|[July 21, 2014]
Fitch Rates Frenship ISD, TX, ULT Bonds 'AAA' TX PSF/'AA-' Underlying; Outlook Stable
AUSTIN, Texas --(Business Wire)--
Fitch Ratings assigns an 'AAA' rating to Frenship Independent School
District, Texas' (the district) unlimited tax (ULT) bonds as follows:
--$45.2 million ULT school building bonds, series 2014.
The 'AAA' 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. Fitch also assigns an underlying rating of 'AA-' to the
series 2014 bonds.
In addition, Fitch affirms the following ratings:
--$117.2 million ULT bonds, series 2006, 2007, 2008, 2009, and 2010 at
The Rating Outlook is Stable.
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, series 2006, 2007, 2009, 2010, and 2014 bonds are secured
by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.
KEY RATING DRIVERS
POSITIVE FINANCIAL PERFORMANCE: The district has consistently posted
positive operating results and maintained solid reserve levels despite
reductions in state aid and cost pressures from enrollment growth.
ELEVATED DEBT LEVELS TO INCREASE: High debt ratios are expected to
increase further given the slow repayment of outstanding principal and
near-term borrowing plans. The elongated repayment structure of proposed
debt raises questions about its affordability.
STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014
and 2015 will reestablish growth in a significant source of operating
revenue for the district after several years of reductions to state
support, despite increasing property wealth.
STRONG TAX BASE & AREA ECONOMY: The district tax base is growing at an
increased rate after a moderate slowdown post-recession, while the area
unemployment rate continues to trend below state and national averages.
HIGH DEBT CAPS RATING: A high and growing debt burden likely precludes
positive rating action over the near term. However, Fitch's expectations
for continued tax base growth combined with the district's history of
sound financial management, positive operating performance, and strong
reserve levels are important credit strengths that moderate this risk.
The 128-square mile district is located immediately to the west and
southwest of Lubbock (rated 'AA+' by Fitch, Stable Outlook), a regional
economic hub in west Texas. A portion of the district lies within the
city limits, population 289,324. The district itself has a population of
HIGH DEBT BURDEN
Incorporating this issue, overall debt ratios are high at $8,776 per
capita and 12.5% of full value, and amortization is slow with 27%
retired within 10 years. The district currently levies a high $0.46 per
$100 of taxable assessed value (TAV) of the $0.50 statutorily permitted
debt service tax rate for new money issuance.
In May 2014 voters approved $85 million of bond authorization to build a
9th grade center and an elementary school. In addition to addressing
school capacity pressures, the district will use the funds for
renovations at the high school, general school facility maintenance,
athletic facilities, and technological infrastructure. The current
issuance is the first from this authorization, and the district plans to
issue the remaining $40 million in early 2016.
The district will increase its tax rate to $0.49 to service the bonds,
drawing on strong reserves in the debt service fund as needed to
maintain the rate below the statutory cap for new issuance. Inclusive of
the projects associated with the recent bond referendum, management
estimates sufficient school capacity through 2020 based on current
enrollment trends. The elongated principal structure and slow
amortization planned for the 2014 bond authorization places some
limitations on the district's future borrowing capacity.
Affordability of current and planned debt is dependent upon district tax
base performance, which has recently improved. TAV increased 6.0% and
6.2% in fiscals 2013 and 2014 following several years of more moderate
growth after the recession. Fitch believes assumptins for continued yet
moderate growth going forward are reasonable.
CONSISTENT POSITIVE OPERATING RESULTS
Audited results for fiscal 2013 depict a modest $61,449 general fund
operating surplus (after transfers). The general fund has recorded
positive year-end results each year dating back to at least fiscal 2002.
The fiscal 2013 unrestricted fund balance of $16.5 million equates to a
strong 30.9% of spending. Balance sheet liquidity is likewise strong,
with year-end cash and investments totaling $20.9 million or 141 days of
general fund spending.
State aid declined slightly in fiscals 2012 and 2013 as a result of an
adjustment in previous years' lower than projected average daily
attendance (ADA) and a legislative reduction in school support at the
state level. State aid is projected to increase 8.1% in fiscal 2014 and
4.9% in fiscal 2015 due to increased school funding at the state level
and enrollment gains within the district. Enrollment growth has recently
trended at approximately 300 students per year, and the district
projects similar growth in the medium term based on a recent demographic
CONSERVATIVE FISCAL 2014 BUDGET
In fiscal 2014, the district has budgeted a one-time capital expenditure
of $1.4 million for technology, as well as increases in salaries and
additions to staff to reduce class sizes to pre-recession levels. The
district historically budgets conservatively, and the budget for 2014
includes an operating surplus but a slight general fund deficit of
STABLE AREA ECONOMY
The district benefits from its location near Lubbock, where health care,
education, and government make up the area's largest non-agricultural
employment sectors. Largest area employers include Texas Tech University
(TTU), Covenant Health System, and TTU Health Sciences Center. The MSA
unemployment rate has remained consistently lower than the state and
national rates and improved to a favorable 3.5% in April 2014 from 4.6%
in 2013. Wealth and income levels for the district are above state
averages and slightly below national averages.
OTHER LONG-TERM LIABILITIES MANAGEABLE
The district's pension liabilities are limited to its participation in
the state pension plan administered by the Teachers Retirement System of
Texas (TRS), a cost-sharing multiple-employer plan. 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
high and growing debt burden. Carrying costs for the district (debt
service, pension, and OPEB costs net of state support) remain very
manageable, consuming 14.7% of governmental fund spending in fiscal
2013. Total carrying costs rise to a high 26.31%, inclusive of maximum
annual debt service after issuance of the series 2014 and planned 2016
bonds. Fitch will continue to monitor the level of state support for
school district pension payments, noting pension contributions for all
districts in the state will increase modestly to 1.5% on the statutory
minimum portion of payroll from 0% beginning in 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
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 Municipal
Advisory Council of Texas, 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
U.S. Local Government Tax-Supported Rating Criteria
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