AUSTIN, Texas--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AAA' rating to the following Grand Prairie Independent School District, Texas' (the district) general obligation (GO) unlimited tax (ULT) bonds:
--$19.4 million ULT refunding bonds, taxable series 2013.
The rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
In addition, Fitch assigns an 'AA' underlying rating to the 2013 bonds and affirms the 'AA' rating on the district's $490 million (pre-refunding, on a non-accreted basis) in outstanding ULT bonds.
The series 2013 bonds are scheduled to sell via negotiation as market conditions permit. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.
The Rating Outlook is Stable.
The bonds are payable and secured by an unlimited property tax levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: The district has generated healthy to sizeable operating surpluses over the last three fiscal years, which has subsequently strengthened reserve levels and liquidity. Fitch views the district's ability to maintain its solid financial profile as fundamental to rating stability.
FAVORABLE LOCATION; STABLE REGIONAL ECONOMY: The district realized moderate taxable assessed valuation (TAV) declines over the recession, although a modest return to growth is projected for fiscal 2014. Fitch anticipates stable to modest growth in TAV over the near-to-intermediate term given the mature nature of the city of Grand Prairie (GO bonds rated 'AA+' with Stable Outlook by Fitch) which is located in the center of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA).
BELOW-AVERAGE SOCIOECONOMIC INDICATORS: Income, wealth and educational attainment metrics are below those of the MSA and nation.
ELEVATED DEBT BURDEN: Debt levels are high due to previous capital needs associated with older infrastructure and consistent enrollment growth. Amortization is below average reflecting the use of capital appreciation bonds (CABs). Carrying costs are low given state support for the district's debt and pension plan.
FINANCIAL AND TAXING FLEXIBILITY DETERIORATION: Material deterioration of the district's solid reserves and liquidity that provide a level of financial flexibility consistent with the district's high-grade rating and/or the inability to manage debt needs while maintaining an adequate debt margin could apply downward rating pressure. The Stable Outlook reflects Fitch's near-term expectation that such shifts are unlikely.
CENTRALLY LOCATED DFW MSA DISTRICT
The district's boundaries include roughly 80% of the geographic area of the city of Grand Prairie. Grand Prairie is a mature city centrally located in the DFW metropolitan area, about 20 minutes west of downtown Dallas and just south of DFW International Airport. Population gains since 2000 have been comparable to the MSA, although income and wealth levels are low for the region. Median household income is about 20% below that of the MSA and remains more comparable to state averages. Enrollment trends reflect modest but steady annual gains that averaged just over 1% in the last five fiscal years despite competition from various area charter schools. Student enrollment totaled about 26,700 in fiscal 2013.
PART OF BROAD REGIONAL ECONOMY
Encompassing Interstate Highways 20 and 30 and state highway 161 (which was recently expanded), access to major air and ground transportation routes has made the area a significant regional wholesale distribution center. Other dominant economic sectors include manufacturing, defense, and aerospace. City unemployment declined on a year-over-year basis to 6.1% in March 2013 from 7% in March 2012 despite solid labor force growth over the same time period. At 6.1%, the city's unemployment rate remained in line with those of the MSA (6.2%) and state (6.3%) while below the nation's (7.6%). The district's longer-term economic prospects remain favorable given its central location in the DFW metro area, which continues to outpace the nation in employment, income and population.
MODEST TAV GAIN PROJECTED FOR FISCAL 2014
The district's fiscal 2013 tax base of nearly $4.8 billion is comprised of about 56% residential properties and 38% commercial/industrial properties. Taxpayer concentration is moderate at just under 10% and the top taxpayers represent a fairly diverse list of retail, distribution, and manufacturing concerns. Recent TAV trends have been sluggish since the recession with TAV declining a moderate 5% over the past four fiscal years (fiscals 2010-2013). The valuation loss initially resulted from declining residential values and more recently is the result of weakness in commercial/industrial values.
Contributing modestly to some of the TAV loss is the district's top taxpayer, Triumph Group Vought Aircraft (Triumph), a commercial and military aircraft component manufacturer. Plans for sale of the plant and risks of layoffs to employees were noted at Fitch's last review. A three-year transition is currently expected with a portion of the company's manufacturing operations to remain in the district and the purchase of the plant for future mixed-use development.
Fitch will continue to monitor the impact of these developments as they unfold, but does not anticipate significant adverse impact to the district's tax base and overall credit profile. Triumph contributed a moderate 4% of TAV in fiscal 2012, which declined to a modest 2% in fiscal 2013.
