News Column

Fitch Affirms Longview ISD, TX's ULTs at 'AA'; Outlook Stable

July 16, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following underlying rating on Longview Independent School District, Texas (the district):

--$250.8 million unlimited tax (ULT) bonds, series 2008, 2009, 2010, 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the series 2008 and 2010 bonds are secured by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Consistently positive operating margins have yielded significant general fund reserve levels and liquidity, providing the district with a high degree of financial flexibility.

ADVANTAGEOUS LOCATION: The district benefits from its location in a larger industrial and retail regional economy along major transportation corridors. Local employment indicators are positive.

SIZABLE DEBT LOAD: Aggregate debt levels and the annual debt burden on the budget are high and amortization is slow. The debt service tax rate is elevated and near the state's tax rate cap for new money debt issuance, but future capital needs for the district reportedly are minimal.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to fundamental shifts in various credit characteristics, including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located roughly 120 miles east of Dallas and 60 miles west of Shreveport, LA and served by major transportation corridors. Average daily attendance in the district varies slightly from year to year but never deviates significantly from the 10-year average of about 7,600 students. The district population of 57,000 has been mostly stable in recent years.

STABLE AREA ECONOMY

The district is located in the Longview metropolitan statistical area, which is an industrial, retail, and distribution center in East Texas. The area economy has traditionally served as a center for oil and natural gas operations, but has become increasingly diversified with the growth of education, health care, manufacturing, transportation/distribution, government and retail trade as major employment sectors.

The area employment picture is positive, with a fairly low unemployment rate and expanding employment count in the city.

Both indicators improved during the 12-month period ending May 2014; the unemployment rate dropped to 4.6% from 5.5% and employment grew 1.7%. Income levels of district residents are below state and national averages, although this concern is mitigated by the area's lower cost of living.

Taxable assessed value (TAV) has been stable the last several years after a modest decline in fiscal 2011. Fiscal 2014 TAV was flat from the previous year at $4.1 billion and preliminary fiscal 2015 values show a slight dip, which management believes is conservative and not likely to appear in certified values.

POSITIVE FINANCIAL OPERATIONS, STRONG BALANCE SHEET

Several years of positive operating results have significantly increased reserves, with fiscals 2013 results producing a $6.1 million operating surplus (10.5% of spending) and marking the tenth consecutive year of positive results. The district closed the year with an unrestricted general fund balance of $54.3 million or a robust 92.7% of expenditures.

The district historically adopts structurally balanced budgets, and management expects fiscal 2014 to mark another year of positive operating results yet with a more modest surplus than recent years have produced. As of June 2014 the district had expended about 75%-80% of the current year's budget that ends on Aug. 31. Preliminary budget discussions for fiscal 2015 are underway and management expects to budget straight line revenues and spending.

WEAK DEBT PROFILE; LIMITED FUTURE CAPITAL NEEDS

Key debt ratios are above average due to the issuance of all of the district's $267 million bond authorization, issued over four installments since 2008, to support comprehensive rebuilding, renovating, and repurposing of district facilities.

Overall debt is a high 5.8% of full market value (MV) and $5,150 per capita. Fitch considers the district's pace of amortization slow at 24% retired in 10 years. The district's debt service tax rate is also high at $0.47 per $100 of TAV, which is near the state's statutory cap of $0.50 for new money debt issuance. However, the district does not expect to issue debt in the near term given the recent capital improvements and modest enrollment growth environment.

OTHER LONG-TERM LIABILITIES MANAGEABLE

Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used.

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. The district's cost for pension and other post-employment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2013, as plan contribution amounts are principally paid by the state and district employees.

The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of a large and growing debt burden. Carrying costs for the district (debt service plus pension and OPEB costs) remain manageable, consuming 17.1% of governmental fund spending in fiscal 2013; the moderate carrying cost burden is also due to the slow pace of amortization. Fitch will continue to monitor the level of state support for school district pension payments, noting contributions for all districts in the state will increase modestly from 0% to 1.5% of the statutory minimum portion of payroll beginning fiscal 2015.

TEXAS SCHOOL FINANCE 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.

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=839863

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, Inc.

Primary Analyst

Leslie Ann Cook, +1-212-908-0507

Analyst

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Rebecca Moses, +1-512-215-3739

Director

or

Committee Chairperson

Steve Murray, +1-512-215-3725

Senior Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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