Fitch Upgrades Red Oak ISD, TX ULTs to 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the following ratings for Red Oak Independent School District, TX (the district) to 'AA-' from 'A+':

--$75 million outstanding series 1999, 2007, 2008, and 2009 unlimited tax bonds;

--Issuer Default Rating (IDR).

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district. The series 1999, 2007, and 2008 bonds are further backed by the Texas Permanent School Fund bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas PSF, see 'Fitch Affirms Texas PSF Rating at 'AAA', dated Aug. 5, 2015).

KEY RATING DRIVERS

The upgrade to 'AA-' reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The rating is driven by the district's positive revenue growth prospects, its limited independent ability to raise revenues, solid expenditure flexibility, and strong reserve position. Carrying costs associated with pension, OPEB, and debt service spending are moderate, as are long-term debt and pension liabilities. The district's carrying costs and long-term liability burden may increase due to expected additional enrollment and capital needs, but should remain in the moderate range.

Economic Resource Base

Red Oak ISD is located in Ellis County, about 20 miles south of Dallas. Its location provides residents with easy access to the Dallas metro area and many district residents commute to jobs throughout the region. Enrollment, approximately 5,800 students in 2016, has seen recent stronger growth, with continued growth projected. The district's top taxpayer, Triumph Aerostructures, makes up a significant of portion of taxable assessed value (TAV), and is also the largest private employer. District TAV growth has strengthened in recent years, reflecting significant expansion at Triumph Aerostructures as well as other tax base growth.

Revenue Framework: 'a' factor assessment

District operations are funded through a combination of state aid and local property taxes. The district's 10-year general fund revenue growth rate (through fiscal 2014) exceeded both national inflation and GDP. Continued revenue growth is expected, given positive enrollment projections driven by ongoing economic development. The district has very limited independent ability to raise revenues, as the operating tax rate is currently set at the statutory maximum.

Expenditure Framework: 'aa' factor assessment

The district's natural pace of spending growth is expected to be close to or marginally above that of revenues, given enrollment trends and capital needs. The district's moderate carrying costs reflect state support for both debt service and retiree benefits, bolstering spending flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The combined burden of long-term debt and pension liabilities is moderate as a share of district personal income. Fitch expects debt levels to increase to accommodate district capital needs, but they should remain in the moderate range. Retiree benefit obligations do not represent a significant burden on personal income.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's strong reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a solid level of spending flexibility in the event of revenue declines

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility, moderate debt and overall long-term liabilities, and adequate reserve levels that Fitch expects it to maintain through a typical economic cycle.

CREDIT PROFILE

District enrollment has shown recent stronger growth, due largely to residential development, following previously flat performance. Ongoing construction is expected to support continued enrollment growth. TAV has also returned to solid growth, reflecting significant Triumph Aerostructures expansion, as well as additional tax base growth. Top 10 taxpayers represented a significant 15% of fiscal 2015 TAV, led by Triumph Aerostructures (about 10%). Area unemployment remains below state and national levels. Personal income levels have been close to or above state and national averages.

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). About 63% of the district's fiscal 2015 revenues were derived from state aid, with about 32% generated by property taxes.

District revenue growth over a 10-year period (through fiscal 2014) exceeded national GDP and inflation. Going forward, the natural pace of revenue growth is expected to continue on a positive trajectory given recent and projected enrollment gains. Following flat performance in 2014 and 2015, enrollment grew by almost 4% in 2016, with another 2% growth estimated for 2017.

The district's legal ability to raise revenue is limited, as the current maintenance and operations (M&O) tax rate of 1.17 per $100 TAV is at the statutory limit. Voters approved the increase to the limit in 2008. The district levies a separate debt service fund tax rate of $0.37, which is below the attorney general's cap for new issuance of $0.50 per $100 TAV.

Expenditure Framework

The bulk of the district's expenditures are related to instruction. In addition, general fund outlays include pay-go spending for capital outlays.

The natural pace of spending is expected to be at or marginally above revenue growth, given enrollment trends and related spending needs.

The district's solid expenditure flexibility derives from notable control over workforce costs and moderate debt service and retiree related carrying costs that reflect state support for debt service and retiree benefits. Carrying costs represented a moderate portion (about 13%) of governmental spending in fiscal 2015.

Long-Term Liability Burden

The district's long-term liability burden (debt and pensions) is moderate at about 14% of personal income in fiscal 2015 and is made up largely of the district's outstanding debt. Amortization is very slow, at about 27% in 10 years. The district's proportionate share of the statewide retirement system net pension liability is minimal. While no debt issuance is currently planned, issuance will likely be necessary over the next two to three years to address middle-school capacity needs. As a result, Fitch expects debt levels and related liabilities and carrying costs to increase but to remain in the moderate range.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to 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 which state statute requires districts to assume. Like all Texas school districts, the district 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 for certain districts.

Operating Performance

The district has shown a high level of financial resilience, maintaining strong reserves through economic cycles. Fiscal 2015 operations yielded a budget surplus that increased the general fund unrestricted balance to $10.7 million or about 21% of spending. Current estimates for fiscal 2016 budget include a deficit of about $2.2 million, driven by capital spending. The fiscal 2017 budget assumes an additional draw-down of $4.2 million, also for capital needs. Even with these estimated draw-downs, reserve levels should remain adequate. District management has indicated that future capital needs will be addressed via debt funding, lessening use of general fund reserves for capital needs.

Fitch believes that the district, supported by its solid expenditure flexibility and strong reserves, would maintain a satisfactory safety margin in a moderate economic decline scenario.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011059

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011059

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Analyst
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or
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Steve Murray
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+1-512-215-3729
or
Media Relations
Elizabeth Fogerty
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New York
[email protected]

Source: Fitch Ratings

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