Fitch Rates Laredo Community College Dist (TX) 2016 Combined Fee Revs 'A+'; Outlook to Stable
Fitch Ratings has assigned an 'A+' rating to the following Laredo
Community College District (LCCD) revenue bonds:
--$5.4 million combined fee revenue refunding bonds (CFRB) series 2016.
The bonds are expected to price via negotiation on or about July 13,
2016. Proceeds will be used to refund outstanding series 2006 bonds. The
series 2016 bonds are expected to sell with bond insurance.
In addition, Fitch has affirmed the rating on LCCD's approximately $60.2
million parity CFRB bonds at 'A+'.
The Rating Outlook has been revised to Stable from Negative.
SECURITY
The CFRB bonds are secured by and payable from a pledge of certain
student fees, up to 25% of gross tuition revenues, and interest earnings
thereon.
KEY RATING DRIVERS
GENERALLY POSITIVE OPERATIONS: The Stable Outlook reflects LCCD's track
record of generally positive GAAP operating margins and ability to
manage effectively through revenue and enrollment cycles. Fitch expects
the district will continue to use its operating tax rate flexibility.
LCCD's revenue diversity and expenditure flexibility should support
continued operating balance.
MIXED ENROLLMENT TRENDS: LCCD's enrollment has improved more slowly than
that of other Texas peers in response to energy-related economic
softening, which can drive countercyclical enrollment growth. Following
a period of marked enrollment declines, the district's headcount
improved modestly starting in fall 2015. However, FTE enrollment and
semester credit hours continue to decline, although the pace of decline
is slowing.
HIGH DEBT LEVELS: The district has a high debt load including a sizeable
recent general obligation (GO) issuance to fund a large capital plan.
Available funds relative to total debt was quite weak at 11.9% in fiscal
2015. Carrying costs are also high relative to peers, with current debt
service equal to 18.1% of operating revenues. However, a majority of the
district's debt is supported by direct property tax levies, and
tax-supported carrying costs are moderate relative to the district's tax
base.
LIMITED PLEDGE: The CFRBs have a relatively narrow pledge of student
tuition and fees that constrains the rating. Pledged coverage from gross
revenues is sound. Due to the gross nature of the pledge, however, Fitch
emphasizes the district's overall ability to meet its obligations from
all available operating revenues.
RATING SENSITIVITIES
BALANCED OPERATIONS: Rating stability assumes that Laredo Community
College District (LCCD) will continue to generate balanced operations
and adequate coverage of all debt obligations over time despite somewhat
volatile and economically countercyclical enrollment trends.
ADDITIONAL DEBT: LCCD currently has no plans for additional debt, and
Fitch believes there is no additional debt capacity at this rating level.
CREDIT PROFILE
Founded in 1946, LCCD offers associate degree and vocational programs
principally from two campuses in Webb County. Its taxing boundaries are
coterminous with the growing city of Laredo, Texas (limited tax bonds
rated 'AA'/Stable Outlook). The city of Laredo is a regional service
center and serves as the principal port of entry into Mexico and is the
largest inland port in the U.S. City population continues to grow
rapidly, with an estimated 2015 population of 275,500 that reflects an
average annual increase of nearly 3% since the 2000 census.
A new president, Dr. Ricardo Solis, was appointed to replace the
retiring president and will begin on Aug. 1, 2016. He comes from a
college in the Maricopa County Community College District, AZ and has
held administrative positions in several other Texas community colleges.
In addition, separate administrative issues that had been credit
concerns appear to have been resolved without material negative effects.
GENERALLY POSITIVE OPERATIONS
LCCD has a track record of generally positive GAAP operating margins,
with surpluses in four of the past five years despite enrollment
volatility and state funding pressure. The district has revenue
diversity and expenditure flexibility that should support continued
operating balance. Major revenue sources, not all of which are pledged
to CFRB bonds, include ad valorem property taxes (37.5%, including the
levy for operations and a dedicated levy for LTGO debt service), grants
and contracts (30.8%), state appropriations (16.5%), and net student
fees (12%).
