Fitch Ratings assigns ratings to Fort Bend Independent School District,
Texas' (ISD; the district) unlimited tax (ULT) bonds as follows:
--$69.8 million ULT refunding bonds, series 2014 'AAA' enhanced / 'AA+'
The 'AAA' long-term rating on the bonds is based on a guaranty provided
by the Texas Permanent School Fund (PSF), whose bond guaranty program is
rated 'AAA' by Fitch.
The bonds are scheduled for negotiated sale during the week of May 12.
Proceeds from the sale of the bonds will be used to refund a portion of
the district's outstanding ULT debt for interest savings.
Fitch also affirms the 'AA+' underlying rating on the district's $886
million in outstanding ULT bonds (pre-refunding).
The Rating Outlook is Stable.
The bonds are direct obligations of the district and are secured by an
unlimited ad valorem tax pledge of the district. In addition, the bonds
are secured by the PSF guaranty.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The district's financial profile is a positive
credit factor, characterized by large reserve levels and a consistent
record of conservative budgeting practices.
STABLE AND DIVERSE ECONOMY: The local economic climate is favorable and
continues to demonstrate low unemployment, high wealth levels, and a
healthy local housing market.
HEALTHY GROWTH PROSPECTS: Housing construction has accelerated, spurred
by major transportation arteries that facilitate access to broad labor
markets in the Houston metropolitan area. Residential development has
also led to renewed enrollment growth which Fitch believes has been
conservatively budgeted by the district.
ELEVATED DEBT BURDEN: The district's overall debt levels are high and
will remain elevated due to the district's plan to seek a general
obligation (GO) bond authorization in the near term. Fitch believes the
debt load is manageable due to the district's moderate carrying costs
and favorable prospects for further tax base expansion.
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental
credit characteristics including the district's healthy financial
profile. Maintenance of solid reserves while addressing its ongoing
capital needs is a key credit consideration.
The district is the seventh largest school district in the state, with
average daily attendance (ADA) at just under 68,000 in fiscal 2014. The
district service area spans a large 170 square miles in northeastern
Fort Bend County (GO bonds rated 'AA+' with a Stable Outlook by Fitch),
in a rapidly growing residential and commercial sector of the Houston
metropolitan statistical area (MSA).
The district encompasses the incorporated cities of Missouri City (GOs
rated 'AA' with a Stable Outlook), Sugar Land (GOs rated 'AAA' with a
Stable Outlook), Arcola, and Meadows Place. The district also serves
portions of Richmond, Houston (GOs rated 'AA' with a Stable Outlook),
and other smaller area communities.
ENROLLMENT AND TAX-BASE GROWTH RESTORED
The district's service area is about 70% developed. Enrollment and tax
base growth moderated during the recession but both have ramped up
recently with improvement in the economy.
ADA was essentially flat from 2010-2014. However, 2014 ADA grew by 2%
and is projected to grow by a similar rate in fiscal 2015 and beyond,
which Fitch considers realistic given recently surging homebuilding
activity within the district. Major road infrastructure currently under
construction in the district has spurred the ongoing residential
development throughout the district which will lead to continuation of
student enrollment growth.
The district's taxable assessed value (TAV) growth moderated during the
recession and registered only one annual dip (-2.5% in fiscal 2011). TAV
for fiscal 2014 of $26.1 billion grew by 7% over the previous year.
Including property values under appeal, the preliminary TAV for fiscal
2015 is up a large 15%. Assuming conservatively that appeals exceed the
typical rate of 5%, the district is using a 9% TAV gain for planning
purposes, which Fitch considers prudent.
Fitch housing data indicate that the Fort Bend County housing market is
performing well, with ongoing new starts and housing prices trending up.
The county's average home sale price rose a large 12.8% to $269,500 in
2013, up from $238,900 in 2012. Fort Bend County's population, which is
estimated at more than 652,000 in 2013, has grown by a compound average
annual rate of 3.8% since the 2010 census. The county's average 2013
unemployment rate of 5.7% was well below the state (6.3%) and national
averages (7.4%) for the same period. Wealth levels of the county's
population are notably higher than those for the Houston MSA, state, and
SOLID FINANCIAL RESERVES MAINTAINED
Positive operating margins have resulted in the accumulation of solid
general fund reserves despite the challenges posed by substantial state
unding cuts. In fiscal years 2010 and 2011, the district proactively
declared financial exigency, a Texas Education Agency prerequisite for
terminating contracted employees, to eliminate 483 positions in order to
close a $22 million budget gap. These cuts along with other tight budget
constraints enabled the district to generate large surpluses over the
past four years.
