News Column

Fitch Affirms Howard County Junior College District, Texas' GOs at 'AA-'; Outlook Stable

June 16, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms its 'AA-' rating on the following Howard County Junior College District, Texas' (the district) outstanding general obligation (GO) debt:

--$16.5 million GO bonds, series 2007.

The Rating Outlook is Stable

SECURITY:

The bonds are secured by an ad valorem tax levied against all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: The district maintains sound and stable finances, characterized by solid reserves and surplus operations despite recent state funding cuts and moderate, counter-cyclic enrollment declines. The district's financial profile is underpinned by ample revenue-raising flexibility through available taxing margin and low tuition rates in conjunction with moderate expenditure flexibility.

NARROW ECONOMIC PROFILE: The local economy is generally stable but rural in nature and driven largely by the energy sector. County unemployment is typically below that of the state and U.S. Local income/wealth levels are generally below state and national averages.

RAPID TAV EXPANSION; HIGH CONCENTRATION: The district's tax base is well represented by all segments of the oil & gas industry, characteristic of the region. TAV has grown rapidly due to robust economic activity in this sector. High taxpayer and sector concentration persists, but has declined with recent TAV expansion.

MODERATE LONG-TERM LIABILITIES: Overall debt levels are moderate. Near-term capital needs are limited and appear manageable given plans for modest pay-go capital spending. Carrying costs are low.

RATING SENSITIVITIES

SHIFT IN CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's solid financial position and conservative fiscal practices. The Stable Outlook reflects Fitch's expectations that such shifts are unlikely.

CREDIT PROFILE

The district serves Howard County and 12 other primarily rural counties in the surrounding West Texas area, although Howard County is the district's sole taxing jurisdiction. The district has four campus locations: Big Spring and the Southwest Collegiate Institute for the Deaf (both located in Big Spring, the county seat of Howard County); the Lamesa campus in Dawson County; and the San Angelo campus in Tom Green County.

RAPID TAV GROWTH TRENDS REFLECT ROBUST ENERGY BOOM

The local economy is generally stable but concentrated, with much of the area's economic activity driven by the energy sector. Oil/gas business concerns center around working the long-productive Permian Basin as well as the more recently discovered Cline Shale. Energy activity is the primary driver of the district's rapid TAV gains in recent years. TAV totaled $3.4 billion in fiscal 2014, which was a modest decline from the prior year's explosive 38% gain in fiscal 2013. TAV has grown an average 10% annually the past six fiscal years.

Tax base and sector concentration among the district's top 10 taxpayers remains elevated at 19% of TAV in fiscal 2014. Top taxpayer concentration is down significantly from the 33% in fiscal 2012 as a result of the large jump in TAV in fiscal 2013. Alon USA, a long-standing refinery, is the district's top taxpayer, providing 7% of the total. Management anticipates flat TAV in fiscal 2015 that may ultimately result in further TAV growth based on conservative, preliminary assumptions provided by the appraisal district that assume a stout buffer against possible appeals. Fitch believes these assumptions are reasonable given recent TAV trends and significant oil/gas exploration, and associated economic activity still underway despite the inherent volatility of oil & gas prices.

SOUND FINANCIAL PROFILE; REVENUE-RAISING AND SPENDING FLEXIBILITY

The district's financial performance is enhanced by a diverse revenue stream and revenue-raising capacity, comparable to all Texas community colleges. This revenue-raising flexibility has allowed the district to successfully offset much of the fiscal pressure associated with state funding cuts and enrollment declines. About 33% of the district's revenues (or $11.5 million) came from state appropriations in fiscal 2013 (which remains the district's largest revenue source), compared to roughly 43% of total revenues in fiscal 2009. Correspondingly, property taxes for operations, debt service and tuition/fees together provided a slightly increased portion of total fiscal 2013 revenues at 30%.

The district continues to produce solid, positive operating margins, averaging 3.8% over fiscal years 2009-2013. Temporary and multi-year expenditure cuts in response to state funding shortfalls and enrollment declines drive positive results. The district, like most community colleges, maintains inherent spending flexibility by employing largely part-time, non-tenured faculty.

