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TMCNet:  Fitch Affirms Bridgeport ISD, TX's GO Bonds at 'AA-' Underlying; Outlook Stable

[August 01, 2014]

Fitch Affirms Bridgeport ISD, TX's GO Bonds at 'AA-' Underlying; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the following Bridgeport Independent School District, Texas (the district) ratings:

--$27.2 million unlimited tax (ULT) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

TAX BASE CONCENTRATION: Natural gas and power generation properties dominate the local economy, with the top 10 taxpayers constituting 35% of taxable assessed value (TAV). Significant capital investment of these properties and the output demand from the energy sector combined with the district's high reserve levels somewhat mitigate these concerns.

SOLID FINANCIAL PERFORMANCE: Strong financial performance has yielded operating surpluses in four of the last five fiscal years. Unrestricted general fund balance and liquidity remain healthy despite recent state funding cutbacks in recent years.

MINIMAL GROWTH PRESSURES: The district maintains a modest student enrollment with minimal growth pressures and ample capacity in existing facilities.

MODEST LONG-TERM LIABILITIES: The district's debt profile is characterized by manageable direct debt, rapid principal amortization, and limited debt plans. Affordable carrying costs for debt service and retiree benefit contributions are a credit positive.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's financial management practices and high fund balance level. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district encompasses about 146 square miles in Wise County, north-central Texas, with a 2012 population of 12,326. Shifts in the locally dominant natural gas industry have caused fluctuations in the district's modest enrollment base of approximately 2,200 students in recent years.

CONCENTRATED ECONOMIC BASE

Natural gas production from the Barnett Shale and other affiliated industries dominate the local economy along with a sizable electric utility plant. Tax base and sector concentration remains high at about 35% of TAV in fiscal 2014. The top two taxpayers, Wise County Power Plant (owned by Suez Energy Generation) and Devon Gas Services, contribute a substantial 24% to district TAV.

Overall, the local tax base grew at a steady, modest pace throughout the economic downturn. TAV grew by 2.2% in fiscal 2013, and an additional 3.2% in fiscal 2014.

Unemployment rates historically have been lower than the state and national averages; the May 2014 rate of 4.4% is below both the state (5.1%) and nation (6.1%). County employment grew by 2.5% over the 12-month period ending May 2014. District enrollment has declined in recent years as population has fluctuated. Resident wealth levels are below average, consistent with the historical trend.

STRONG FINANCIAL PROFILE

The district continues to maintain a sound financial profile despite operating pressures associated with state funding cuts of $2.3 million (27%) since 2011 and enrollment declines of approximately 1.5% per year. Conservative expenditure forecasting and enrollment budgeting have allowed the district to maintain a healthy financial cushion despite decreases in operating revenues. The district has actively managed spending in line with revenue declines, with positive operations in three of the last five fiscal years. Deficits (after transfers) in fiscal years 2011 and 2012 were driven by capital investments including installation of the district's technology program.

The district's unrestricted general fund balance increaed to $10.4 million in fiscal 2013 (83% of general fund spending) from $9.9 million (49%) in fiscal 2012, due to the issuance of $5.9 million tax maintenance notes. Funds from the notes reversed an operating deficit (before transfers) of $408,000 driven by approximately $1 million of planned capital spending. The district's fund balance policy requires an unrestricted balance equal to a prudent 25% of spending, and management indicated that though capital spending is planned for future years, there is no intention to reduce reserves to this level.


The fiscal 2014 budget is approximately level with the prior year with total spending of $18 million, including the use of $477 of fund balance. Management projects final results will reflect a reduction in fund balance of approximately $500,000 for capital projects, reducing total fund balance to $14.9 million, or a still-healthy 81% of budgeted general fund spending.

AFFORDABLE LONG-TERM LIABILITIES

Overall debt per capita is moderate at $3,926 and 2.9% of market value. Principal amortization is rapid at 67% retired in 10 years. The district's debt service tax rate is less than half of the state attorney general's threshold for new debt issuance. The district does not anticipate the need for additional debt following the tax maintenance notes in fiscal 2013, as enrollment declines have created excess capacity in the district's existing facilities.

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 state historically has borne most of the costs, although districts will assume a higher share beginning in fiscal 2015. 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, totaling less than 1% of governmental fund spending in fiscal 2013. TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used.

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, including debt service, pension and other post-employment benefit (OPEB) contributions, were a low 10.9% of fiscal 2013 governmental fund spending. Starting in fiscal 2015, pension contributions for all districts in the state will rise to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs further, although pass-through state aid is projected to largely offset the year's increase. Further increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

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 the 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 supreme court.

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.

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=843876

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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