Fitch Ratings has affirmed the following United Independent School
District, TX ratings:
--Issuer Default Rating (IDR) at 'AA-';
--$332.6 million unlimited tax bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The unlimited tax bonds are payable from an unlimited property tax levy.
KEY RATING DRIVERS
The 'AA-' IDR and unlimited tax bond rating reflects the district's
moderate long-term liability burden and superior financial flexibility,
aided by ample expenditure flexibility and modest carrying costs.
Economic Resource Base
United ISD encompasses a sizeable 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 of 168,248, which includes a
portion of Laredo (GO bonds rated 'AA'), the third most populous city on
the U.S. - Mexico border.
Revenue Framework: 'a' factor assessment
The district has realized strong revenue growth over the past 10 years
at a rate in excess of inflation and U.S. GDP gains. It does not have
the ability to independently raise revenues, but Fitch believes revenue
growth prospects remain solid based on enrollment and demographic trends.
Expenditure Framework: 'aa' factor assessment
Fitch expects the pace of spending growth to be generally in line with
revenue gains. Expenditure flexibility is derived from management's
control over workforce costs and low carrying costs.
Long-Term Liability Burden: 'aa' factor assessment
The liability burden is moderate, comprised nearly equally of direct and
overlapping debt. Fitch expects additional debt will be accompanied by
continued gains in personal income, keeping the liability burden
moderate over time.
Operating Performance: 'aaa' factor assessment
Fitch expects the district's financial flexibility to remain solid
through an economic downturn based on ample financial reserves and solid
expenditure flexibility.
RATING SENSITIVITIES
Shift in Fundamentals: The IDR and GO bond ratings are sensitive to
material change in the district's strong expenditure flexibility and
prudent budgeting, which Fitch expects the district to maintain
throughout economic cycles.
CREDIT PROFILE
Transportation, warehousing, and distribution sectors have historically
produced the district's core economic growth. These sectors benefit from
the Laredo's major role, as the nation's largest inland port, in
international trade and should provide stability to the local economy in
the wake of ongoing contraction in natural gas and oil drilling activity.
In recent years, economic activity has been boosted by substantial oil
and natural gas exploration and production in the nearby Eagle Ford
formation. However, the 2014 plunge in oil prices stalled new drilling
activity and led to the reduction in the number of active wells within
Webb County by over 50% according to the Texas Railroad Commission. TAV
declined by 13% in fiscal 2017 due primarily to reductions in mineral
values, a reversal after a period of strong 10% compound average growth
Mineral values now comprise 18% of TAV, down from 30% in the prior year.
Nine of the district's top 10 taxpayers are in the oil & gas sector.
Management projects another large decline in mineral values in fiscal
2018, resulting in a more moderate 4%-5% decline in net TAV.
Commercial development continues within the district, particularly
within the warehouse and distribution sector, supplemented with retail
and multi-family projects. Beyond the district's boundaries (but within
Laredo) lies a $100 million outlet mall which is scheduled to open March
2017 and projected to add over 1,000 permanent jobs to the local economy.
Revenue Framework
Funding for public schools in Texas is provided by a combination of
local (property tax), state, and federal resources. The state budgets
the majority of instructional activity through the Foundation School
Program (FSP), which uses a statutory formula to allocate school aid
taking into account each district's property taxes, projected
enrollment, and amounts appropriated by the legislature in the biennial
budget process. The vast majority of districts are funded using a target
revenue approach whereby the combination of local and state funding for
operations meets a predetermined per pupil amount that varies from
district to district. In fiscal 2015, the district received 50% of its
total general fund revenues from state sources, followed by property
taxes (40%).
The district's general fund revenues grew by a 10-year CAGR of 6%
between 2004 and 2014, above the pace of inflation and U.S. GDP growth
rate. The pace of growth, which is driven in part by enrollment, is
likely to slow in the near term due to contraction in the area's energy
sector, but Fitch expects medium term revenue growth will rebound to
historical levels due to the continued rapid growth of Laredo's overall
economy. The reduction in property tax revenues due to the 13% TAV
decline in fiscal 2017 will have an immediate impact on the district's
budget as lower revenues will not be offset by increased state funding
until fiscal 2018. The state uses prior year AV in determining state
aid. Therefore, the district projects fiscal 2017 net revenues to
decline by $21 million or 5.4% of fiscal 2016 revenues. However, Fitch
does not expect the state's structural lag to materially impact the
district's strong medium term revenue growth prospects.
United ISD's maintenance and operations (M&O) tax rate of $1.04 per $100
of taxable assessed valuation (TAV) is at the statutory cap above which
voter approval is required, leaving it with no independent
revenue-raising flexibility. The district does not have plans to seek
voter approval of an increase in its M&O tax rate.
Expenditure Framework
Instructional costs account for 56% of fiscal 2025 operating
expenditures, which Fitch expects to grow in line with revenues, along
with the district's other operational costs.
The district's pace of expenditure growth is expected to be generally in
line with revenue growth given the moderate pace of growth in its
enrollment base. Average daily attendance (ADA) flattened in fiscal 2016
due to contraction of the energy sector but is rising again in the
current year.
The district's expenditure flexibility is derived from discretion over
its workforce costs and modest carrying costs. The district operates
with individual one-year contracts and does not engage in collective
bargaining. The district's carrying costs are low at 8.4% of fiscal 2015
spending, comprised primarily of debt service. Fitch expects carrying
costs to remain modest-to-moderate based on the district's measured pace
of debt issuance and the assumed ongoing state funding for the vast
majority of employer pension contribution. The district does not offer
other pension employment benefits.
Long-Term Liability Burden
The district's long-term liability burden is elevated but still within
the moderate range at 19% of personal income and is comprised almost
equally of direct and overlapping debt, in addition to a modest net
pension liability. The recent lower pace of enrollment growth allowed
the district to slow its capital program comprised of seven schools. As
a result, the district delayed its planned 2016 issuance and is
considering issuing $60 million to $75 million of its remaining $209
million bond authorization during summer 2017.
The district participates in the Texas Teachers Retirement System (TRS),
a cost-sharing multiple employer pension system. Under GASB 67 and 68
reporting, TRS's assets covered 83.3% of liabilities as of fiscal 2015,
a ratio that falls to a Fitch-estimated 75% using a more conservative 7%
return assumption. The state assumes the majority of TRS employer
contributions and net pension liability on behalf of school districts,
except for small amounts that state statute requires districts to assume.
Operating Performance
Fitch expects United ISD to retain ample financial flexibility in a
moderate economic downturn based on its strong expenditure flexibility
and robust financial cushion. Fitch's analytical sensitivity tool (FAST)
suggests that the district's operating revenues would be impacted only
modestly, resulting in manageable net losses in an unaddressed scenario.
The district accumulated large reserves during the current economic
recovery despite cuts in state aid revenues, allowing the district to
use a portion of reserves for pay-go capital outlays and still maintain
solid fund balances.. The fiscal 2015 audit posted a modest $514,000 net
general fund operating surplus (0.1% of spending) after pay-go capital
outlays of $10.4 million or 2.7% of spending. The resulting unrestricted
general fund balance declined to $83 million, equal to 21% of spending.
A healthy net income of $8.7 million (2% of spending) is projected for
fiscal 2016., increasing the financial cushion to about $91.8 million or
25% of spending.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014421
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https://www.fitchratings.com/regulatory
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