Market Overview

Fitch Rates Progreso ISD, TX ULT Bonds 'AAA' PSF; 'A' Underlying; Outlook Stable

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AUSTIN, Texas--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AAA' rating to the following Progreso Independent School District, TX unlimited tax (ULT) bonds:

--$3.495 million ULT refunding bonds, series 2012.

The 'AAA' long-term rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch. Fitch also assigns an 'A' underlying rating to the series 2012 bonds and affirms the 'A' rating on the district's $30.4 million in outstanding parity bonds.

The bonds are expected to sell via negotiation during the week of Nov. 5, 2012. Proceeds will be used to refund outstanding debt for interest cost savings.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited annual property tax levy. Additional security is provided by the Texas PSF guaranty.

KEY UNDERLYING RATING DRIVERS

CONSERVATIVE FINANCIAL MANAGEMENT: The district's operating revenues are heavily dependent on the state due to the district's very limited taxable resources. However, the conservative budgeting of its enrollment-based state revenues has resulted in favorable financial performance and strong reserve levels which Fitch views favorably.

MIXED DEBT PROFILE: The district's debt profile is characterized by substantial state support for debt service that has enabled the effective overall debt burden to remain moderate balanced against slow amortization. Notably, the district does not anticipate additional debt needs for the next five to 10 years, which will allow the debt burden to decline modestly over time.

WEAK TAX BASE: The district's tax base is small and moderately concentrated in agriculture. Tax collection rates are below average. Tax base growth reversed modestly after a slowdown in building activity. However, Fitch believes the tax base will remain stable given current population trends.

LIMITED BUT STABLE ECONOMY: The district's service area economy is limited, with high unemployment and poverty rates and low wealth levels. Fitch notes that such metrics are not unusual for smaller school districts located along the U.S. - Mexico border.

CREDIT PROFILE

Limited But Stable Economy

The district is located in Hidalgo County and includes the town of Progreso, a trading center located at the intersection of U.S. Highway 281 and Farm to Market Road (FM) 1015. The town's 2010 population was 5,507, a 13.5% increase since the 2000 census. The 2012 district population is modest and estimated at 6,957. Student average daily attendance (ADA) in the district grew by an annual average of 2.3% in fiscal years 2008-2012 and year-to-date fiscal 2012 ADA growth totals 4.8%. For planning purposes, the district administrators anticipate ADA growth to continue in the 3%-5% range in the near to intermediate term.

District taxable assessed valuation (TAV), while very limited in size, witnessed substantial growth in previous years, but contracted 6.4% in fiscal 2011 following a moderation in growth. TAV grew negligibly by 1% in fiscal years 2012-2013. This deceleration is significant compared with an average annual growth rate of about 17% from fiscal years 2006 to 2009. Previous TAV growth resulted from significant commercial and residential development in the area, which has since dropped off substantially. Moderate taxpayer concentration exists, with the top 10 taxpayers accounting for 13% of TAV.

Tourism, agriculture and trade with Mexico are the leading sectors of commerce in Hidalgo County. The Progreso-Nuevo Progreso International Bridge, expanded in 2003, has enhanced the area's role in foreign trade activity. Unemployment rates in the county historically have been significantly higher than state and national levels. The July 2012 unemployment rate totaled 12.3%, well above the state and national averages of 7.5% and 8.6%, respectively. Likewise, local wealth indicators traditionally have lagged significantly behind state and national averages.

Large Financial Reserves

Financial operations have remained consistently strong with healthy reserves and unreserved fund balances of 24%-40% of spending from fiscal 2007 to 2011. The fiscal 2011 audit posted a notable $926,000 general fund net deficit that resulted in an unrestricted fund balance of $6.9 million, equal to a still large 36.1% of spending. Unaudited fiscal 2012 results continue this trend with a more modest deficit of $461,000, decreasing the unrestricted fund balance to $6.4 million or a still large 31% of spending. The fiscal 2012 net deficit is attributable to $2.4 million in pay-go capital outlays that the district plans to reimburse with $2.1 million of repurposed bond proceeds by the end of fiscal 2013. Net of the capital outlays, reserves would have grown to $8.6 million or 46% of spending.

District management credits its positive financial performance to its practice of conservatively budgeting 5%-8% declines in its annual ADA. Actual ADA levels grew annually in most years, leading to greater than budgeted state aid revenue and positive financial results.

Operations Rate Maximized Temporarily

Fiscal 2012's performance was aided by the district's strategic use of the state tax code which allows districts to increase their operations and maintenance (O&M) tax rate, previously at $1.04 per $100 TAV for the district, up to the maximum $1.17 per $100 TAV in the year following the declaration of a natural disaster in the district's service area. One such disaster, Hurricane Alex, resulted in damages and operating losses at the beginning of fiscal 2011. Under the Texas tax code, such an increase does not require voter approval but can remain in place for only one fiscal year.

Although not required to do so, the district also executed a tax rate swap in which the debt service tax rate was reduced by the same amount, $0.13 per $100 TAV, resulting in a level total tax rate. The additional taxing effort on the O&M levy generated an additional $920,000 in local and state revenues, allowing the district to offset the loss of state aid cuts imposed statewide in fiscal 2012. To fully fund its debt service obligations in fiscal 2012, the district used a modest amount of its debt service fund balance to supplement its temporarily reduced debt service tax levy.

The fiscal 2013 budget is balanced and conservatively based on a very conservative 8.5% projected decline in ADA. To offset $300,000 in state aid cuts, the district eliminated or reduced certain pre-Kindergarten classes. The budget also funds $1,000 pay hikes for professional staff and 5% pay hikes for non-professional staff.

Low Property Wealth Levels Brings Substantial State Support

A major determinant in the amount of state financial aid for Texas school districts is local property wealth levels. The district's property wealth per student is among the lowest in state and, therefore, the district is heavily dependent on state aid for operating support. State financial support has consistently represented nearly 80% of general fund revenues and property taxes account for only about 10%. Tax collections, typical of the border region, are somewhat weak but have improved in recent years due to a change in delinquent tax collection procedures. The district budgets conservatively for collections at a rate of 85%, somewhat offsetting concerns about low collection rates.

High State Support for Capital Keeps Debt Burden Manageable

Due to the district's very low property wealth, the state also contributes significantly to the repayment of its debt, currently paying about 76% of annual debt service. Because state support has declined modestly from 82% in previous years, due to a growing tax base, effective overall debt ratios have risen but remain moderate at $1,072 per capita and 4.5% of market value when this assistance is taken into account. Without state support, debt levels would be a high $3,980 per capita and 16.6% of market value. The pace of principal repayment is below average with only 36% of debt retired in 10 years. The current offering is projected to generate large net present value savings of 12.3% of refunded bonds. Current instructional space utilization totals 80% which management estimates will suffice for the next five years.

District employees participate in the Teacher 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 the district. The system also offers post-employment health benefits to retirees.

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 informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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