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Fitch Rates El Paso ISD, Texas' ULT Rfdg Bonds 'AAA' PSF; 'AA' Underlying; Outlook StableFitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'AA' underlying rating to the following El Paso Independent School District, Texas' (the district) obligations: --$84.28 million unlimited tax refunding bonds, series 2014A. The bonds are expected to sell via negotiation on December 15, 2014. Proceeds will be used to refund outstanding obligations for debt service savings. In addition, Fitch affirms the following ratings: --$383.7 million (pre-refunding basis) outstanding ULT bonds at 'AA'; --$15.3 million outstanding maintenance tax notes at 'AA'. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee program rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sep. 4, 2014.) The maintenance tax notes are payable from all available funds including, but not limited to, the operations and maintenance (M&O) tax levy limited to $1.04 per $100 taxable assessed valuation (TAV) on all taxable property located within the district. KEY RATING DRIVERS SOLID FINANCIAL PERFORMANCE: The district has achieved five consecutive years of surplus margins despite modest enrollment declines and state-wide funding cuts. Sound reserves provide an adequate financial cushion. LARGE AND DIVERSE TAX BASE: The diverse tax base remains relatively stable, without material decline during the recession. Fitch anticipates the inner city tax base to remain flat in the near term, limiting local revenue growth, although the district is considering a tax ratification election (TRE) to seek a modest increase in the M&O tax rate providing a measure of revenue flexibility. MANAGEABLE DEBT PROFILE: High overlapping debt reflects regional growth and contributes to the districts elevated overall debt. Low carrying costs - - the district's annual debt service, pension and other post-employment benefit (OPEB) contributions - - reflect a moderate pace of principal amortization and state support for debt service and pension costs. RESTORATION OF ELECTED BOARD: The district anticipates return of its seven-member board of trustee governance structure in May 2015. This follows the state's appointment of a board of managers for a two year term pursuant to findings by the Texas Education Association (TEA) of student testing abnormalities. RATING SENSITIVITY: SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's ongoing ability to maintain a sound financial profile and adequate reserves in the midst of flat enrollment and facility improvement needs. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. CREDIT PROFILE The district is the tenth largest school district in the state and the largest in the City of El Paso (rated 'AA' by Fitch). DIVERSE REGIONAL ECONOMY STABILIZES TAX BASE El Paso and Juarez, Mexico comprise the largest Mexican bi-national metroplex, with a combined population of more than 2.5 million. The area's location midway between the U.S. coasts has made it a significant gateway between the U.S. and Mexico. The Fort Bliss army installation and a sizable medical sector, anchored by the downtown Medical Center of the Americas, lend stability to the local economy. Commercial development and recent military and medical sector expansions have contributed to sound regional growth. However, population increases have largely eluded the inner city, representing the district's primary service territory and leading to modest enrollment declines over the past five years. El Paso's downtown continues to realize a variety of new commercial development, benefiting most recently from the city's Southwest University downtown baseball park, opened in August 2014. The park is home to the El Paso Chihuahuas, a triple-A team and affiliate of Major League Baseball's San Diego Padres. Fitch expects the strength of the regional economy and ongoing developent to contribute to stability of the district's tax base despite modestly declining inner city residential values. The tax base per capita is a modest $56,000 per capita. Although growing at an above average rate of 2.9% per annum over the past five years, median household income represents 74% of the U.S. average. At 6.4% in September 2014, the city's unemployment rate is also improved but continues to lag state (5.0%) and national averages (5.7%) for the same period. SOUND FINANCES DESPITE ENROLLMENT CHALLENGES The district budgets conservatively and generally realizes financial performance favorable to budget. Five years of consecutive surplus margins result from cost controls, including attrition. The district has aligned its spending with relatively flat revenues, reflecting state-wide funding cuts during fiscal 2012 and 2013 and a trend of enrollment declines within the district. Fiscal 2014 unrestricted reserves of $98.2 million represent a sound 21.0% of spending, favorable to the district's informal 60-day target. Officials estimate closing fiscal 2015 between breakeven and a $2 million deficit, inclusive of a sizable $7.8 million in capital budgeted for fiscal 2015. The district's fiscal 2016 budget may benefit from facility consolidations pursuant to a soon to be completed facility assessment. The district's M&O tax rate is at the maximum $1.04 per $100 of TAV, requiring voter approval for increase. Officials anticipate the potential for a TRE election in fiscal 2016 to seek a modest increase in the M&O tax rate. MANAGEABLE DEBT PROFILE Overall debt is elevated at 6.3% of market value due to sizable overlapping debt reflecting regional growth trends. The district's fiscal 2014 debt service burden is a relatively low 6.4% of governmental spending, and an even lower 5.2% considering state debt service support. Officials anticipate potentially seeking up to $230 million in authorization during fiscal 2016 to improve the aging infrastructure. The district's modest $0.195 per $100 of TAV interest & sinking (I&S) fund tax rate provides ample capacity in relation to the $0.50 cap for new debt issuance. District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the State of Texas on behalf of the district, thus eliminating any liability for the district. The system also offers post-employment health insurance benefits to retirees. The district's carrying costs are a low 7.8% of fiscal 2014 governmental spending (6.5% considering state debt service support). TEXAS SCHOOL FUNDING LITIGATION For the second time in the past 18 months a Texas district judge ruled in August 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, 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. Following a similar ruling in February, 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. 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 will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates. RETURN TO NORMALIZED DISTRICT GOVERNANCE In December 2012 the Texas Education Agency (TEA) appointed a five-member board of managers pursuant to forensic audit findings of fraudulent student testing procedures under the leadership of a previous school administration. According to the TEA commissioner, the board of managers will stay in place until elections are held in May 2015 for three new school board members, transitioning the district back to its normal governance structure. In April, TEA restored the district's accreditation from the probationary status in place since August 2012. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, CoreLogic/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015 U.S. Local Government Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=947455 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 (News - Alert) 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. |
