-thirds of annual operating revenues come from the state due to the district's below average property wealth. Finances have recently strengthened following significant one-time costs that reduced operating reserves in fiscal 2009. The district returned to positive operations in fiscal years 2010 and 2011, achieving a larger than budgeted fiscal 2011 operating surplus after transfers of $6.3 million (3.7% of spending). The positive variance was produced through a number of cost saving and revenue raising initiatives. Available fund balance was additionally bolstered by a $3.2 million transfer of net internal service fund assets into the general fund, yielding a $27.9 million unrestricted general fund balance equal to 16.2% of spending.
State funding cuts impacted all Texas school districts in the 2012-2013 fiscal biennium. The district has lost $18 million in state aid (10% of total fiscal 2011 operating revenue), with the larger loss occurring in fiscal 2012.
Management made necessary spending reductions to adopt a balanced fiscal 2012 budget and unaudited results show the district again significantly outperformed the budget. Management used the final portion of non-recurring federal aid while also conservatively budgeting for attendance-based state aid and other federal revenues, and foregoing pay raises to staff. The budget actions are expected to produce a $13.6 million operating surplus after transfers and unrestricted general fund balance of roughly $40.1 million or a strong 23% of spending.
The fiscal 2013 budget incorporates the second year of state budget cuts and loss of the federal funds but uses prior-year cost savings to balance the budget while also providing raises to staff. Fitch expects the stable financial performance will continue given management's recent track record. The preservation of solid operating reserves is a key factor in the current rating.
ELEVATED DEBT BURDEN
A key credit concern is the district's elevated debt burden at 7.5% of full market value, even when accounting for roughly 45% of debt repaid by state aid. This debt ratio includes accreted interest from outstanding CABs. The state debt service aid lowers the net maximum annual debt service burden, inclusive of this issuance, to an affordable 11% of general fund and debt service expenditures. Amortization is below average at 41% of outstanding principal retired within 10 years.
This issuance exhausts voter-approved debt authorization, though the district may seek additional authorization in November 2014 to address aging infrastructure and facility needs. As a result, Fitch expects debt levels will remain elevated over the near term, particularly given the recent tax base contraction.
The district retains some flexibility in its debt service tax rate, which is 7.5 cents below the state $0.50 cap for new bond issuances. Management plans to apply roughly $12 million of existing debt service fund balance over the next five years to maintain the tax rate at the current level, dropping the debt service fund balance to approximately $3.3 million (8% of MADS).
AFFORDABLE PENSION & OPEB
Pension and other post-employment benefits (OPEB) are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit plan. The district's obligations are relatively minimal as most risks and costs are the liability of the state along with participating employees. Required contributions for each are statutorily set and the district's combined ARC for pension and OPEB consumed a modest 1.8% of fiscal 2011 general fund spending.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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