News Column

Fitch Rates Eagle Mountain-Saginaw ISD, TX ULTs 'A+' Underlying; Outlook Stable

June 19, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' underlying rating to the following unlimited tax bonds of Eagle Mountain-Saginaw Independent School District, Texas (the district):

--$16.9 million unlimited tax refunding bonds series 2014-A;

--$3.6 million unlimited tax refunding bonds series 2014-B.

Fitch also assigns an 'AAA' rating to the series 2014-A bonds, which is based on a guarantee provided by the Texas Permanent School Fund, whose claims paying ability is rated 'AAA' by Fitch.

The series 2014-A and series 2014-B bonds are scheduled for a negotiated sale the week of June 23, 2014. Proceeds from both series will be used to refinance a portion of the district's outstanding unlimited tax bonds for debt service savings.

In addition, Fitch affirms the following rating:

--$589 million outstanding unlimited tax bonds (pre-refunding; includes current accreted CAB values) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

SOUND FINANCES: Cost savings and enrollment growth have allowed the district to maintain a solid financial profile through a period of reduced state funding. A recent tax ratification election trades off increased debt service for operating flexibility by shifting a portion of the interest and sinking fund (I&S) tax rate to the maintenance and operations (M&O) tax rate, providing the district with an increase in operating revenues.

HIGH DEBT, WELL-FUNDED PENSIONS: High overall debt results from a history of reacting to rapid enrollment. Carrying costs (annual debt service, pension, and other post-employment benefit contributions (OPEB)) place a moderate burden on the budget, reflecting a slow principal amortization rate and the state's strong pension funding support.

TAX BASE GROWTH: Improving home prices and new construction drove moderate fiscal 2014 tax base gains, reversing recent taxable assessed valuation (TAV)losses associated with the recession and mineral valuation declines. Fitch considers the district's projection of ongoing TAV growth reasonable based on regional trends and development underway.

STABLE LOCAL ECONOMY: The district participates in the diverse greater Fort Worth economy. Top employers represent the airline and defense industries, as well as government, education, and health service sectors. Economic metrics compare favorably to state and national averages.

RATING SENSITIVITIES

FINANCIAL, DEBT FLEXIBILITY: The rating is sensitive to changes in the district's financial flexibility, evidenced by sound reserves and adequate tax rate capacity. Further increases in the debt without commensurate tax base growth could put pressure on the rating.

CREDIT PROFILE

Eagle Mountain-Saginaw ISD is located in Tarrant County, approximately seven miles from the center of Fort Worth, and includes the northernmost portion of the city as well as the cities of Saginaw and Blue Mound.

POSITIVE FINANCIAL PERFORMANCE

The district budgets conservatively and has registered positive financial results in four of the past six fiscal years. A fiscal 2013 net deficit of 1.8 million (1.4% of spending) reflected cost pressures of starting up the district's new high school. The district's fiscal 2013 unrestricted general fund balance of $25.6 million represents a sound 20.1% of spending.

Voters approved an increase in the district's M&O tax rate to $1.17 per $100 of TAV. The total fiscal 2014 tax rate will not increase as the debt service rate declined by the same amount. The tax rate restructuring provided a reported additional $650,000 in state funding, subsequent to a transfer of surplus funds for debt service. Additionally benefitting from enrollment gains and a salary freeze, officials conservatively expect to complete fiscal 2014 with break-even results.

TAX BASE EXPANSION, STRONG DEMOGRAPHICS

The tax base more than tripled over the past 12 years as economic activity throughout the Dallas Fort-Worth metro area and local activity spawned a housing boom in the district. The district's population doubled over the same period.

Recessionary pressures and declining mineral values led to TAV declines between fiscal years 2011 and 2013 prior to a 5.4% gain in fiscal 2014. Officials report that a strengthening residential housing market and new construction are expected to provide ongoing solid TAV growth in the near term, which Fitch considers reasonable, although the tax base remains sensitive to the impact of gas price volatility.

The district's median household income is 135% of the Texas and 130% of the U.S. average, with a poverty rate less than half of the state and national levels. The city of Fort Worth unemployment rate of 4.7% as of April 2014 matches that of the state and compares favorably to the U.S. level of 5.9%.

HIGH DEBT; ONGOING NEEDS

Overall debt of 9.5% of market value is high and amortization is slow, with less than 25% of debt scheduled for repayment in the next 10 years. Proceeds from the series 2014-A and 2014-B bonds will be used to refund a portion of the district's outstanding debt for savings without extending principal repayment.

Officials anticipate new debt issuance in 2015 to fund elementary school construction needs driven by ongoing enrollment growth not anticipated in the last rating. The district's fiscal 2014 I&S tax rate of $.37 per $100 of TAV, subsequent to the tax rate restructuring, provides ample capacity in relation to the statutory cap of $.50 for new debt issuance. The current rating assumes that the pace of tax base growth will equal or exceed the rate of debt service spending.

The district plans to remarket its series 2011 Variable Rate Demand Obligations (VRDOs) for a new 5-year, fixed-rate period in the summer of 2014. In the unlikely case of a failed remarketing, the district would pay an elevated interest rate, capped at a fixed rate of 8% for the first six months and 10% thereafter on the district's outstanding VRDOs, until successfully remarketed.

LIMITED PENSION/OPEB 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 moderate 18.8% 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 year 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 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.

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, 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

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=835478

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

Rebecca Meyer, +1 512-215-3733

Director

Fitch Ratings, Inc.

111 Congress Ave., Suite 2010

Austin, TX 78701

or

Secondary Analyst

Steve Murray, +1 512-215-3729

Senior 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


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters