News Column

Fitch Affirms Edinburg CISD, Texas' ULT Bonds at 'AA'; Outlook Stable

May 22, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following bonds for Edinburg Consolidated Independent School District, TX (the district):

--Approximately $185 million unlimited tax (ULT) bonds affirmed at 'AA' (underlying);

--Approximately $15 million maintenance tax bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The ULT bonds are secured by an unlimited annual property tax levy.

The maintenance tax limited tax (LT) bonds are secured by the district's operations and maintenance (O&M) tax levy, limited to $1.04 per $100 taxable assessed valuation (TAV) unless district voters approve an increase up to the state maximum of $1.17 per $100 TAV.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The district's financial position remains solid, supported by conservative budgeting practices that have yielded annual operating surpluses and increases in reserves.

BELOW AVERAGE ECONOMIC INDICATORS: Edinburg has seen ongoing improvement in income and wealth indicators. However, these indicators remain below average. Local unemployment levels have been declining, but are still above average.

VOLATILE TAV: The district's TAV has been variable and was negatively affected by reduced oil and gas activity resulting in a 12% decline in fiscal year (FY) 2013. TAV was flat in FY 2014.

MODERATE DEBT PROFILE: District debt levels are moderate, even without consideration of substantial state support for the district's outstanding debt. Average principal amortization and a lack of near-term debt issuance plans should result in continued moderation in debt ratios.

RATING DIFFERENTIAL FOR LIMITED TAX BONDS: The one-notch rating differential for the maintenance tax bonds reflects the limited flexibility in the district's O&M tax rate, currently at the state-mandated tax rate cap of $1.17 per $100 TAV.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability.

CREDIT PROFILE

Serving an estimated 143,000 residents, the district is located in fast-growing Hidalgo County, adjacent to the U.S.-Mexico border and near the southern tip of Texas. The district's service area includes primarily the City of Edinburg (LT bonds rated 'AA-' by Fitch), a small portion of the City of McAllen (LT bonds rated 'AA+') and unincorporated areas of Hidalgo County (LT bonds rated 'AA-').

The district's average daily attendance (ADA) is at about 31,700 currently. Although annual ADA growth since 2012 has been modest (less than 1% in 2012, 2013 and 1.3% estimated for 2014), annual ADA gains averaged 3.7% over the previous five years. The district projects flat to modest growth in the near term, and has historically underestimated growth to provide a budgetary cushion.

SOLID FINANCIAL PERFORMANCE

The district's financial position remains solid. Conservative fiscal practices have yielded operating surpluses and healthy and increasing reserves. This even as the district addressed recent year enrollment growth related needs and state funding uncertainties. In response to the state aid reductions included in the state's fiscal 2012-2013 biennial budget, the district implemented budget reductions, cutting 136 positions even as it opened two new schools.

The district's unreserved/ unrestricted general fund balances have been above 17% of spending for the last three fiscal years. The FY 2013 unrestricted general fund balance was $61.5 million or 19.6% of expenditures and transfers out. This represented a slight increase from $59.1 million or 19.4% in FY 2012. Current budgetary basis estimates for FY 2014 indicate another small operating surplus of about $1.8 million for the district's primary operating fund. This represents the bulk of the consolidated general fund presented in the district's audits. The consolidated general fund includes additional smaller funds, which in aggregate are expected to be balanced for 2014.

SWITCH OF OPERATING AND DEBT SERVICE TAX RATES

The district's total tax rate (1.2398 per $100 TAV) has remained unchanged since FY 2011. As part of the district's post Hurricane Dolly recovery, per state law, the district was allowed to raise its O&M tax rate in FY 2012 to the state cap of $1.17 per $100 TAV from 1.04 without voter approval for one year. To maintain a flat total rate, the district lowered its interest & sinking (I&S) tax rate by an equal amount.

The O&M tax rate was increased permanently to the maximum rate of $1.17 per $100 of TAV for FY 2014 following voter-approval. The I&S fund rate was correspondingly decreased in September 2013. The swap is estimated to provide the district with approximately $8 to $12 million in additional annual net revenue derived from increased state aid for operations. Fitch views the use of this tax rate swap cautiously. However, Fitch notes that the I&S rate could be raised without voter authorization to repay the bonds and the swap could be reversed if needed.

BELOW AVERAGE ECONOMIC INDICATORS

The district economy is anchored by the distribution of agricultural products and goods shipped from Mexico, as well as oil and gas exploration. Currently at about $5 billion, the district's TAV saw strong annual growth from FYs 2006 to 2010, but experienced volatility in recent years due to reductions in mineral values. TAV declined in FY 2013 by about 12.3% but remained essentially flat (0.3% growth) in FY 2014. Four of the top 10 taxpayers are in the mineral/ oil and gas sector. The single largest taxpayer, Oxy USA Inc. (a subsidiary of Occidental Petroleum Corporation), represents 4.2% of TAV. The district expects modest TAV growth in the near term as volatility in the oil and gas sector is moderated by growth in other sectors.

Local unemployment rates have seen improvement in recent years, though remain above average. The Hidalgo County unemployment rate of 9.4% as of March 2014 is well above state (5.3%) and national (6.8%) rates. The comparable city rate is lower, at 6%, which still exceeds the state rate, but is below the national average. County per capita personal income and median household income lag far behind those of the state and nation, though both have seen good growth in recent years. As a result, from 2007 through 2011, the city's poverty rate declined from 34.3% to 27.8% and the county rate declined from 37.5% to 35.3%. Poverty rates are still considerably higher than state (17.0%) and national figures (14.3%).

MODERATE DEBT PROFILE

The district's FY 2013 debt ratios are midrange at $2,141 per capita and 4.5% of market value. These do not reflect state support of about 48% of annual debt service. Including this support, debt service as a percentage of governmental spending is low at about 3.7% in fiscal year 2013. Amortization is average, with about 51.5% of principal maturing in ten years.

Voters approved bond propositions in May 2008, with proceeds funding the construction of seven new schools. The district has no remaining authorization to issue additional bonds, and there are no near-term plans to return to voters to approve additional issuance.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple-employer defined benefit pension plan. The district's statutory pension contribution was modest at about 1.5% of governmental spending in FY 2013 and the district has made 100% of its required contribution in the last three years. Other post-employment benefits (OPEB) are also provided through TRS, with the district's OPEB contribution at less than 1% of spending.

TRS is adequately funded at 80.8% as of Aug. 31, 2013, though Fitch estimates the funded position to be lower at 72.8% when a more conservative 7% return assumption is used. Carrying costs for the district (debt service, pension, and OPEB costs, net of state pension and debt service support) totaled a relatively low 5.5% of governmental fund spending in FY 2013. Starting in FY 2015, pension contributions for all districts in the state will rise to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs modestly.

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 to be '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 re-opened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began in January 2014. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.

Additional information is available at 'www.fitchratings.com'.

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, 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:

U.S. Local Government Tax-Supported Rating Criteria

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

Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831350

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Maria Coritsidis, +1 212-908-0514

Analytical Consultant

Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004

or

Secondary Analyst

Gabriela Gutierrez, +1 512-215-3731

Director

or

Committee Chairperson

Amy Laskey, +1 212-908-0568

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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