Fitch Rates Northwest ISD, TX's ULTs 'AAA' TX PSF/'AA' Underlying; Outlook Stable
Fitch Ratings has assigned an 'AAA' rating to the following Northwest
Independent School District, Texas (the district) unlimited tax (ULT)
bonds:
--$88.2 million ULT bonds, series 2015B.
The bonds are scheduled for negotiated sale the week of Oct. 19.
Proceeds will be used to refund a portion of the district's outstanding
ULT debt for interest savings.
Fitch has also assigned an 'AA' underlying rating to the bonds and
affirmed the 'AA' underlying rating on the following outstanding bonds
(pre-refunding):
--$765.6 million in outstanding ULT bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levy of the
district, and also carry the Texas PSF bond guarantee (for more
information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at
'AAA'; Outlook Stable', dated Sept. 4, 2014).
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: General fund reserves and liquidity remain
solid, maximizing the district's financial flexibility. Management's
sound and proactive fiscal practices have historically enabled annual
operating surpluses despite a trend of rapid enrollment growth.
GROWING, SOMEWHAT CONCENTRATED ECONOMY NEAR DALLAS-FORT WORTH: The
district benefits from its proximity to the employment base of the
Dallas-Fort Worth (DFW) metro area, as well as its location near the
Barnett Shale natural gas field. Wealth and employment indices exceed
state and national averages.
TAV RESTORED: Residential and commercial development returned taxable
assessed valuation (TAV) to previous peak levels in fiscal 2015 and
mitigated losses in the previous four years from low natural gas prices.
The district's growth prospects are positive given the availability and
affordability of land.
HIGH DEBT BURDEN: Capital needs from rapidly growing enrollment will
continue to drive already high debt levels. The fixed cost burden is
tempered in part by the district's overall financial flexibility, some
remaining tax rate cushion below the statutory $0.50 tax rate ceiling
for new debt, and limited pension and OBEB liabilities.
RATING SENSITIVITIES
DETERIORATION OF FINANCIAL CUSHION: The district is sensitive to a
material deterioration of solid reserve levels that provide ample
financial flexibility in a high growth environment. The Stable Outlook
reflects Fitch's expectation that such decline is unlikely in the near
term.
GROWING DEBT BURDEN: The district's rating is sensitive to a substantial
increase in the already elevated debt levels. Capital plans are
affordable given tax base and enrollment growth assumptions, but
issuance beyond current expectations would put downward pressure on the
rating.
CREDIT PROFILE
The district is located in the northwest part of the DFW metropolitan
area and encompasses a large 232 square miles that include 16 rural
communities in Denton, Tarrant, and Wise counties. Population and
enrollment growth have been rapid since 2000 spurred by the availability
of affordable land and location within the broad DFW metro. Median
household income is well in excess of regional, state, and national
averages, and the county unemployment rate has fallen to a low 3.6% as
of July 2015 compared to the state (4.3%) and nation (5.6%).
The district typically adds between 1,000-1,500 new students per year,
although that figure fell slightly to 833 (4.1% increase in enrollment)
for the current fiscal year. Annual enrollment gains have remained in
line with demographic studies that project steady increases in student
enrollment, and the district has recently pared down projections
slightly to 6% from 7% through fiscal 2018 in light of the modest
slowdown. District enrollment totaled just fewer than 21,000 students in
fiscal 2016.
FINANCIAL PROFILE A CREDIT POSITIVE
Financial performance has been strong historically, characterized by
operating surpluses, solid reserves, and ample liquidity. Sound
management has helped to navigate the operating pressures associated
with rapid enrollment growth, changes in the state funding formula, and
cuts to state funding.
Audited fiscal 2014 results were better than the budgeted $2.7 million
deficit, ending the year with an $11 million operating surplus (roughly
8% of the year's spending). Management reports this excess was due to
the budgeting of positions that remained vacant, and expects personnel
costs to be more accurately budgeted going forward. Unrestricted general
fund reserves at fiscal 2014 year-end rose to a high $71.6 million or
50% of spending, well above the district's informal target of 33%.
General fund liquidity also remained solid at nearly $81 million, or
about seven months of spending.
For fiscal 2015, unaudited results point to another year of surplus
despite the $1.8 million budgeted net operating deficit after transfers,
typical for the district. Management reports no actual variances from
the balanced fiscal 2016 budget year-to-date.
UNCERTAINTY SURROUNDING STATE FUNDING
The district's current financial forecast projects annual operating gaps
that grow to a substantial $23 million (13% of projected revenue) in
fiscal 2018 due to the expiration of a state tax relief program.
