Fitch Rates Sharyland ISD, TX’s Series 2015 ULT Bonds ‘AAA’ PSF; ‘AA-‘ Underlying; Outlook Stable

AUSTIN, Texas

Fitch Ratings assigns an ‘AAA’ rating based on the Texas Permanent School Fund (PSF) and an ‘AA-‘ underlying rating to the following Sharyland Independent School District (ISD), Texas (the district) unlimited tax (ULT) bonds:

–$29.68 million ULT refunding bonds, series 2015.

The bonds are expected to price via negotiation the week of April 6, 201. Proceeds will be used to refund outstanding obligations for level debt service savings with no extension of maturities.

Fitch also affirms $116.9 million (pre-refunded basis) of outstanding district ULT bonds at ‘AA-‘.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district, without limitation as to rate or amount 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 Sept. 4, 2014).

KEY RATING DRIVERS

ADEQUATE RESERVES: The district maintains sound reserves despite the challenge of historically rapid growth and exposure to state funding uncertainties. Financial results are typically favorable to budget.

SOUND TAX BASE GROWTH: A history of solid growth in taxable assessed valuation (TAV) reflects ongoing residential development in this lower Rio Grande Valley bedroom community. Economic metrics are mixed, with above average median household income, but high unemployment, characteristic of the region.

ELEVATED, BUT AFFORDABLE DEBT: Fitch expects modest near-term improvement in the district’s high debt burden based on the lack of new issuance plans and a moderate principal amortization rate. Low carrying costs, including debt service, pension and other post-employment benefits (OPEB) result primarily from the strong state-wide support for district pension and debt service contributions.

RATING SENSITIVITIES

SOUND FINANCES: The rating is sensitive to a material decline in the district’s reserves, which serve as a mitigant to state funding variability exposure. The Stable Outlook anticipates continuation of sound financial management practices, including maintenance of structurally balanced operations.

CREDIT PROFILE

Sharyland Independent School District, population 45,909, serves the municipalities of Mission and McAllen (the latter’s GOs rated ‘AA+’; Outlook Stable) in Hidalgo County (GOs rated ‘AA-‘; Outlook Stable), at the southernmost tip of the state. The district’s fiscal 2014 average daily attendance of 9,731 reflects high compound annual growth of 6.9% between fiscal 2000 and 2010 and more modest 0.5% average growth in the subsequent five years.

STABLE FINANCES DESPITE STATE FUNDING VARIABILITY

District operations are supported by state funding (60%) and local property tax revenues (40%). Both have realized moderate five-year growth, mirroring the regional economy. The district’s total tax rate is relatively low at $1.28 per $100 of TAV, reflecting a low interest and sinking (I&S) fund rate of $.166. Voters approved a maintenance and operations (M&O) tax rate increase to the maximum of $1.17 in fiscal 2013. The tax rate election provided the district with a net increase in state funding of $3.5 million in additional state aid. Although the current M&O rate now resides at the statutory maximum rate, the district retains the ability to shift pennies from the M&O back to the I&S rate without voter approval or to increase the I&S tax rate.

The district completed fiscal 2014 with a $6.8 million (8.1% of spending) surplus reflecting the tax rate increase, reinstatement of state funding and relatively flat expenditures. An unrestricted general fund balance of $22.6 million represents a healthy 26.8% of spending. Officials estimate fiscal 2015 unrestricted reserves at a similar level.

ELEVATED DEBT; LOW CARRYING COSTS

The district’s overall debt is above-average at 5.5% of market value; amortization is moderate at 42% in 10 years. Near-term capital needs are modest. Upon completion of its second high school in fiscal 2014, the district reports ample capacity over the next several years. A resumption of previously rapid population growth likely will pressure campus capacity in the medium to longer term, generating both facility and operational needs.

The district’s pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district’s annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan; the vast majority of these contributions are made by the state on behalf of the district. However, districts are vulnerable to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Including debt service, pension and OPEB contributions, carrying costs were a low 7.8% of fiscal 2014 governmental spending, and even lower at 5.9% considering state support for debt service.

SOUTH TEXAS ECONOMY; GROWTH PROSPECTS

The district participates in the south Texas regional economy traditionally based on agriculture, international trade and maquiladora operations. Manufacturing and assembly within the maquiladora industry occurs in nearby Mexico, with warehousing and distribution on the U.S. side of the border.

The district’s TAV has enjoyed growth of about 3.5% on average annually over the past seven years, reflecting growth across industrial, commercial and residential property groups. Comprising a low 5.3% of total TAV, the top 10 taxpayers represent technology, utility, retail, commercial and industrial interests. Fiscal 2014 market value per capita of $72,000 is high for the region, but moderate nationally.

The district’s population has almost doubled since the 2000 census, although growth has moderated over the past couple of years. The district’s median household income is moderately above the U.S. average. Nearby city and county unemployment rates are improved from a year ago, but continue to exceed state and U.S. metrics, characteristic of the region. Fitch anticipates modest improvement in the employment base over the next several years based on an expanding health care sector and SpaceX’s recently announced spaceport launchpad development site in Brownsville. Space X, a private concern, designs, manufactures and launches rockets and spacecraft for telecommunication purposes and in coordination with NASA.

TEXAS SCHOOL DISTRICT 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.

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, 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=982142

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