Fitch Rates Dallas ISD, TX ULT Bonds 'AAA' TX PSF, 'AA' Underlying; Outlook Stable
Fitch Ratings has assigned an 'AAA' rating to the following Dallas Independent School District, Texas' (DISD, or the district) unlimited tax (ULT) bonds:
--$410.5 million unlimited tax refunding bonds, series 2012;
--$47.3 million unlimited tax refunding bonds, taxable series 2012-A.
This rating is based on the guaranty provided by the Texas Permanent School Fund (PSF), whose claims paying ability is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of 'AA' to the series 2012 and series 2012-A bonds. The bonds are tentatively scheduled for a negotiated sale in mid-November. Proceeds from both series will be used to refund a portion of the district's outstanding ULT bonds for interest savings.
In addition, Fitch affirms the following ratings:
--$2.54 billion ULT bonds outstanding (pre-refunding) at 'AA';
The Rating Outlook is Stable.
The series 2012 bonds and series 2012-A bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district, and are secured further by the PSF guaranty.
KEY RATING DRIVERS
IMPROVED FINANCIAL POSITION: The district's audited fiscal 2011 results included a second consecutive year of healthy operating surpluses and marked another increase in reserves, as well as continued progress in addressing material weaknesses and deficiencies in reporting and internal control systems. Preliminary fiscal 2012 results suggest further gains.
MANAGEABLE DEBT BURDEN: Despite recent large issuances, debt ratios remain manageable. Payout has slowed in order to minimize the tax implications of these borrowings, although all debt is retired in 25 years. Assuming voter approval, further bond financings are likely over the near to medium term based on large, previously identified capital needs.
NAVIGATING STATE FUNDING CHALLENGES: State funding for all Texas public school districts has been materially reduced for the 2012-2013 biennium, and DISD has responded to the cutback with significant staffing reductions and other spending reductions.
LARGE, DIVERSE REGIONAL ECONOMY: The Dallas metro area economy fared relatively well during the recent recession and in recent months registered employment gains while unemployment has declined. District taxable assessed valuation (TAV) posted a modest 2% gain for fiscal 2013 after a cumulative dip of more than 8% over the past three years.
WHAT COULD TRIGGER A RATING ACTION
Fitch notes the notable progress the district has made in terms of management, internal controls and procedures, and financial performance over the past several years. Continued positive performances and direction from the new administration, coupled with a measure of clarity regarding legal challenges to the state's public school funding program, could position the district for positive rating action over the near to medium term.
STRENGTHENING FINANCIAL POSITION
The district's financial profile continues to strengthen following a series of financial missteps and the exposure of systemic problems regarding financial controls and oversight in 2008. Fiscal 2010 and fiscal 2011 results featured net surpluses after transfers of $62.4 million and $32 million, respectively, and corresponding increases in fund balance. The unrestricted general fund balance (committed, assigned and unassigned per GASB 54) at fiscal 2011 year-end was $128.3 million or nearly 11% of spending. This total is comparable to reserve levels in fiscal 2007 prior to the emergence of the financial and management issues.
These favorable results were the product primarily of significant spending adjustments that saw general fund outlays decline by nearly 10% from fiscal 2008 to fiscal 2010. The bulk of the spending reductions were staffing-related, as the vast majority of district expenses (more than 80%) are comprised of salaries and benefits. Management reports the fiscal 2011 totals were also aided by $27 million in federal EduJobs money, although results would have been positive without this funding infusion.
The fiscal 2012 budget presented fresh challenges, as DISD and other Texas school districts faced significant state funding reductions for the 2012-2013 biennium. The cumulative funding cut for the district totals $100 million over this two-year period, and management responded with budgeted fiscal 2012 general fund spending of $1.17 billion--$77 million or 6.2% less than the prior year budget. Savings were generated primarily by staffing reductions; more than 1,400 positions were eliminated.
Management currently anticipates a net surplus for fiscal 2012 of more than $65 million, which would handily exceed original budget projections; the surplus reportedly is also due to unfilled vacancies and tight departmental spending controls. Fitch considers this projection reasonable based on recent positive operating results. The fiscal 2013 budget is balanced, and management hopes to add further to reserves by year-end.
IMPROVED FINANCIAL CONTROLS
The district also has made significant progress in the areas of financial management and controls. In addition to numerous senior staffing changes since 2008, efforts have included a corrective action plan to restore internal controls and procedures, and a financial recovery plan to restore operating reserves.
Progress is evident both in the implementation of new budgeting and reporting procedures and software and the significant reduction in audit findings reported in the district's annual report. Overall, eight findings were included in the district's fiscal 2011 annual report, down from 16 in fiscal 2010 and 29 in fiscal 2009. Fitch notes that these improvements are key components of the district's efforts to restore and maintain financial balance and rebuild reserves to a satisfactory level.
MANAGEABLE DEBT BURDEN, LARGE CAPITAL NEEDS
Fitch considers the district's direct debt burden moderate, although it increased over the past several years due to borrowings associated with a $1.35 billion bond authorization approved by voters in May 2008. The district has exhausted this authorization but continues with the building program that includes new and replacement schools, renovations and additions at existing campuses, as well as a variety of other improvements. The program, which is projected to meet district capital needs through around 2014, is reportedly within budget and generally on schedule.
Overall debt currently is $3,796 per capita and 5.4% of market value. The pace of debt retirement has slowed considerably as a result of recent offerings and now is well below average at roughly 32% repaid in 10 years. A district-appointed citizen committee is working to identify future capital needs. Based on estimates made in 2008 the list could have a price tag exceeding $1 billion. Proceeds from the current offering will refund a portion of the district's outstanding unlimited tax debt for interest savings.
District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the State of Texas on behalf of the district, eliminating any liability for DISD. The system also offers post-employment health benefits to retirees.
RESILIENT LOCAL ECONOMY
The district's fiscal 2013 TAV is $76.6 billion, up 2% from last year and reversing a three-year decline that saw TAV dip more than 8%. City of Dallas employment has registered moderate gains each of the past two years. Also, the local unemployment rate has declined in the latest monthly report to 7.5% (August 2012) from 8.7% in the same period last year. This rate is higher than the state average (7%) but lower than the U.S. average (8.2%). District income levels, as measured by median household income, are below both state and U.S. averages.
The district is the second largest in the state, with an estimated 157,200 students. Enrollment, which has been essentially unchanged over the past several fiscal years, is projected to remain at or near current levels for the near term. The district serves the majority of the City of Dallas, as well as all or portions of 11 area cities and towns, with a total estimated population of approximately 1.3 million.
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, and the 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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