Fitch Affirms Alvin Community College District, Texas' Ltd Tax Bonds at 'A+'; Outlook Stable
Fitch Ratings has affirmed the 'A+' underlying rating on Alvin Community
College District, Texas' (the district) approximately $13.4 million in
outstanding limited tax bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an annual property tax levy limited to $0.50
per $100 taxable assessed valuation (TAV) on all taxable property within
the district.
KEY RATING DRIVERS
ADEQUATE FISCAL POSITION MAINTAINED: Recent fiscal performance reflects
break-even-to-modestly positive operations, although the district's
financial position remains fairly marginal with narrow liquidity and a
modest reserve cushion. A balanced budget and the year's slightly
improved enrollment supports management's projections of another modest
surplus in fiscal 2016.
STEADY TAX BASE EXPANSION: TAV continues to grow at a moderate annual
pace. Various petrochemical, energy, and associated industries make up
the top 10 taxpayers and provide moderately high tax base concentration.
ENROLLMENT TRENDS MIXED: There has been some modest yet inconsistent
enrollment growth. This is balanced against overall trends that
generally reflect an eroding base, which Fitch views with some concern.
Nonetheless, Fitch believes it is feasible that the district may realize
some enrollment gains in the near term given the counter-cyclicality of
matriculation trends to the recent economic softening in the Houston
metropolitan statistical area (MSA).
AVERAGE SOCIO-ECONOMIC INDICATORS: Population growth trends and local
income/wealth levels are slightly below or at MSA, state, and national
averages.
MIXED DEBT PROFILE: High overall debt levels are balanced against the
district's rapid principal amortization and low carrying costs.
RATING SENSITIVITIES
OPERATING PERFORMANCE AND FINANCIAL CUSHION: The rating is sensitive to
material changes in the district's financial position.
CREDIT PROFILE
Located about 25 miles southeast of downtown Houston, this
comprehensive, two-year institution serves a relatively small local
enrollment base in and near the towns of Alvin, Manvel, and portions of
the city of Pearland. Enrollment totaled 7,211 full-time student
equivalents (FTSEs) in fiscal 2015. Population growth and income/wealth
levels are generally comparable to the MSA, state and nation.
SLIM OPERATIONS; MODEST RESERVE CUSHION MAINTAINED
Operations benefit from a relatively diverse revenue stream of tuition,
property taxes, and state aid available to all Texas community colleges.
The district has regained its modestly positive to break-even operating
performance in the last two fiscal years (fiscals 2014 and 2015) while
preserving a modest reserve cushion despite recent enrollment
fluctuations. Growth in the biennium state appropriation ($9.3 million
or 22% of total revenue in fiscal 2015, up about $1 million from fiscal
2013), use of the district's revenue-raising options, and some
expenditure savings (such as implementation of a one-time, exit
incentive) underlie the improved performance.
The district has periodically implemented some tuition/fee increases,
but more notably, has more consistently generated additional property
tax revenue for operations from a growing tax base coupled with modest
increases to the operating tax rate. The increased property tax
collections totaled $13 million in fiscal 2015 or 31.6% of total
revenues, which was up from $11.6 million or 28.7% in fiscal 2014.
A 1.9% operating margin was generated in fiscal 2014, bolstered by the
year's 2% uptick in enrollment headcount, although operating performance
quickly slimmed to break-even in fiscal 2015 given pressure from the
subsequent enrollment decline.
Available funds-to-expenditures remained persistently low at 19.3% at
the close of fiscal 2015. This includes the district's internally
designated reserves equal to $2.7 million or about 6% of spending at
fiscal 2015 year-end. The district's fiscal 2015 financial statements
also reflect the impact of GASB 68 on a historically slim financial
profile, as the unrestricted net position declined to a negative $1.6
million from $3.8 million in fiscal 2014 (before restatement).
For fiscal 2016, the balanced $28.2 million adopted maintenance and
operations (M&O) budget grew by about 3%, supported by tuition increases
and about $1 million in additional operating tax revenue. The district
maintained a nominally flat total tax rate of slightly over $0.20 per
$100 TAV for the second consecutive fiscal year. Management indicates
year-to-date operating performance is generally in line with budgeted
expectations. Enrollment above budget should boost the district's fiscal
position minimally by $500,000. Conclusion of a pending, one-time sale
of property by fiscal year-end could additionally improve results by
approximately $1.3 million.
