Fitch Rates Port Arthur ISD (TX) $25.2MM Series 2016D and $52.5MM 2016E ULT Rfdg Bonds 'AA-'
Fitch Ratings has assigned an 'AA-' rating to the following Port Arthur
Independent School District, Texas' (the district) unlimited tax (ULT)
bonds:
--$25.2 million ULT refunding bonds, series 2016D;
--$52.5 million ULT refunding bonds, series 2016E.
The bonds are scheduled to sell Oct. 4th via negotiated sale. Proceeds
will be used to refund certain outstanding maturities for savings and to
pay related costs of issuance.
In addition, Fitch has affirmed the district's Issuer Default Rating
(IDR) at 'AA-' and the 'AA-' rating on the approximately $362.2 million
(pre-refunding) in outstanding parity bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax (ad valorem) pledge
levied against all taxable property within the district.
KEY RATING DRIVERS
Underpinning the 'AA-' IDR and unlimited tax (ULT) ratings is the
district's adequate financial resilience and strong gap-closing capacity
that Fitch believes will be maintained throughout the economic cycle,
primarily a result of its sound labor cost flexibility. The district's
slowly amortized and rising debt service schedule drives the majority of
its moderately high carrying costs. The overall long-term liability
burden is elevated but still in the moderate range.
Economic Resource Base
The district serves primarily the city of Port Arthur, which is part of
the Beaumont-Port Arthur metropolitan statistical area (MSA), a
three-county region in southeast Texas located along the upper Gulf
Coast. Much of the local economy is driven by a long-standing,
concentrated base of petroleum-related industries and its limited nature
is apparent in the city's weak socio-economic metrics that include high
unemployment and low wealth/educational attainment levels. District
population (estimated at 54,550 in 2016) has grown modestly in the last
few years, which Fitch believes is a likely result of added employment
opportunities from the area's large industrial construction projects.
Enrollment declines have moderated. A 1% average annual enrollment
decline was realized over fiscals 2005-2015, which roughly halved the
rate of decline over fiscals 2002-2012. This relative improvement in
recent enrollment performance underpins Fitch's expectation of a similar
enrollment trend to be sustained. Enrollment totaled 8,972 in fiscal
2016.
Revenue Framework: 'bbb' factor assessment
The district's independent legal ability to raise revenues is limited by
state law according to the school funding system. Fitch believes growth
prospects for revenues remain solid, comparable to historical trends,
due to the likelihood of further assessed valuation growth and the
ability of district property taxes to capture that growth. However, this
assessment is diminished by district's recent history of sizeable and
successful tax protests requiring repayment, recent taxable assessed
value (TAV) decreases in a highly concentrated tax base, and Fitch's
expectations of continued, modest enrollment decline.
Expenditure Framework: 'aa' factor assessment
Enrollment is a key driver of both revenue and expenditure trends, which
should keep the pace of spending generally aligned with revenues over
time. Expenditure flexibility is adequate; the district's ability to
adjust labor costs if needed is balanced against its moderately high
carrying costs.
Long-Term Liability Burden: 'aa' factor assessment
The district's long-term liability burden is elevated but still in the
moderate range in relation to the local resource base. Continued, modest
population growth should keep future debt and capital needs manageable
and in line with the 'aa' assessment.
Operating Performance: 'aa' factor assessment
Sound flexibility in its labor costs and historically solid revenue
growth underpin the district's demonstrated operating flexibility,
allowing for a high level of reserves to be maintained. Fitch believes
the district's operating cushion would remain adequate and in line with
the 'aa' assessment in a moderate economic decline.
RATING SENSITIVITIES
Financial Flexibility: The rating is sensitive to the district's ability
to maintain an adequate level of operating flexibility in light of a
controlled revenue environment (pursuant to the state's funding formula)
and the district's specific vulnerability to sizeable tax protests by
large industrial taxpayers.
CREDIT PROFILE
Large industrial properties dominate the district's tax base, most of
which are involved in the energy and chemical sectors. Home to a large
portion of United States' refining capacity, the area continues to
attract significant industrial investment. Key contributing factors
include the area's extensive energy and pipeline infrastructure as well
as proximity to transportation/shipping networks that include the Port
of Port Arthur, one of Texas' leading seaports.
Recent development includes Sempra Energy's announcement of plans for a
LNG natural gas liquefaction facility in Port Arthur. This project, in
addition to other large projects underway, such as the nearby Golden
Pass LNG terminal (estimated at $12 billion in value at completion) is
expected to bolster population and employment trends.
High taxpayer concentration in terms of industry composition and among
individual taxpayers in addition to some volatility in the district's
property tax base is also a result of the outsized impact of the
petrochemical sector. This lack of diversity constitutes a measure of
risk to the district. The top 10 taxpayers comprise about 30% of TAV in
fiscal 2016 with Premcor (Valero) Refinery as the leading taxpayer at
12% of fiscal 2016 TAV, followed by the Motiva refinery at 10% of TAV.
The district's historically strong annual tax base growth was largely a
result of capital improvements and expansions to refineries made by
various top taxpayers. Moderate TAV decline in the last three fiscal
years (fiscals 2015-2017) is primarily attributable to reduced valuation
from successfully protested industrial properties as well as lower fuel
prices and a subsequent reduction in industrial inventory values.
Currently, management reports there are no pending or outstanding tax
protests. Fitch believes the essentiality of oil and gas refining in the
U.S. makes the closure of these plants unlikely, but expects the
district's exposure to TAV volatility to continue. Modest TAV growth
appears likely given further industry investment planned or underway.
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 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 (which varies from district to
district). This third-party funding support for operations stems from
the long-standing commitment of the state to fund K-12 education.
