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TMCNet:  Fitch Rates United ISD, Texas 2014 ULT Bonds 'AAA' PSF & 'AA-' Underlying; Outlook Stable

[June 20, 2014]

Fitch Rates United ISD, Texas 2014 ULT Bonds 'AAA' PSF & 'AA-' Underlying; Outlook Stable

AUSTIN, Texas --(Business Wire)--

Fitch Ratings has assigned an 'AAA' rating to the following United Independent School District, Texas (ISD; the district) unlimited tax (ULT) bonds:

--$100 million ULT school building bonds, series 2014.

The 'AAA' long-term rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

The bonds are expected to price via negotiation the week of June 23, 2014. Proceeds will be used to construct school facilities and acquire sites for school facilities.

In addition, Fitch assigns an 'AA-' underlying rating to the series 2014 bonds and affirms the 'AA-' rating on the following debt:

--$198.6 million ULT bonds;
--$1.7 million limited tax public property finance contractual obligations, series 2004 and 2005.

The Rating Outlook is Stable.

SECURITY

The series 2014 ULT bonds and outstanding ULTs are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. In addition, the bonds are secured by the Texas PSF guarantee, whose bond guarantee program is rated 'AAA' by Fitch. The contractual obligations are secured by a limited ad valorem tax pledge levied on all taxable property within the district, limited to $1.04 per $100 taxable assessed value (TAV), unless district voters approve an increase up to the state maximum of $1.17 per $100 TAV.

KEY RATING DRIVERS

CONCENTRATED ECONOMIC GROWTH: The district's tax base has risen sharply in recent years due to an increase in oil and gas values. Low unemployment rates reflect increased drilling activity as well as a stable base of governmental, educational, and health service providers. Fitch notes that the expanding oil and gas sector drives local economic development, but also exposes the district to increased economic cyclicality.

GROWING DEBT BURDEN: The district's overall debt is moderate, although the district faces sizable capital needs resulting from projects that were deferred subsequent to a failed 2007 bond election. Fitch expects that debt levels will rise with the issuance of debt authorized in 2013.

FINANCIAL PRESSURES/ADEQUATE RESERVES: Current general fund reserves are adequate but have become increasingly pressured by facility maintenance and capital expenditures to keep up with a growing student body. The district is dependent on state funding for operations.

NO RATING DIFFERENTIAL: Fitch currently makes no distinction between the ULT and limited tax contractual obligation ratings due to the district's tax rate capacity relative to the cap and adequate financial flexibility.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's healthy financial management practices. Maintenance of adequate reserves while addressing ongoing capital needs is a key credit consideration.

CREDIT PROFILE

United ISD encompasses a sizable 2,450 square miles in Webb County with the Rio Grande River forming a portion of its western boundary. The district serves an estimated population in excess of 160,000 which includes a portion of Laredo (general obligation bonds rated 'AA' with a Stable Outlook by Fitch), the third most populous city on the U.S.-Mexico border.

GROWING CONCENTRATED ECONOMY
TAV grew by a compound annual rate of 8.1% since fiscal 2008 to $12.9 billion in fiscal 2014, reflecting an expanding oil and gas sector as well as the region's extensive transportation network supporting international trade, warehousing and distribution businesses. Residential values comprise 32% of the base, followed by commercial/industrial (27%) and mineral (24%) properties.

Fiscal 2014 TAV growth of 11.2% resulted largely from the reported addition of oil and gas wells in the Eagle Ford natural gas and oil field located in the northern part of the district which increased the oil and gas property values by 25%. Top 10 taxpayers comprise a high 22% of TAV, represented by oil and gas, refinery, and utility companies. The district reports an estimated preliminary TAV gain of 15% for fiscal 2015, due largely to ongoing oil and gas asset appreciation, with the expectation of further strengthening in fiscal 2016. Fitch recognizes that the tax base gains are above average, but consistent with other municipalities in Texas currently benefiting from the upside swing of oil-rich mineral properties.


The city of Laredo's unemployment rate of 4.9% (down from 6.2% in 2013) as of April 2014 is on par with the state and compares favorably to the national rate. A growing employment base is supported by drilling, oil field support services, and a stable base of top employers representing government, education, medical, and retail sectors of the economy.

The district's income and wealth levels are steadily improving but continue to lag state and national averages. The region's lower cost of living mitigates low wealth levels as a credit concern. As a property-poor district under Chapter 42 of the Texas Education Code, the district currently receives state support for both operations (58% of general fund revenues in fiscal 2013) and debt service (19%). Increasing property values have led to reductions in annual aid under the state's school funding formula.

OPERATING FUND PRESSURES
The district typically generates favorable results despite enrollment-based and capital funding pressures. However, state funding cuts, one-time lump-sum salary payments, capital expenditures, and transfers to the debt service fund resulted in a fiscal 2012 net deficit of $11.9 million (3.5% of spending and transfers out), the first in six years. Subsequent to a failed bond election in 2007, operations have funded more than $60 million of capital expenditures to support infrastructure improvement and growth needs.

Fiscal 2013 operating results were modestly positive due to strong revenue performance offset by $10 million in science lab improvements. Management's projections for a modest surplus in fiscal 2014 appear reasonable, reflecting further revenue growth along with $10 million funding of a transportation compound and facility improvements.

Fitch expects that some general fund flexibility will be afforded by the current issuance and a planned increase in the property tax rate, which will allow for reductions in pay-as-you-go capital spending and transfers for debt service. The balanced budget for fiscal 2015 includes a $19 million payroll increase for deferred staffing needs from the past three years.

MODERATE DEBT; SIZABLE NEEDS
Moderate overall debt of about $3,500 per capita or 3.7% of market value reflects the district's history of pay-as-you-go financing for capital needs. The amortization rate is average with about 43% of principal scheduled for repayment within 10 years.

The current issuance is the first from the district's successful $408 million bond election in November 2013. The program includes planned borrowing in each of the next three years to fund land acquisition for and construction of four ninth grade campuses, three middle schools, five elementary schools, and two elementary school replacements. Proceeds will also fund security and technology purchases and other facility renovations.

Fitch expects the debt burden to remain manageable based on the district's tax base growth trend. The district anticipates an increase of $0.028 per $100 in the debt service tax rate for this bond issue, but the district retains flexibility given their current low rate of $0.155 per $100 TAV in relation to the state's statutory cap of $0.50 per $100 for new debt issuance.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other post-employment benefits (OPEB) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled $2.4 million or a low 0.6% of spending in fiscal 2013. The district's total carrying costs for debt service and retirement benefits comprised a low 7% of governmental spending, net of state aid for debt.

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 (News - Alert) Global Insight, the National Association of Realtors, and the Municipal Advisory Council of Texas.

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=835728
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 (News - Alert) 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.


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