Preliminary estimates of fiscal 2014 district-wide TAV anticipate modest growth of 2.5% despite Triumph's declining TAV trend. The growth for the year is due primarily to additional retail/commercial development along the expanded SH-161 corridor. Fitch believes stable to modest tax base gains over the near to intermediate term are feasible given the return to growth and likely further development around recently completed highway improvements as well as some city revitalization efforts.
FINANCIAL PERFORMANCE A CREDIT POSITIVE
About 70% of annual operating revenues come from the state due to the district's below-average property wealth. The district has generated increasingly larger operating surpluses in each of the last three fiscal years (fiscals 2010-2012), which has subsequently strengthened its financial position. Management informally targets maintaining two to three months of cash on hand. Conservative budgeting and tightened spending by management allowed the district to successfully navigate the state funding cuts that affected all Texas school districts in the last biennium (fiscals 2012-2013). Over these two fiscal years, the district lost about $18 million in state aid, equivalent to about 10% of fiscal 2011 operating revenues.
Audited results for fiscal 2012 were slightly better than previous projections. The district generated a sizeable net operating surplus of $15.5 million or nearly 9% of spending, and unrestricted general fund reserves rose to a solid $42 million or 24% of spending at year-end. Liquidity improved as well. General fund cash and investments totaled $46.6 million or just over three months of operational spending in fiscal 2012, up from $33.7 million in fiscal 2011.
For fiscal 2013, management projects a more modest $3 million addition to fund balance by year-end. The preliminary fiscal 2014 budget anticipates balanced operations and incorporates some savings from added efficiencies in facility operations but also includes the possibility of pay raises that if approved by the governing board, would cost about $4 million. Fitch expects stable financial performance will continue given management's recent favorable track record.
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 as a constitutional flaw in the current system.
Fitch will monitor the appeal process of the suit, which may go directly to the state supreme court. If the supreme court upholds the lower court ruling, the state legislature will be directed to make changes to the funding system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.
ELEVATED DEBT RATIOS WITH AFFORDABLE FIXED COSTS DUE TO STATE SUPPORT
The district's high debt levels are a key credit concern, particularly as measured by market value. Without consideration of state support, debt to market value is 9.4%, reflective of the district's low property wealth levels. Debt per capita is more moderate at $4,217. These debt ratios include accreted interest from outstanding CABs. The overall debt ratio totals a higher, nearly 12% of market value once overlapping debt is considered.
Despite unfavorable debt ratios, the district's fixed cost burden for its debt service remains fairly modest at about 9.7% of governmental spending in fiscal 2012 given the amount of annual state debt service aid received by the district. Annual state support totaled about 41% of debt service in fiscal 2012.
Amortization remains below average at 41% of principal retired within 10 years, including this issuance. The current plan of finance projects modestly descending annual debt service with maximum annual debt service (MADS) of $38.5 million occurring in fiscal 2014 and the majority of debt service savings from this refunding over fiscals 2014-2016.
The district retains some flexibility in its debt service tax rate, which is 7.5 cents below the state $0.50 cap for new bond issuances. Management plans to apply about $7.7 million of existing debt service fund balance over the next four years (fiscals 2013-2016) to maintain the tax rate at the current level, which would drop the debt service fund balance to approximately $6.6 million (17% of MADS). Nonetheless, future TAV gains and/or refunding opportunities would likely reduce the use of these funds.
The district has no remaining GO ULT bond authorization, but capital needs are manageable. Overall, the district maintains capacity in its facilities and prior bond issuances have addressed various facility improvements at some of the district's older schools. Plans to approach voters for additional bonding authority in November 2014 for facility renewal and replacement needs remain somewhat uncertain.
OTHER LONG-TERM LIABILITIES MANAGEABLE
The district's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the district provides the bulk of the employer's annual pension contribution. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run OPEB healthcare plan. The district consistently funds its annual required contributions. Carrying costs for the district (debt service, pension, and OPEB costs, net of state support) totaled a low 10% of governmental fund spending in fiscal 2012, largely reflective of state support as well as the below-average pace of amortization.
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, IHS Global Insight, and the Texas Municipal Advisory Council.
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
U.S. Local Government Tax-Supported Rating Criteria
Rebecca C. Moses, +1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
Blake Roberts, +1-512-215-3741
Doug Scott, +1-512-215-3725
Elizabeth Fogerty, New York, +1-212-908-0526