Fitch Rates Hays CISD, TX's ULT Rfdg Bonds 'AAA' PSF; 'AA-' Underlying; Outlook Stable
Fitch Ratings assigns an 'AAA' rating to the following Hays Consolidated Independent School District, Texas' (the district) bonds:
--$95 million unlimited tax (ULT) refunding bonds, series 2012A (taxable).
The rating is based on a guaranty provided by the Texas Permanent School Fund, whose bond guaranty program is rated 'AAA' by Fitch.
In addition, Fitch assigns an underlying 'AA-' rating to the series 2012A bonds.
The bonds are expected to price via negotiation the week of Nov. 12. Proceeds will be used to refund certain outstanding bonds for interest cost savings.
Fitch also affirms its 'AA-' underlying rating on approximately $315 million (pre-refunding) in outstanding district ULT bonds.
The Rating Outlook is Stable.
The 2012A bonds and outstanding bonds carry the Texas PSF guaranty. The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
HIGH DEBT BURDEN: Key debt ratios are high even after accounting for state support for debt service. Amortization is below average. The district's debt levels are expected to remain elevated as growth continues.
FUTURE CAPITAL NEEDS: The district has issued all of its bond authorization and has capacity for enrollment growth over the next two to three years. Given the district's favorable location and affordable housing developments, facility growth pressures are expected to persist. Capital needs outpacing tax base expansion may pressure the district's ability to accommodate enrollment growth.
SOLID FINANCIAL POSITION: Strong financial management, conservative budgeting, and a history of operating surpluses have produced significant reserves and liquidity.
SOUND SOCIO ECONOMIC BASE: The district's diverse tax base continues to expand. Population has more than doubled in the past 10 years and commercial development promptly followed. Wealth and employment indicators are strong.
CONSISTENT POSITIVE FINANCIAL MARGINS YIELD SOLID RESERVES
Hays CISD reported an operating surplus in each of the past five fiscal years reflecting the district's ability to manage expenses in line with revenue growth. With an additional fiscal 2011 contribution of $6.1 million to fund balance, the district reported an unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) of $31.5 million, or 28.9% of spending.
Fiscal years 2012 and 2013 state funding reductions were mitigated by a combination of cost savings and continued enrollment growth. Compound annual average enrollment growth has been about 8% over the last 10 years, with a more moderate pace of 4% to 5% in the past two years. Commensurate with enrollment growth, state funding for operations has increased rapidly and comprised 65% of the district's fiscal 2011 revenues.
Unaudited results for fiscal 2012 point to another $2.6 million increase to the general fund balance despite a $3 million transfer to the debt service fund. The fiscal 2013 budget was conservatively adopted with a modest use of fund balance reserves. However, actual enrollment gains surpassed the budget and management preliminarily estimates ending the year with roughly a $1 million surplus.
Additionally, the board has formalized a minimum general fund balance policy at the current target of 25% of spending. Fitch views favorably the board's formal commitment to maintaining healthy financial reserves.
HIGH DEBT BURDEN EXPECTED TO REMAIN HIGH DUE TO RAPID GROWTH PRESSURES
Overall debt ratios remain high at $6,100 per capita and 9.9% as a percent of market valuation even after accounting for about 24% state support for debt service. Not uncommon for a fast growth district, debt amortization is slower than average with 44% of principal repaid in 10 years.
Increased debt service costs and slower taxable assessed valuation (TAV) growth prompted the district to transfer available general fund resources for debt service beginning in fiscal 2011 in order to maintain a level debt service tax rate and flexibility under the state's statutory tax rate cap limiting new money debt issuance. The district's current debt service tax rate of $0.42 per $100 of TAV remains $0.08 (16%) below this $0.50 cap. In fiscal 2011 the district transferred $2.5 million from the general fund, which would be the equivalent to nearly $0.07 debt service tax levy. Despite these transfers, the district has maintained its solid financial reserves; however, Fitch cautions that, given the state funding cuts and uncertainty with regard to state funding, these transfers are not sustainable as they may apply some pressure to the general fund, especially if enrollment growth suddenly stalls.
The district has no remaining voter-approved debt and its existing facilities provide two to three years of capacity based on the district's enrollment projections. However, another election may be necessary as early as May 2014 given the ongoing enrollment growth pressures to construct another elementary and middle school. Although TAV remained solid through the recession, capital and debt needs have outpaced TAV growth. Fitch believes that the district's debt service tax rate will be pressured to accommodate enrollment growth, despite its current margin, especially since this margin is somewhat artificial due to the subsidy from the general fund.
AFFORDABLE PENSION & OPEB
The district's pension and other post-employment benefit (OPEB) liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. Contributions are made by the state on behalf of the district and are recognized as revenue and expenditure on the district's financial statements. Additional amounts paid on the portion of the employees' salaries that exceeded the statutory minimum amounted to $1.6 million, or 1.1% of total general fund spending.
Including debt service, fixed costs for long-term liabilities are moderate at 18.3% of fiscal 2011 spending. The debt service schedule is fairly level with this issuance, though additional capital needs may increase the fixed cost burden on the budget. Maintenance of strong fund balance reserves somewhat mitigates this concern.
STABLE ECONOMY IN RAPID GROWTH CORRIDOR
The district's service area consists of about 221 square miles in Hays County along the IH-35 corridor between Austin and San Antonio. This area is populated by more than two million people and is the state's third largest region of economic activity. As one of the fastest growing school districts in Texas, enrollment more than doubled over the past decade to over 16,500 in fiscal 2013.
Employment also has grown steadily in the county at a 10-year compound rate of 3%. The August 2012 unemployment rate of 5.8% improved from 7.0% a year ago, and remains lower than the state's 7.0% and nation's 8.2%. Median household income exceeds that of the state and nation.
The composition of the district's tax base is being quickly transformed from rural to urban. Residential construction increased very rapidly before the recession as Austin housing pressures quickly expanded development southward, while growth in San Marcos pushed development northward. Commercial development promptly followed the population growth with significant corporate investment in the community spanning from retail centers to health care, including a new hospital and medical offices.
Notably, the commercial developments that were announced prior to the downturn were completed as planned despite the economic recession, offsetting negative revaluation of residential properties. The district's TAV at $3.9 billion for fiscal 2013 grew by a solid 5.7% from the prior year.
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
Gabriela Gutierrez, +1 512-215-3731
111 Congress Ave, Suite 2010
Austin, TX 78701
Blake Roberts, +1 512-215-3741
Amy Laskey, +1 312-606-2337
Elizabeth Fogerty, +1 212-908-0526