Fitch Ratings takes the following rating action on South San Antonio
Independent School District, Texas' (the district) unlimited tax (ULT)
--$117.5 million ULT bonds affirmed at 'AA-'.
The Rating Outlook remains Negative.
The bonds are direct obligations of the district, secured by an
unlimited tax pledge levied against all taxable property within its
NEGATIVE OUTLOOK: Operating reserves have declined due to recurring
general fund deficits. Management restored current-year budget balance
through spending cuts, and adequate fiscal cushion remains, but Fitch is
concerned about the district's ability and political willingness to
eliminate out-year deficits that are presently forecast.
STRONG REGIONAL ECONOMY: The district's central location in the diverse
economy and broad employment base of the San Antonio metropolitan area
is a credit strength. The district's taxable assessed value (TAV) trend
is positive and long-term economic prospects are favorable.
LIMITED LOCAL RESOURCE BASE: Residents' income levels are below average
and poverty rates are elevated. The local tax base is concentrated and
has a low per-capita valuation.
WEAK DEBT PROFILE: The debt to market value (MV) ratio is high,
reflecting the limited tax base. Debt levels will likely remain elevated
given the slow debt amortization and future capital needs.
WHAT COULD TRIGGER A RATING ACTION:
FUND BALANCE DECLINE: Fitch expects to resolve the Outlook within the
next 12 months and views the district's ability to maintain balanced
operations in the short term and make structural adjustments to
eliminate projected out-year deficits as key to rating stability.
This primarily residential district comprises 21 square miles in the
southwest part of San Antonio (GO bonds rated 'AAA' with a Stable
Outlook by Fitch). Annual enrollment has fluctuated slightly in recent
years and 2013 enrollment is up 1% from last year to 9,840.
STRONG RESERVES HAVE DECLINED BUT REMAIN SOLID
Recurring operating deficits from fiscal years 2009-2012 resulted from
structural budget imbalance that was caused primarily by increases to
staffing levels in prior years that outpaced enrollment growth. The
annual deficits (2%-3% of spending) have typically been lower than the
originally budgeted deficits, but they have produced a cumulative 23%
decline in operating reserves during this four-year period.
In recognition of the negative fiscal trend, management commissioned an
external staffing study and local cost-savings committee and began
implementing the respective recommendations in fiscal 2011 to curb
spending. Budget savings have included a reduced FTE count (6%) through
attrition and a hiring freeze, as well as discretionary reductions to
department and administrative budgets, summer-school, overtime, and
Significant under-spending of the 2012 budget offset lost revenue from
state budget cuts and narrowed the operating deficit to $2.4 million
(from $4.8 million budgeted). The unrestricted general fund balance
declined to $18.3 million or a sound 24% of expenditures, just below the
district's working fund balance target of 25% of spending.
2013 BUDGET IS BALANCED; OUT-YEAR DEFICITS FORECAST
The district accelerated spending reductions for fiscal 2013 to adopt a
balanced budget, reducing appropriations by 3.3% ($2.6 million) from the
prior-year budget. Officials offered an early resignation stipend that
yielded additional personnel savings and were able to provide a
non-recurring stipend for employees. Interim results were not yet
availale but attendance is up 1%.
Fitch views positively the return to current-year budget balance,
particularly amid lower state funding levels, but remains concerned
about the baseline financial forecasts for continuing deficits (1%-2% of
expenditures) through fiscal 2016. The district does retain some budget
flexibility, but Fitch believes that some of the budget mechanisms on
the table, including furlough days, layoffs, and a voter-approved tax
rate increase, will be politically difficult to implement or altogether
unlikely to occur.
The district's solid fund balances have historically been the key
mitigant to credit pressures from the below-average resource base and
high debt levels. Further budget imbalance and declines in reserves
would likely cause a rating downgrade.
LIMITED LOCAL RESOURCE BASE; SUBPAR SOCIO-ECONOMIC INDICES
District wealth indicators are well below average, with per capita
income at 46% of the national average, per-capita market value at a low
$33,000, and a poverty rate (20%) that exceeds the national average
(14%). The district's tax base is also concentrated, with the top 10
payers comprising an above-average 21% of fiscal 2013 TAV. The top payer
is Boeing Aerospace (long-term Issuer Default Rating of 'A' with Stable
Outlook) which alone comprises 6% of TAV.
The district's recent TAV trend has been positive, with stabilized
housing prices, positive re-appraisals, and development activity
producing a nearly 12% cumulative TAV gain since fiscal 2010. Prospects
for further gains are favorable given anticipated development adjacent
to a Texas A&M University satellite campus and regional growth prospects.
LOCATION IN STRONG SAN ANTONIO ECONOMY
The district's location in the broad and diverse San Antonio economy is
also a credit positive. San Antonio is the second largest city in the
state and eighth largest in the nation, with an estimated population of
1.8 million. Prominent sectors include military and government, domestic
and international trade, convention and tourism, medical and health
care, financial services, and telecommunications.
The San Antonio market shed jobs in 2010 as a result of the national
recession but has since recovered most of the job losses. Considerable
growth in the hospitality and energy sectors, the latter being driven by
drilling activity in the expansive Eagle Ford shale gas formation south
of the city, improved the unemployment rate to 5.9% from 7.2% for the
12-month period ending October 2012.
HIGH DEBT BURDEN MAY RISE FURTHER
Overall district debt is high at 8.5% of market value even after
adjusting for annual state debt service aid of about 60% of debt,
reflecting the district's low property wealth. The overall debt
calculation includes the currently accreted interest of outstanding
capital appreciation bonds. Debt per capita is moderate and the annual
carrying cost is affordable at 5% of governmental spending (excluding
capital projects fund spending).
Debt levels will likely remain elevated due to slow principal
amortization (34% retired in 10 years) and future capital needs.
Officials plan to seek debt authorization from voters in the range of
$30 million-$50 million as early as November 2013. The proposed bond
program would fund construction of a new elementary school and major
renovations to aging facilities. Management notes that the debt issuance
would be done in conjunction with approval of state debt service aid.
The current tax rate of $0.42 provides adequate capacity below the
state's $0.50 statutory tax ceiling for new debt issuance, but continued
growth in the tax base will be critical to supporting debt plans and
mitigating any impact to the tax rate.
PENSION AND OPEB LIABILITIES NOT A CREDIT PRESSURE
Pension and other post-employment benefits (OPEB) for retiree healthcare
are provided through the state's Teacher Retirement System, a
cost-sharing multiple employer plan. State subsidies pay the bulk of the
required contributions on behalf of school districts for both pension
and OPEBs, resulting in an affordable $1.1 million annual required
contribution for the district in fiscal 2012 that equaled 1.1% of
governmental spending. Combined debt service, pension, and OPEB costs
totaled an affordable 6.1% of governmental spending for the year.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the
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, and 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).
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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