CONTINUED TAV GAINS IN MODERATELY CONCENTRATED TAX BASE
The district's tax base continues to grow at a steady, moderate pace
with gains realized from some new home starts as well as expansion by
local industry, the health care sector, and supporting businesses. About
half of the district's tax base is residential. Totaling $8.5 billion in
market value as of fiscal 2015, the tax base has moderately high
concentration with the 10 largest taxpayers representing 16% and the
largest taxpayer (INEOS USA) 6.6%. Top taxpayers include a number of
large petrochemical plants and other associated industries.
The Houston MSA economy made a robust post-recessionary recovery due in
part to the strength of the energy sector. However, Fitch believes low
oil prices may dampen the pace of growth over the near term. As it is
one of the state's petrochemical centers, the positive impact of lower
energy prices on that activity may partially offset any economic
softening (see Fitch's report, 'How Will Local Oil Patch Governments
Fare? (Financial and Economic Impacts of Fluctuating Energy Prices)'
dated August 2015).
As a complement to the strong metro economy, activity in Brazoria County
centers on chemical manufacturing and petroleum processing. The county
benefits from the Port of Freeport, the 16th largest port in the U.S. in
terms of foreign tonnage, which provides critical shipping access for
the region's industries. Dow Chemical Co is the largest employer in the
county with 4,300 employees. Sizeable expansion plans were recently
announced for its Freeport chemical complex, in addition to the
construction of a research and development center in Lake Jackson.
While the area economy is dominated by the chemical and energy sector,
the essentiality of these industries and the ongoing diversification of
the regional economy somewhat offsets concerns regarding economic
concentration. The county's economic momentum has slowed modestly
year-over-year due to the stability of its other employment sectors and
those of the larger Houston MSA. Unemployment levels are up slightly to
4.8% in November 2015 from 4.5% a year ago due to faster erosion of
employment (2%) than labor force (1.5%). The county's unemployment rate
remained generally in line with the MSA (4.9%) and nation (4.8%) while
rising slightly above the state (4.5%).
OVERALL DEBT LEVELS HIGH BUT CARRYING COSTS LOW
The overall debt burden is high at approximately 10% of market value,
but a more moderate $2,580 on a per capita basis. This contrasts with
the college's relatively modest direct debt profile. The college has
been an infrequent borrower and amortization of its debt is rapid, with
100% of principal retired in 10 years. Recent TAV gains have allowed the
college to taper its already low debt service tax rate, which remains
under $0.03 per $100 TAV and well within the $0.50 debt service levy
limit.
A GO bond election for $88.5 million was recently approved by the
college's board of regents for the May 2016 ballot. Capital needs to be
funded by the proposed authorization include a new educational facility
on the west side of the college's taxing jurisdiction, with which
management anticipates the college can generate additional student
enrollment from the growing Alvin ISD school district as a result of
reduced commuting time. A debt service tax rate increase of under $0.07
per $100 TAV is currently projected under what Fitch believes to be
reasonable TAV growth assumptions of no more than 5% in the near term.
The college participates in the Teacher Retirement System of Texas
(TRS), a cost-sharing multiple-employer defined benefit plan. As the
non-employer contributing entity, the state contributes an amount
roughly equal to the current employer contribution rate.
However, like all Texas community colleges and K-12 public schools, the
college is vulnerable to future policy changes by the state. Legislative
changes in 2013 increased the state's annual contributions, although it
remains to be seen whether this improves TRS' ratio of assets to
liabilities over time.
Under GASB 68, the district reports its share of the TRS net pension
liability (NPL) at $5.1 million, with fiduciary assets covering 83.3% of
total pension liabilities at the plan's 8% investment rate of return
assumption (approximately 75% based on a more conservative 7% investment
rate of return). The NPL represents less than 1% of the district's
fiscal 2016 market value. Other post-employment benefit (OPEB)
contributions paid by the college are nominal, as the state and
employees also pay the bulk of these costs.
Carrying costs for debt service, pensions and OPEB are presently low at
5.5% of total operating/non-operating spending in fiscal 2015 and may
rise to a more midrange level if the proposed GO bond authorization is
approved, although Fitch recognizes this remains contingent on future
issuance and debt structure plans.
Additional information is available at www.fitchratings.com
Fitch recently published exposure drafts of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating
Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated
Feb. 2, 2016). The drafts include a number of proposed revisions to
existing criteria. If applied in the proposed form, Fitch estimates the
revised criteria would result in changes to less than 10% of existing
tax-supported ratings. Fitch expects that final criteria will be
approved and published in the first quarter of 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 Lumesis, CreditScope, the Texas Municipal Advisory
Council, and IHS Global Insight.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local
Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
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=1000418
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000418
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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