Liquidity as measured by available funds (cash and investments not permanently restricted) to expenses remained adequate and slightly improved at $10.9 million or 32% in fiscal 2013. The district maintained $9.5 million in unrestricted reserves at fiscal 2013 year-end or approximately 28% of spending, in line with its informal reserve policy at 25%-30%.

The structurally balanced $28.1 million fiscal 2014 general operating budget includes a tuition increase and a $1 million use of reserves for pay-go capital spending on the new San Angelo campus facilities. Management's expectation of fiscal 2014 recurring revenues balancing against recurring expenses appears reasonable given spending reductions implemented to offset somewhat higher than budgeted enrollment declines. The district is poised to maintain its reserves according to policy, even with full utilization of the planned $1 million for new facilities that is now not expected until fiscal 2015.

Preliminary budget plans for fiscal 2015 include the development of a structurally balanced operating budget supported by assumptions of stable state revenue in the current biennium (fiscals 2014-2015) and ample revenue-raising flexibility, along with projections for added, moderate enrollment declines. The district maintains significant capacity under its total tax rate cap, levying roughly $0.20 of the $0.70 per $100 TAV limit in fiscal 2014 for operations and debt service and has approved a modest tuition increase. The district also expects to incur additional operating expense to open its new facilities.

COUNTER-CYCLIC ENROLLMENT TRENDS

The district maintains a competitive position in its large regional service area given partnerships with various local school districts to provide college coursework. Continued expansion of its offerings at the San Angelo campus has also helped grow the district's enrollment base. Nonetheless, like most community colleges, enrollment trends have largely followed a counter-cyclic pattern in relation to local economic conditions.

Enrollment peaked in 2011 during the recession and has since eroded with improvement in the local economy. Student enrollment as measured by unduplicated credit enrollment totaled 5,894 in fiscal 2013, reflecting the effect of a cumulative 9% decline over the last two fiscal years. Nonetheless, the district maintains some of the residual effect of enrollment gains made over the recession; credit-hour enrollment hovers closer to pre-2011 levels, which Fitch believes may indicate a larger student base has developed. Management anticipates moderate enrollment declines experienced in fiscal 2014 will likely continue over the near term given favorable regional economic conditions. Fitch expects the district will be able to offset much of this pressure however with use of its expenditure flexibility.

MODERATE LONG-TERM LIABILITIES

Overall debt is moderate at $4,031 per capita and 3.6% of market value. Fitch expects the district's direct debt to remain manageable given capital needs largely focused on renewal and replacement. The district is an infrequent borrower, choosing instead to offset a portion of its capital needs with private donations and grants as well as pay-go capital spending. Principal amortization of the district's tax-supported debt is slightly above-average with 66% repaid in 10 years.

The college participates in the state-administered Teachers Retirement System of Texas (TRS) for pension and other post-employment benefit (OPEB). TRS is a cost-sharing, multiple-employer plan in which the state has historically provided the bulk of the employer's annual pension contribution. The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan.

The state began shifting some of this funding burden to community college districts in the 2012-2013 biennium, requiring districts to contribute more (roughly 60%) of the annual cost. The employer's pension contribution is now shared at a marginally lower 50% with the state as of the 2014-2015 biennium. Despite the increase, carrying costs for debt service, pension, and OPEB costs, net of state support, remained low at 6.3% of total expenses in fiscal 2013.

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, Texas Municipal Advisory Council, IHS Global Insights.

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=834869

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Fitch Ratings

Primary Analyst

Rebecca C. Moses

Director

+1 512-215-3739

Fitch Ratings, Inc.

111 Congress Avenue, Suite 2010

Austin, TX 78701

or

Secondary Analyst

Steve Murray

Senior Director

+1 512-215-3729

or

Committee Chairperson

Jessalynn Moro

Managing Director

+1 212-908-1608

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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