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EPISD earns favorable credit ratings for Bond 2016.
(EL PASO INDEPENDENT SCHOOL DISTRICT -- May 11, 2018) — Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'AA' underlying rating to the unlimited tax (ULT) bonds for the El Paso Independent School District.
The bonds are expected to price via negotiated sale the week of May 14, 2018, subject to market conditions. Proceeds will be used to refund a portion of the district's unlimited tax school building and refunding bonds, series 2008 and to pay the costs associated with the issuance.
Additionally, Fitch has affirmed the district's Issuer Default Rating (IDR), the underlying rating on $487 million in outstanding ULT bonds, and $18 million in maintenance tax notes at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further secured by the PSF bond guarantee program, rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated July 21, 2017).
ANALYTICAL CONCLUSION
The 'AA' IDR and unlimited tax bond ratings are based on El Paso ISD's strong operating performance, solid expenditure flexibility, and moderate liability burden. Economic Resource Base The district is the 10th largest school district in the state and the largest in the city of El Paso (GOs rated AA/Stable). It is bounded by Mexico on the south, New Mexico on the west and the Canutillo, Socorro and Ysleta Independent School Districts to the north and east.
KEY RATING DRIVERS
Framework: 'bbb' El Paso ISD revenues realized growth roughly in line with CPI for the 10 years ending in fiscal 2017. However, recent declining enrollment trends are expected to continue which, coupled with some increases to state support, Fitch expects to result in stagnant revenue growth below the level of inflation going forward. The district has no independently ability to raise operating revenues without voter approval.
Expenditure Framework: 'aa' Expenditure growth is likely to be marginally above pace of revenue growth given declining enrollment and natural attrition of the workforce. El Paso ISD maintains solid spending flexibility thanks to strong workforce control and a low fixed cost burden.
Long-Term Liability Burden: 'aa' El Paso ISD's long-term liability burden is moderate at 13% of personal income. Fitch expects the burden to remain moderate based on anticipated regional population and debt growth. The net pension liability represents a modest portion of the district's long-term liability burden.
Operating Performance: 'aaa' Fitch expects the district to demonstrate exceptional financial resilience throughout a moderate economic downturn based on moderate budget flexibility, low expected revenue volatility and ample reserves. The district typically outperforms its conservative budget. RATING
SENSITIVITIES
Financial Flexibility: The IDR and ULT rating are sensitive to maintenance of exceptional financial flexibility, influenced by enrollment and revenue trends and maintenance of ample reserves. CREDIT PROFILE El Paso and Juarez, Mexico, form a binational metroplex with a combined population of more than 2.5 million. 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. 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.
Commercial development and military and medical sector expansions have contributed to moderate regional growth historically, but have slowed down in the last couple of years demonstrated by a 2% compound annual growth rate (CAGR) of the district's taxable assessed valuation (TAV) between fiscal 2007 and 2017 during which time population has remained relatively flat. Significant multi-use, residential and commercial development projects are expected to support additional tax base growth but most likely not affect the district's enrollment trends for some years.
The proposal of President Trump to withdraw from the North American Free Trade Agreement (NAFTA) has created uncertainty with respect to the regional economic structure. The full implementation of such a policy would be a credit negative for the local economy. However, Fitch believes the proposed shift to trade protectionism would be met with significant corporate lobbying and demands from Congress to approve any treaty changes (For more information, see 'Fitch: Trump Policies Would Be Negative for U.S. Public Finances', dated Nov. 9, 2016 and 'Tax-Supported / U.S.A.NAFTA Termination Could Hit Upper Midwest, Border State Economies Hard' April 11, 2018).
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 Tier 1 component of the FSP provides districts a certain level of operational funding, and the basis for most Tier 1 allotments is called the basic allotment. This is a per-pupil dollar amount which, multiplied by average daily attendance (and adjusted for specific circumstances) produces a district's Tier 1 allotment. The state of Texas' favorable revenue growth prospects bode well for K-12 funding in the medium term, though the district's declining enrollment will offset some of these gains. In fiscal 2017 the district received about 62% its revenues from state sources, with 34% of the remainder from property tax.
El Paso ISD's revenues realized stagnant slow growth at about the level of inflation over the 10 years that ended in fiscal 2017. Growth reflects the district's ability to capture year over year tax base gains due to a one-year lag in state aid adjustments, historically flat enrollment and state funding adjustments. Recent enrollment declines and more expected in the coming years, Fitch anticipates revenue growth will fall below U.S. CPI despite regional tax base trends and recent increases in state support over the medium term.