Nonetheless, this revenue stream remains susceptible to changes in local
enrollment trends and recessionary pressures on state revenues.
About 60% of the district's general operating revenues come from local
property taxes. The district is considered property-rich under the
state's funding framework due to its expansive industrial base, although
it is not required to make equalization payments to the state presently.
District property tax revenues stem from a highly concentrated tax base.
Fitch recognizes these revenues remain vulnerable to further assessment
appeal activity by individual taxpayers, which can have a magnified
impact on revenue loss, not fully offset by additional state aid due to
the district's above-average property wealth.
Fitch expects revenue gains to be solid and in line with historical
trends--above the rate of inflation, but below U.S. GDP. Additional
economic expansion should drive these gains, although sizeable tax
repayments, recent TAV decreases, and Fitch's expectations of continued,
modest enrollment decline weigh on the assessment.
The district has almost no ability to independently increase its
operating revenues. Per state statute, the district cannot increase its
operating property tax levy ($1.04 per $100 TAV) further unless it
receives voter approval. The district levied a separate, unlimited debt
service tax rate of approximately $0.31 per $100 TAV in fiscal 2016.
Expenditure Framework
Instruction consumed about 60% of operational spending in fiscal 2015.
Fitch expects enrollment to trend with a similar, modest decline, which
should keep spending pressures manageable and more or less aligned with
the expected solid pace of revenue growth over time.
The district has demonstrated its ability to adjust staffing and class
sizes in order to control key expenditure items in times of fiscal
stress without affecting its educational goals. This is tempered by the
district's need to maintain a competitive salary structure in order to
recruit and retain highly educated professionals. Nonetheless,
management's legal control of labor costs and headcount remains strong.
The district's fixed carrying costs, which are largely a product of
annual debt service costs, weigh on this assessment. The combination of
total annual debt service, the contractually required annual pension
funding amount, and the annual actual spending for other post-employment
benefits (OPEB), net of state support - consumed a moderately high 19%
of fiscal 2015 governmental spending. Fitch expects these fixed costs
will slowly rise going forward as a result of projected debt service and
future debt planned. Annual debt service is currently estimated to peak
at roughly $25 million (about 22% of fiscal 2015 governmental spending).
Nonetheless, these costs should remain comparable to the 'a' assessment.
District capital needs remain manageable, evidenced by an extended
timeframe to utilize $50 million in remaining ULT bond authorization, as
well as low retiree costs that reflect primary state funding of this
expense.
Long-Term Liability Burden
The long-term liability burden is moderately elevated at approximately
20% of personal income, primarily attributable to the district's direct
debt levels. However, Fitch believes this metric somewhat overstates the
burden given the significant property wealth inherent in the district's
large industrial base that also underpins the long-term liability
burden. Roughly 85% of the overall burden is derived from the district's
direct debt (roughly $354 million post-refunding) and principal
amortization is slow (about 30% retired in 10 years). Fitch believes the
overall liability burden should remain consistent with an 'aa'
assessment as the recent trend of modest population growth should
support manageable future debt and capital needs.
A portion of this refunding issuance provides up-front savings in order
to preserve the district's debt service tax rate at just under $0.32 per
$100 TAV as promised voters. The district maintains ample flexibility
under the state-imposed $0.50 per $100 TAV cap for new money issuance.
The district participates in the Texas Teachers Retirement System (TRS),
a cost-sharing, multiple-employer plan for which the state provides the
bulk of the employer's (the district) annual pension contribution.
Recent reforms have lowered benefits and increased statutory
contributions in order to improve plan sustainability over time.
Under GASB 67and 68, the district reports its share of the TRS net
pension liability (NPL) at $10.4 million, with fiduciary assets covering
83.3% of total pension liabilities at the plan's 8% investment rate
assumption (approximately 75% based on a more conservative 7% investment
rate assumption, for a liability of $17 million). The NPL adjusted for a
7% interest rate assumption remains small at less than 1% of personal
income. The district also provides OPEB through the state-run,
post-employment benefit healthcare plan.
Participants' required pension contributions are based on a statutory
formula that consistently falls short of the actuarially-determined
amount. Fitch therefore expects there will be modest growth in the NPL
even if investment returns meet assumed rates, although not outside of
expectations for the 'aa' assessment given how small the pension
liability is relative to overall debt. Like all Texas school districts,
Port Arthur ISD is vulnerable to future policy changes that shift more
of the contributions and liabilities onto districts, as evidenced by a
relatively modest 1.5% of salary contribution requirement effective
fiscal 2015.
Operating Performance
Fitch would expect the district to use a balanced combination of its
sound labor cost flexibility and historically strong reserve levels to
maintain an adequate level of operating financial flexibility throughout
the economic cycle.
The fiscal discipline and strong budgetary practices of district
management has allowed for balanced operations and high reserves to be
maintained despite the occurrence of required, multi-year tax repayments
in recent fiscal years. Fiscal 2015 operating performance was roughly
break-even before $9.8 million of reserves (14% of spending) were drawn
down as planned for the year's required property tax repayments.
Unrestricted general fund balance totaled $29.4 million or 35.4% of
spending at fiscal 2015 year-end.
The modest operating surplus projected in fiscal 2016 is planned for use
on various one-time spending priorities in fiscal 2017, inclusive of
performance incentives, which should keep the district's fiscal 2016
year-end cushion at no less than that of the prior fiscal year ($30
million or approximately 35% of spending).
The approximately $70 million fiscal 2017 operating budget is
structurally balanced and down by about 5% or $4 million year-over-year,
largely a result of tighter staff budgeting that eliminated most of the
district's currently unfilled positions.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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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