News Column

Fitch Rates Canutillo ISD, TX ULTs 'AAA' PSF, 'AA-' Underlying; Outlook Stable

May 29, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' PSF rating and an 'AA-' underlying rating to the following Canutillo Independent School District, Texas (the district) unlimited tax (ULT) bonds:

--$8.8 million ULT refunding bonds, series 2014.

The Rating Outlook is Stable.

The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of June 2. Proceeds will be used to refund outstanding debt for interest cost savings.

In addition, Fitch affirms the following underlying rating for the district:

--Approximately $96 million ULT bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by revenues from an unlimited tax levied against all taxable property within the district. The PSF guaranty applies to all outstanding bonds of the district except the series 2006 ULT school building and refunding bonds.

RATING DRIVERS

SOUND FINANCIAL PROFILE: Ample general fund reserves reflect conservative budgeting and cost management, supplemented by voters' approval of a permanent maintenance and operations (M&O) tax rate increase.

STEADY REGIONAL ECONOMIC GROWTH; WEAK INCOME LEVELS: Rapid residential and commercial development continues to expand westward towards the district from El Paso, creating healthy gains in taxable assessed valuation (TAV). Nonetheless, wealth indicators remain below average and the unemployment rate is higher than the state.

ABOVE-AVERAGE DEBT: Overall debt levels are high and will be pressured by ongoing facility needs based on current enrollment projections. A moderate debt service tax rate provides adequate borrowing capacity over the medium term.

RATING SENSITIVITIES

ADEQUATE RESERVES AMIDST GROWTH PRESSURES: Failure to maintain structural balance and adequate reserves as the district faces growing enrollment pressures may lead to negative rating action.

CREDIT PROFILE

The district is located in the less developed northwestern corner of El Paso County (GO bonds rated 'AA'/Stable Outlook), serving a population of about 27,700 over 67 square miles which include portions of the City of El Paso and neighboring rural areas.

HIGH-GROWTH BI-NATIONAL DISTRICT

The district receives residual enrollment growth from El Paso and nearby Santa Teresa, New Mexico, a significant commercial hub and port of entry into Juarez, Mexico. Officials expect current average daily attendance of nearly 5,600 students to grow by 20% in the next five years due to the availability of affordable land, the extensive transportation network traversing the district, and master planned development projects currently underway.

The district's $2.1 billion tax base increased more than 6% annually between fiscal 2009 and 2014, reflecting the economic impact of the $5 billionFort Bliss military base expansion and influx of international investment which muted the effects of the recession. Expectations for additional near term growth are supported by extensive commercial and residential development underway in the Paseo Del Norte region of the district.

The district has some taxpayer concentration with top 10 taxpayers totaling 15% of TAV in fiscal 2014. The largest taxpayer, the El Paso Outlet Center Holding LLC, successfully sued the county appraisal district to reduce its TAV by a large 33%, reducing its percentage of total TAV to 3.6% from 5.3%. Relative to total TAV, the reduction represents a 1.9% loss which Fitch considers modest. Two other major taxpayers, Hoover, Inc. (1.6% of TAV) and Leviton MFG Co Inc. (1% of TAV) both closed their manufacturing plants due to their relocation overseas. Their combined fiscal 2014 TAV account for a manageable 2.5% of the district's TAV. Offsetting these losses, commercial development plans include a $120 million teaching hospital, scheduled to open in fall 2016, and a new wing at the outlet center which is projected to add 200 jobs.

IHS Global Insights points to the region's younger-than-average population as a key strength, supporting strong service sector growth. However, relatively low skill levels limit high-paying job growth. The city's latest unemployment rate of 6.7% for March 2014 is improved from the prior year, and remains on par with the national average (6.8%) but above the state (5.3%) for the same period.

SOUND FINANCIAL PROFILE

The district generally outperforms the budget and maintains strong general fund balance levels. State funding comprises 60% of total revenues, a function of strong enrollment growth and the district's property poor classification. After a shift in the district's fiscal year boosted the district's financial cushion in fiscal 2011, the district posted two consecutive years of general fund net surpluses, aided by conservative budgeting, recurring cost savings, and additional revenue associated with the M&O tax rate increase to $1.17 from $1.04 per $100 TAV. These revenues represented a notable 6.7% hike in general fund revenues, offsetting operating costs of an expanding student population and state funding cuts.

In fiscal 2013, the district's $3.4 million general fund net surplus resulted in an unrestricted general fund balance of $17.7 million or a strong 34.3% of spending and transfers out. Officials report that year to date fiscal 2014 revenue and expenditures are on track to produce balanced results or better, despite the loss of property tax revenues associated with the outlet mall litigation.

The M&O tax rate is at the statutory cap subsequent to the TRE election, limiting further ad valorem tax revenue growth aside from TAV appreciation. In light of continuing enrollment growth and school funding uncertainty, officials report that the district is identifying further cost savings and prioritizing programs and capital needs. The district has been able to manage growth to date without resorting to portable facilities or materially larger class sizes.

ABOVE AVERAGE DEBT / CONTINUING CAPITAL NEEDS

The district's overall debt is above-average at $6,344 per capita and 8.6% of market value. However, due partly to state support for debt service and a low principal amortization rate (34% in 10 years), debt service carrying costs were low at 6.6% of governmental spending in fiscal 2013.

In May 2013, the district exhausted its 2011 bond authorization. The 2011 bond program was projected to bring the district's debt service tax rate to $0.41 per $100 of TAV, based on reasonable TAV and enrollment growth assumptions, but has risen to only $0.32. The district retains adequate debt capacity in relation to the attorney general's tax rate cap of $0.50 for new debt issuance.

Fitch expects the district's overall debt ratios to remain elevated due to enrollment growth pressures and slow debt amortization. The district expects to seek voter approval for a bond authorization in two to three years for a new high school and two elementary schools. Given the district's goal to maintain a level debt service tax rate, steady tax base gains will be necessary to finance the construction of new schools.

AFFORDABLE PENSION BENEFITS

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan; other-post employment benefits (TRS-Care) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled a modest 1% of fiscal 2013 governmental spending. Carrying costs including debt service totaled a manageable 7.7% of governmental spending in fiscal 2013.

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 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, 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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832163

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

Jose Acosta

Senior Director

+1-512-215-3726

Fitch Rating, Inc.

111 Congress Ste. 2010

Austin, TX 78701

or

Secondary Analyst

Shane Sellstrom

Analyst

+1-512-215-3727

or

Committee Chairperson

Karen Ribble

Senior Director

+1-415-732-5611

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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