Due to the state funding mechanism, Texas school districts have very limited ability to independently increase general fund revenues. However, this limitation as a factor in the revenue framework assessment is somewhat offset by the recognition of K-12 education as fundamentally a state responsibility and the strong foundation of state support for education funding. The district could raise operating revenues by an additional $0.10 to $1.17 through a tax ratification election, although no decisions have been made on whether or not to approach the voters.
Expenditure Framework The majority of the district's budget is applied to workforce costs and is focused on instructional and support processes.
Fitch expects the district's recurring operating expenditures to grow marginally above its expected revenue growth over the medium term. Declining enrollment will slow the pace of expenditures growth by allowing the district to adjust staffing through attrition coupled with low carrying costs reflected in state-wide funding for the majority of employer pension and other post-employment benefit contributions. The largest area of spending pressure for the district going forward includes personnel wages. Nonetheless, management's legal control of labor costs and headcount remains strong.
Fitch's 'aa' expenditure flexibility assessment reflects the district's discretion pertaining to staffing and labor costs. The district's debt and pension contribution carrying costs are a low 5.1% of governmental spending. Fitch expects carrying costs to remain affordable considering spending trends, and including its planned debt issuance. The district's pension contributions are currently limited to 1.5% of salaries plus contributions on the portion of salaries above the statutory maximum. Fitch's expenditure flexibility assessment assumes ongoing state funding for the majority of the employer pension. However, like all Texas school districts, El Paso ISD 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 that became effective fiscal 2015.
Long-Term Liability Burden El Paso ISD's $1.6 billion long-term liability burden is moderate at 13% of estimated personal income. The burden is comprised primarily of debt ($1.3 billion, of which $521 million is direct debt). The district expects to issue approximately $250 million in January 2019 and $219 million in January 2020 for purposes of facility renovations and improvements. The district's plan of finance anticipates that its I&S tax rate (currently $0.24 per $100 of TAV) will remain well below the $0.50 statutory rate cap for new debt issuance. Fitch's long-term liability assessment assumes that the district's long-term liability burden, incorporating new debt issuance plans, will remain moderate.
El Paso ISD historically maintains a modest amount of variable-rate unlimited tax bonds. The district's series 2004 variable rate bonds, remarketed in 2016, represent about 5% of total debt outstanding subsequent to its series 2017 issuance. The series 2004 bonds bear interest at a weekly rate and are supported by a standby bond purchase agreement (liquidity agreement) with JP Morgan Chase Bank (rated AA-/Stable), which expires on May 31, 2019, unless extended or terminated prior to expiration. Fitch considers the risks associated with a failed remarketing manageable, based on assumed ready market access given the district's sound credit profile. The district does not have plans at this time to issue additional variable rate bonds.
The district participates in the Texas Teachers Retirement System (TRS), a costsharing multiple-employer pension system. Under GASB 67 and 68 reporting, TRS' assets covered 78.4% of liabilities as of fiscal 2016, a ratio that falls to a Fitchestimated 62% using a more conservative 6% return assumption. The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts that state statute requires districts to assume. The district's pension contributions are determined by state statute, rather than actuarially, and similarly to other Texas school districts, have historically fallen short of the actuarial level, resulting in a growing liability. Recent state reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.
Operating Performance Fitch expects El Paso ISD to maintain the highest level of gap closing capacity through a moderate economic downturn based on its solid expenditure flexibility, low expected revenue volatility and sound reserve levels. The district's history of strong operating performance demonstrates its ability and willingness to undertake spending cuts during periods of revenue decline in order to maintain a strong financial cushion. The district's finances will benefit from savings associated with facility improvements and consolidations slated for completion over the next five years. Although the district projects ending Fiscal 2018 with a draw of $7 million on reserves, primarily due to one-time capital projects, Fitch anticipates the district's reserves to remain consistent with the current 'aaa' operating performance assessment.
The district typically budgets conservatively. The current rating assumes that the district will continue to prudently manage its costs in order to maintain a strong financial cushion.
Contact:
Primary Analyst Nancy Rocha Director +1-512-215-3741 Fitch Ratings, Inc. 111 Congress Avenue Austin, TX 78701
Secondary Analyst Rebecca Moses Director +1-512-215-3739
Committee Chairperson Karen Ribble Senior Director +1-415-732-5611
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools. Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com
Additional information is available on www.fitchratings.com
Applicable Criteria U.S. Public Finance Tax-Supported Rating Criteria (pub. 03 Apr 2018) (https://www.fitchratings.com/site/re/10024656)
Additional Disclosures Dodd-Frank Rating Information Disclosure Form
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