Fitch Ratings assigns an ‘AAA’ rating to Lockhart Independent School District, Texas’ (the district) unlimited tax (ULT) bonds as follows:
–$57.8 million ULT school building bonds, series 2014.
The ‘AAA’ rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated ‘AAA’ by Fitch. Fitch also assigns an underlying rating of ‘AA’ to the series 2014 bonds.
The bonds are scheduled for sale the week of July 28th. Proceeds will be used for various capital projects.
Fitch also affirms the following ratings:
–$2.1 million in outstanding ULT bonds series 2011 at ‘AA’.
The Rating Outlook is Stable.
The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. The bonds are also secured by the Texas PSF, whose bond guaranty program is rated ‘AAA’ by Fitch.
KEY RATING DRIVERS
STRONG FISCAL MANAGEMENT: The district’s financial profile is characterized by conservative budgeting practices and healthy reserves.
GROWTH POTENTIAL: Lockhart’s regional transportation network links it to the growth of greater Austin and San Antonio. The completion of State Highway 130 near Lockhart further improves access to Austin and bodes well for additional residential and commercial development.
STEADY TAX BASE GAINS: Taxable assessed valuation (TAV) demonstrates sound and steady growth; prospects for ongoing TAV gains are favorable based on development underway.
HIGH BUT AFFORDABLE DEBT: A large, unexpected new issuance increases debt from what was a low burden on the tax base to the high range. However, the rating affirmation recognizes that carrying costs for debt service, pension and other employment benefits (OPEB), will remain low to moderate in relation to governmental spending with the added debt. The carrying cost calculation incorporates state support for debt service and pension obligations.
FURTHER CAPITAL PRESSURES: Further weakening of the district’s debt profile, although currently unanticipated, could result in debt burden and affordability levels no longer consistent with the current rating level.
The district spans approximately 300 square miles including the city of Lockhart along the southern bounds of the Austin-Round Rock metropolitan area.
AGRICULTURAL-BASED GREATER AUSTIN ECONOMY WITH GROWTH POTENTIAL
The area economy is limited, with agriculture, farming, and ranching assets contributing a significant amount to the district’s market value. Recent trends reflect an increased diversity into manufacturing activity and land development. TAV grew by an average annual compound rate of 5.2% since fiscal 2008 without registering a single year of decline. Taxpayer concentration is moderate, with the top 10 taxpayers contributing 13% to TAV, and income levels of district residents are below state and national averages, although this concern is mitigated by the area’s lower cost of living.
District population and enrollment have historically grown modestly, although enrollment has averaged 3% growth annually since 2010. Fitch expects affordability of property and transportation improvements to spur economic growth as evidenced by recent residential and commercial development.
Sound financial management is evidenced by a history of operating surpluses and healthy reserves. The district completed fiscal 2013 with a $1.9 million (5%) net deficit due to funding $2.5 million of capital projects. An unrestricted reserve of $12.8 million represents a strong 35% spending. Officials estimate a modest surplus for fiscal 2014 aided by $1 million in enrollment-based state revenue gains and expect to maintain reserves in excess of the district’s three months of spending policy target.
The district reports a balanced fiscal 2015 budget that includes $1.5 million in additional revenues reflecting 3.5% in anticipated enrollment gains and $.4 million from TAV growth. Officials expect that future enrollment and property values will continue to produce adequate revenues in the near term. The district is at the maximum maintenance and operations (M&O) tax rate of $1.04 per $100 of TAV without a referendum.
ABOVE AVERAGE DEBT PROFILE
Debt levels are high as a percent of market value (8.8%) and above average on a per capita basis (4,308). Debt service will increase to 10.4% of governmental spending in fiscal 2015 from 3.8% currently as the district begins paying interest on the 2014 bonds. State support, covering over a third of the district’s debt service on average, is included in this ratio. The new issuance pushes a previously rapid principal amortization of 83% to a slow 32% within 10 years.
The 2014 bonds will fund renovations, expansion projects, and new facilities, including additional capacity at the high school and the construction of a new elementary school. The district projects an interest and sinking fund (I&S) tax rate of $0.4251 per $100 of TAV in fiscal 2015 before leveling at about $0.34. Projected tax rates leave capacity in relation to the statutory $0.50 new issuance cap, but the district has no additional new issuance plans until at least fiscal 2018. However, last August the district anticipated upcoming debt would be in the $12 million-$20 million range, compared to the $58 million now being offered.
LOW PENSION OBLIGATIONS
The district’s pension 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. Including debt service, pension and OPEB contributions, carrying costs were a low 4.6% of fiscal 2013 governmental spending, benefitting from the state’s strong support for school district pension funding. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.
TEXAS SCHOOL DISTRICT LITIGATION
In February 2013, a district judge ruled that the state’s school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system ‘inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels…’. The judge also cited inadequate funding and districts’ inability to exercise ‘meaningful discretion’ in setting tax rates as constitutional flaws in the current system.
The judge agreed to reopen testimony in January 2014 after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.
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, 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