Fitch Rates Garland ISD, TX’s ULT Bonds ‘AA+’ Underlying; Outlook Stable

AUSTIN, Texas

Fitch Ratings has assigned the following ratings to bonds of Garland Independent School District (ISD), Texas:

–$185.3 million unlimited tax (ULT) school building and refunding bonds, series 2015A at ‘AAA’;

–$21 million ULT school building bonds, series 2015B at ‘AA+’.

The ‘AAA’ rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated ‘AAA’ by Fitch. Additional information on the Texas PSF is available in Fitch’s Sept. 4, 2014 press release, ‘Fitch Affirms Texas PSF Rating at ‘AAA’; Outlook Stable’, available at ‘www.fitchratings.com‘.

The bonds are scheduled for negotiated sale May 19. Proceeds from the sale will be used to construct new facilities, improve existing school facilities, and refund a portion of the district’s outstanding ULT bonds for interest savings.

In addition, Fitch assigns an ‘AA+’ underlying rating to the series 2015A bonds and to $321 million in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. In addition, the series 2015A bonds are approved for the Texas PSF guarantee.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district’s conservative financial management practices have produced consistently healthy financial results, accumulating ample reserves despite regular cash financing of capital expenditures.

DIVERSE REGIONAL ECONOMY: The city is part of the broad Dallas-Fort Worth (DFW) metropolitan statistical area (MSA) economy. Residents have easy access to a diverse employment market that continues to outperform the nation in terms of population, employment, and income growth.

STABILIZED TAX BASE: Taxable assessed valuation (TAV) has gained traction after a period of mild contraction from declining home values. Moderate near-term TAV growth is likely given improved reassessment trends and development underway.

MANAGEABLE DEBT, EXPANDED CAPITAL PLANS: Overall debt is slightly above average and will likely increase with planned issuance over the next five years. The rate of principal amortization is above average and carrying costs are low due to significant state support for debt service and pensions.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district’s track record of sound operating performance and healthy reserve levels.

CREDIT PROFILE

The relatively mature district is located 17 miles northeast of downtown Dallas and serves an estimated population of nearly 290,000 in the cities of Garland, Rowlett, and Sachse. District enrollment is approximately 57,000 and is expected to remain flat in the near term.

SOLID FINANCIAL POSITION

State revenue represents over 65% of the district’s overall revenue, followed by property taxes at about 30%. Prudent financial management has enabled the district to maintain financial flexibility despite state funding cuts for all Texas school districts in fiscals 2012 and 2013. The district generated surplus operating results in each of the past five fiscal years (2010-2014), enabling the district to address various capital needs while still adding to reserves.

Fiscal 2014 results bettered original projections and included a healthy general fund surplus of $11.4 million (2.7% of spending), benefiting from conservative revenue and expenditure assumptions. These results were net of a $12 million transfer to the capital projects fund to finance bus purchases and various capital improvements. The unrestricted fund balance at fiscal year-end totaled $151.8 million, or a stout 36% of spending and transfers out.

District officials currently project a fiscal 2015 general fund surplus of $5 million on an operating basis (1.2% of budgeted spending). The district is expected to transfer $3 million to the capital projects fund for bus purchases for a net surplus of about $2 million. Fitch expects that the district will maintain reserves in excess of its informal target for 25% of spending.

Fitch’s concerns about previous TAV declines are largely mitigated by the state’s funding formulas, which backfill lost local revenues with additional state aid. If TAV changed course and declined further, the district’s debt affordability and capacity would be reduced, constraining its ability to address future capital needs.

LOCATION IN BROAD DFW ECONOMY

The district benefits from its proximity to Dallas and its location in the broader DFW metro area, which provides residents with easy access to a large and diverse labor market. Dallas is home to numerous corporate headquarters and prominent sectors include transportation, financial services, wholesale trade, manufacturing, oil/gas, and education and government. The district contains two rail transit stations connecting residents to downtown Dallas.

Employment growth in the city of Garland and the surrounding DFW region has outpaced the U.S. since the recession ended in 2009. Garland’s February 2015 unemployment rate declined to 4.3% from 6.1% in 2014 despite a solid 2.5% labor force gain over the same period. The city’s unemployment rate is average for the state but below the U.S. rate of 5.8%. Median household income in the district exceeds the state and nation, though educational attainment is below average.

TAX BASE GROWTH RESUMES

The district’s tax base is primarily residential, with a stable industrial/commercial representation and modest housing stock. Garland’s industrial market is the second largest in the MSA and includes a diverse mix of manufacturing and distribution concerns. The tax base is without concentration.

Recessionary declines produced sluggish TAV performance in fiscal years 2009-2013, reflected in modest declines each year and a cumulative loss of 7.8%. However, TAV regained footing with marginal growth in fiscal 2014, evidence of an improving housing market. Further improvement, coupled with new residential and commercial construction, produced stronger TAV growth of 5.5% for fiscal 2015. Retail and housing developments currently underway support the district’s projection for modest near-term tax base growth.

MANAGEABLE DEBT PROFILE, EXPANDED PLANS

The overall debt burden is above average at 5.7% of market value while debt per capita is moderate at $3,088. This burden is expected to increase with planned issuance of $455 million through 2019, inclusive of this offering (offset by $165 million retiring). The amortization rate is above average, with 64% of principal to be retired within 10 years.

In November 2014 a large 62% of district voters approved $455 million of ULT bonds to finance a natatorium, a career and technology education center, and various improvements to existing school facilities. The district’s last bond election was in 2012. The planned bonds are projected to increase the district’s debt service tax rate by $0.17 per $100 of TAV to a total $0.38 in 2021, well below the state’s $0.50 threshold for new debt issuance. This debt issuance follows a number of years in which the district financed various capital expenditures with general fund resources. Fitch views the increasing debt burden as a neutral trade-off with the district’s ability to fund capital needs.

LOW PENSION COSTS

The district’s pension and other post-employment benefit (OPEB) liabilities are limited to its participation in the state pension plan administered by the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district’s annual contribution to TRS is determined by state law. The fiscal 2014 pension cost represented only 1.4% of governmental fund expenditures, as plan contribution amounts are principally paid by the state and district employees.

Fitch will continue to monitor the level of state support for school district pension payments, noting the modest required 1.5% local contributions that have recently been imposed by the state. The district’s combined carrying costs for debt service, pension, and OPEB were very affordable at 6.5% of governmental fund spending in fiscal 2014, although that amount will likely increase with planned debt and the higher required pension contribution.

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 changes intended to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, the Municipal Advisory Council of Texas, and the 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=984228

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Fitch Ratings
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Austin, TX 78701
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