At the close of fiscal 2013, the district's unrestricted general fund
balance stood at $169 million, or a high 36% of spending, inclusive of a
$16 million net surplus for the year (equal to 3.5% of spending). The
fiscal 2014 budget was adopted as balanced but interim results point to
another large estimated $20 million to $25 million surplus, equal to
4%-5% of budgeted appropriations. Management reports the surplus is due
largely to continued austerity despite restored state aid cuts, as well
as greater than budgeted ADA. Management indicates that it plans to
transfer any net surplus to the capital projects fund for instructional
In fiscal 2014, the district also transferred $10 million (2% of
spending) of committed fund balance to eliminate the deficit position in
the health insurance fund. Under a new CFO, the district has issued a
request for proposal (RFP) for health insurance providers and interim
changes have reportedly stabilized the fund. The preliminary proposed
budget for fiscal 2015 is balanced, funds 4%-8% pay hikes for teachers
and 4% pay hikes for all others, and adds 400 new positions to
accommodate the projected 2% gain in ADA. Despite the restoration of
state funding in fiscal years 2014 and 2015, the district remains
vigilant to maintain its solid financial cushion. The district has
adopted formal fiscal policies including: maintain the unassigned
general fund balance at 30% of net budgeted operating expenditures for
the following year, adopt balanced budgets, and limit the use of fund
balance reserves for nonrecurring expenditures. Fitch believes adherence
to these policies provides stability to the high credit rating.
ELEVATED DEBT BURDEN
The district's overall net debt burden is high at 9.2% of fiscal 2014
market value and $7,015 per capita. The high overall debt load includes
a large number of special districts in the area. The payout rate is
moderately below average with 46% of principal maturing in 10 years.
The district still has $63 million in authorized but unissued bonds for
two new elementary schools. These bonds were a part of a $428 million
bond authorization approved by voters in 2007. The district plans to
start construction on these schools in the short term and reimburse
itself with bond proceeds upon the issuance of this remaining
authorization in early 2015.
A facilities master plan (FMP) was recently completed which identified
the need for 11 new schools and facility improvements, estimated to cost
roughly $818 million. The district plans to seek voter approval for the
first phase of these projects in November 2014. The size of the
authorization has not yet been determined but management's goal is to
limit the tax rate impact from the additional borrowings. The district's
phased approach is viewed positively by Fitch given that the estimated
cost of the FMP nearly equals the par amount of the district's
The district has maintained a manageable debt service tax rate
(currently $0.30 per $100 of TAV), well below the attorney general's tax
rate cap for new debt issuance of $0.50 per $100. The debt burden is
expected to remain elevated given the large number of special districts
within the area, but carrying costs should be manageable, assisted in
part by a level debt service schedule, anticipated tax base growth, and
phased approach for funding the FMP.
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 (OPEB). Including debt service, pension and OPEB
contributions, carrying costs were a moderate 12% of fiscal 2013
governmental spending, benefitting from the state's strong pension
funding system currently in place. However, districts in Texas are
susceptible to future funding changes by the state - as evidenced by a
relatively modest 1.5% of salary contribution requirement effective
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 re-opened the lawsuit in June 2013 after state legislative
action that partially restored state funding levels and made other
program changes. The trial began in January 2014. If the state school
finance system is ultimately found unconstitutional, the legislature
will be directed to make changes to the system to restore its
constitutionality. Fitch would consider any changes that include
additional funding for schools a positive credit consideration.
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, IHS Global Insight, and the Municipal
Advisory Council of Texas.
Applicable Criteria and Related Research:
--Additional information is available at 'www.fitchratings.com'.
--'Tax-Supported Rating Criteria' (Aug. 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 2012).
Rating Criteria' (Aug. 2012);
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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