Approximately 30% of Texas school districts still received this type of
tax relief funding in fiscal 2014. While the forecasted imbalance is
material, the district has also built up very high reserves in
preparation of this funding uncertainty. Given management's history of
conservative budgeting practices and prudent financial management, Fitch
believes the district will make necessary expenditure adjustments in
order to preserve their strong financial posture in the long term.
STRONG RESIDENTIAL AND COMMERCIAL GROWTH
The district's tax base is somewhat concentrated in mineral values, but
they comprised only 10% of fiscal 2015 TAV, down from a much higher 22%
in fiscal 2011. Diversification in the tax base is a result of strong
residential and commercial growth that mitigated losses in TAV caused by
several years of low natural gas prices. Modest annual average TAV
declines of just 2% over fiscals 2011-2014 were more than restored in
fiscal 2015 with almost 9% growth. The district projects similar growth
of 7.5% annually through fiscal 2019 and then moderating to 1% growth by
fiscal 2025. Fitch views the near-term growth assumptions as optimistic
but believes continued residential and commercial development will add
to TAV in coming years.
Top 10 taxpayer concentration is down slightly but remains above average
at 21% in fiscal 2015, led by Devon Energy Corp at a sizeable 7% (Fitch
Issuer Default Rating 'BBB+'/Outlook Stable). Devon Energy has held the
place of top taxpayer since 2002, and the Barnett Shale accounts for
approximately a third of the firm's overall production from a geographic
perspective. While TAV losses pose minimal operational risk given the
current school funding formula, TAV declines could apply pressure to the
district's already high debt profile and capital plans.
HIGH DEBT LEVELS
Debt levels are high at $12,332 per capita and 6.7% of market value.
Principal amortization is slow with about 37% retired in 10 years.
Inclusive of this refunding, annual debt service is projected to rise
steadily from $52 million in fiscal 2016 to reach maximum annual debt
service (MADS) at $64 million in 2028. The district's debt profile is
primarily comprised of fixed-rate debt with some use of capital
appreciation bonds and a low amount (2% of outstanding principal) of
variable rate bonds. While the high debt burden is a credit concern,
Fitch notes that the fixed cost burden is tempered in part by the
district's overall financial flexibility, some remaining tax rate
cushion below the statutory $0.50 tax rate ceiling for new debt, and
limited pension and OBEB liabilities.
The district has $130 million in unissued but authorized debt from the
2012 referendum, and management reports it is undergoing a comprehensive
internal review of capital needs and respective funding sources.
Management has made a commitment to voters to maintain the debt service
tax rate at the current $0.4125 throughout the issuance of the 2012
authorization, which was raised from $0.335 in fiscal 2014. Fitch will
continue to monitor the district's ability to address capital pressures
in relation to its tax base and budgetary flexibility as it implements
its growth-related capital plan.
OTHER LONG-TERM LIABILITIES MANAGEABLE
The district's pension liability is limited to its participation in the
state 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
2014, 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 affordable in the face a
growing debt burden. Carrying costs for the district (debt service,
pension, and OPEB costs) consumed a manageable 15% of governmental fund
spending in fiscal 2014, however rise to 21% of fiscal 2015 budgeted
spending when it reaches MADs in 2028. Fitch will continue to monitor
the level of state support for school district pension payments, noting
pension contributions for all districts in the state increased to 1.5%
on the statutory minimum portion of payroll from 0% beginning in fiscal
2015.
TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past 18 months a Texas district judge ruled
in August 2014 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 underfunded. The judge also ruled
that local school property taxes are effectively a statewide property
tax due to lack of local discretion and therefore are unconstitutional.
Following a similar ruling in February 2013, the judge granted a motion
to reopen the lawsuit four months later after state legislative action
that partially restored state funding levels and made other program
changes. Fitch expects the state will appeal the latest ruling to the
state supreme court. 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 and more local
discretion over tax rates to be a credit positive.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015). The draft includes a number of proposed
revisions to existing criteria. If applied in the proposed form, Fitch
estimates the revised criteria would result in changes to fewer than 10%
of existing tax-supported ratings. Fitch expects that final criteria
will be approved and published by Jan. 20, 2016. Once approved, the
criteria will be applied immediately to any new issue and surveillance
rating review. Fitch anticipates the criteria to be applied to all
ratings that fall under the criteria within a 12-month period from the
final approval date.
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 Global Insight, National
Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel,
Trustee, US Federal Government (non-public information), and the
Municipal Advisory Council of Texas.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992255
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992255
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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