LCCD generated a positive operating margin of 4.6% in fiscal 2015,
similar to the prior year. In recent years, the district has relied more
heavily on property tax revenue to offset volatility in
enrollment-related revenues and some pressure on state funding. The
district has authority to set its own tuition, although its mission and
the region's below-average wealth and income levels effectively
constrain tuition increases. The district's taxing capacity has good
headroom under the $0.40/$100 taxable assessed value (TAV) rate limit
for operations; current rates are about $0.25. The district has
demonstrated its willingness to raise both property tax rates and
student fees as needed to maintain budgetary balance.
The district's tax base (TAV of $11.8 billion in fiscal 2016) remains
sound despite low oil prices and reduced activity in the nearby Eagle
Ford shale formation. The district's taxing boundaries are coterminous
with the city of Laredo, which has a diversified and still-growing
economy anchored in international trade with Mexico and its role as a
regional service center. Fitch expects the district will continue to use
its operating tax rate flexibility to maintain budgetary balance given
recent volatility in enrollment and related revenue streams.
MIXED ENROLLMENT TRENDS
LCCD's enrollment is improving more slowly than that of its Texas peers
in response to nearby energy-related economic softening, which typically
drives countercyclical enrollment growth at community colleges. The
district's FTE enrollment fell by a significant 20.4% between fall 2011
and fall 2015, as economic growth post-recession drew more potential
students into the workforce. However, the pace of FTE decline appears to
be slowing. Fitch views the district's headcount as a less informative
enrollment measure, but notes that headcount bottomed out and increased
by about 5% in fall 2015 to 8,749 (5,862 FTE).
Management anticipates overall stabilization and continued headcount
growth going forward, as participation in the district's relatively new
oil and gas training programs is holding generally steady, and expansion
of high-school dual-enrollment programs with Laredo ISD and United ISD
may boost contact hours. For fall 2016, LCCD anticipates another 5%
headcount increase, but modest FTE declines.
ADEQUATE DEBT SERVICE COVERAGE
LCCD has managed enrollment-related revenue pressures to maintain
adequate debt service coverage for the CFRBs; increases in tuition and
certain fees have kept pledged (gross) revenues generally steady despite
enrollment volatility. As a result, pledged coverage has remained over
2x in each of the past five years. Due to the gross nature of the
pledge, however, Fitch emphasizes the district's overall ability to meet
its obligations from all available operating revenues.
TAV gains have also helped the district maintain operating balance and
adequate overall debt service coverage. Overall coverage of maximum
annual debt service (MADS) for all debt obligations from fiscal 2015
operations was more modest at 1.1x. Fitch considers this adequate given
that over 70% of the district's debt is supported by a dedicated levy.
LIMITED FINANCIAL CUSHION
The district's balance sheet provides less financial cushion to absorb
revenue pressures compared with other community college districts rated
by Fitch. Fiscal 2015 available funds (defined as cash and investments
less restricted net assets) held steady at $28.8 million but equaled
just 33.3% and 11.9% of operating expenses and total long-term debt,
respectively. LCCD's cash position, as reported on the balance sheet,
includes unspent bond proceeds that Fitch excludes from the available
funds calculation.
HIGH DEBT LEVELS
Outstanding debt at Aug. 31, 2015 was $223 million, including $60
million CFRBs, $123 million LTGO bonds, and $39 million maintenance tax
notes. LCCD's very high pro forma MADS burden (21.4% for all debt types)
results mainly from recent borrowing to fund a large capital improvement
plan (CIP). The district is moving into the final phase of its $213
million CIP, with all associated debt issued. The plan is expected to
cover major capital needs over at least the next five years and was
expanded to include additional modernization projects and the Oil & Gas
Institute facility.
Tax-supported debt represents about three quarters of annual debt
service and is separately secured by an ad valorem tax levied on all
taxable property within the district. The CFRBs have level debt service,
with approximately $4.7 million due annually. MADS debt burden for just
the CFRBs is more moderate at around 5.2% of fiscal 2015 revenues.
No additional debt of any type is planned, as LCCD expects the current
CIP to meet its campus needs over the next 5-10 years. Fitch considers
the district to have no additional debt capacity at the current rating.
For more information see Fitch's press release, 'Fitch Rates Laredo
Community College District, Texas' Series 2015 LTGO Rfdg 'AA-'; Outlook
Stable,' dated June 4, 2015, available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008652
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008652
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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 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.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160708005830/en/
Copyright Business Wire 2016
