Fitch Rates Eagle Pass ISD, TX ULT Rfdg Bonds 'AAA' PSF/'A+' Underlying; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following obligations of Eagle Pass Independent School District, Texas (the district):

--$41.7 million unlimited tax (ULT) refunding bonds series 2016.

The 'AAA' Long-term rating on the bonds is based on a guarantee provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. For additional information on the Texas Permanent School Fund, see Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

The bonds are scheduled to sell via negotiation February 17. Proceeds from the bonds will be used to refund a portion of the district's outstanding debt for interest cost savings.

In addition, Fitch assigns an 'A+' underlying rating to the series 2016 bonds and affirms the underlying 'A+' rating on $55.6 million in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited tax levied against all taxable property in the district.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL RESERVES: Sound reserves have grown as a result of several years of generally positive financial performance. Budget balance has been largely preserved despite state funding reductions in some years.

CONCENTRATED RESOURCE BASE: The local economy centers on trade with Mexico and oil and gas production, and top taxpayer concentration is moderately high. The rating recognizes the potential tax base volatility driven by economic activity surrounding the Eagle Ford Shale formation, particularly in light on ongoing oil price declines.

BELOW-AVERAGE DEMOGRAPHIC PROFILE: Growth in per capita income has outpaced the state and U.S. but overall wealth indices and educational attainment remain very weak.

AFFORDABLE DEBT BURDEN: Outstanding debt levels are moderately low and the carrying costs for debt service and retiree benefits are modest due to state subsidies. The rate of amortization is moderate and the district's capital needs are limited.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: Continued growth in healthy reserve levels paired with economic diversification would lead to positive rating consideration.

CREDIT PROFILE

This 15,000-student district is located along the U.S.-Mexico border, approximately 150 miles southwest of San Antonio. The county seat, Eagle Pass (GO bonds rated 'A+' by Fitch with Stable Outlook), serves as the port of entry into Mexico at Piedras Negras, Coahuila.

ECONOMY LINKED TO MEXICO, ENERGY

The population of the Eagle Pass and Piedras Negras metropolitan area approximates 200,000, providing a solid base for trade and tourism that is complemented by agriculture and oil/gas production in the surrounding Maverick County. A portion of the district's tax base overlies the Eagle Ford Shale, a large natural gas play spanning southern Texas. Strong drilling activity spurred residential and commercial development in some recent years, as demonstrated by average annual tax base growth of 5% from fiscals 2010 - 2015.

However, changes in taxable assessed valuation (TAV) related to the Eagle Ford Shale will likely be affected over at least the near term by price declines in oil. Fitch's rating assumes some continued tax base variability due to the district's participation in this volatile economic sector.

Ongoing retail, hospitality, and gaming development helps diversify the district's tax base to offset further declines in mineral values, which represent 4% of the fiscal 2016 tax roll. TAV declined by 4.5% for fiscal 2016 as a result of a new statewide exemption, but the resulting revenue decline is expected to be offset by additional state funding.

The top 10 taxpayers comprise a slightly elevated 12.3% of fiscal 2016 TAV. There is some energy-industry concentration among the top payers (three out of 10), which exposes the district to economic cyclicality in that sector. The remaining top payers span healthcare, retail, real estate, and utilities. The large amount of farm and ranch land in Maverick County makes up the largest share of the tax roll and contributes to a low per-capita market value of $61,000.

Enrollment, on which state aid is largely based, has flattened in recent years, with fiscal 2016 enrollment up 0.3% from the prior year. Officials project flat enrollment to continue in the near term.

PERSISTENTLY HIGH UNEMPLOYMENT, LOW WEALTH

Top employers include the school district, retail, healthcare, and a casino, though the area's large migrant-worker labor force has contributed to historically elevated unemployment rates. County unemployment in November 2015 rose to 10.9% from 9.0% year-over-year and remains well above the state (4.2%) and U.S. (4.8%) rates. Resident wealth levels are below average, with per capita income at about half of the state average and individual poverty at nearly twice the national rate.

PRUDENT BUDGET PRACTICES ADD TO RESERVES

Conservative budgeting practices yielded operating surpluses in five of the last six years despite relatively flat enrollment, with only a modest deficit in fiscal 2012 due to state budget cuts. Increased local and state revenues produced positive results in fiscals 2013 -2015, as the district outperformed budget expectations each year. The general fund produced a surplus of $2.6 million (1.9% of spending) in fiscal 2015, despite a $2.5 million transfer to the capital projects fund. Unrestricted fund balance totaled $18.9 million or a solid 13.6% of spending. Liquid general fund assets remained satisfactory.

The district's fiscal 2016 proposed budget includes a general fund deficit of $998,000 (0.8% of spending) related to one-time spending items. The district typically budgets conservatively for state funding and maintains a degree of expenditure flexibility in its ability to increase class sizes, which are currently below the state's maximum. Fitch expects that reserves and liquidity will remain sound.

LOW DEBT SERVICE BURDEN

Overall debt ratios, including direct and overlapping debt, are low to moderate at $1,984 per capita and 3.2% of market value. Debt service is heavily subsidized by state funds totaling 63% of annual debt service. Net of state subsidies, debt service is only 1.1% of governmental fund spending. The rate of amortization is moderate, with 50% of principal retiring in 10 years.

The district maintains a five-year facility plan that includes annual cash funding of improvements as needed. Due to the district's flat enrollment trend, officials indicate no near-term borrowing plans. The current tax rate for debt service is $0.12 per $100 of TAV, which is very competitive with other school districts and affords significant capacity if debt needs were to arise.

AFFORDABLE PENSION OBLIGATIONS

The district participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS's ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $13.5 million, with plan fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment return rate assumption (approximately 75% based on a more conservative 7% rate assumption). The NPL represents approximately 0.4% of the district's fiscal 2015 market value. Carrying costs for debt service and pension costs totaled a low 5% of governmental fund spending in fiscal 2015, largely reflective of state support.

TEXAS SCHOOL FUNDING LITIGATION

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 and was the second such ruling in the past two years, 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.

The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature would likely follow with change 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 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). 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 Creditscope, Lumesis, and the Municipal Advisory Council of Texas.

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=999272

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999272

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160209006686/en/

Fitch Ratings
Primary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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