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TEXT-Fitch rates Mansfield ISD, Texas bonds

Mon Oct 22, 2012 3:12pm EDT

Oct 22 - Fitch Ratings has assigned an 'AAA' rating to the following unlimited tax (ULT) bonds for the Mansfield Independent School District, Texas (the district): --$29.155 million ULT refunding bonds, series 2012-B. The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (PSF; bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of Oct. 22, 2012 (pending market conditions). Proceeds will be used to refund a portion of the district's outstanding obligations. Fitch also assigns an 'AA+' underlying rating to the series 2012 bonds. In addition, Fitch affirms the following ratings for the district: --$692 million in outstanding ULT bonds (pre-refunding) at 'AA+'. The Rating Outlook is Stable SECURITY The bonds are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the PSF guarantee. KEY RATING DRIVERS SOUND FINANCIAL PROFILE: The district's financial profile is a credit positive and characterized by strong reserve levels and sound management practices. Six consecutive years of positive operating margins have bolstered the general fund balance to a notably high level. The district has demonstrated its ability to absorb state funding reductions. Fitch anticipates that management will continue to adjust spending levels as necessary to maintain a sound financial position. SOLID TAX BASE GROWTH: Fiscal 2012 taxable assessed value (TAV) registered solid growth, following a small dip the year prior. With a market value of over $10 billion, the tax base reflects continued expansion over the past six years, although at a slower post-recession pace. Taxpayer concentration is minimal. MODERATING ENROLLMENT GROWTH: Ample, affordable land and location in the Fort Worth-Arlington metro area fueled the district's previously rapid growth in population and enrollment. However, enrollment increases have moderated somewhat due primarily to the housing market downturn, easing growth pressures. SHRINKING DEBT FLEXIBILITY: The district's debt has grown to above-average levels due to regular borrowings to accommodate an expanding student population. Additional borrowings are planned for various facility upgrades and expansions. The borrowings have driven the district's debt service tax rate to the maximum allowed by the state for new bond issuances. While Fitch notes this as a concern, officials report near-term flexibility in the pace of debt issuance based on easing enrollment growth. FAVORABLE DEMOGRAPHIC PROFILE: The district's profile is characterized by above-average income and wealth. Historically low unemployment rates edged up during the recession but have remained below state and national averages. WHAT COULD TRIGGER A RATING ACTION DETERIORATION OF FINANCIAL FLEXIBILITY: Deterioration of the district's positive financial profile could apply downward pressure on the rating, given that the district is now levying a $0.50 debt service tax rate and has limited flexibility to issue new debt absent TAV growth. CREDIT PROFILE STRONG FINANCIAL PROFILE Fitch views the district's solid financial position as a credit strength. Despite ongoing operating and capital pressures, the district typically generates positive operating results, maintaining sizable fund balance levels that provide significant flexibility. Management budgets conservatively, with actual results typically outperforming the budget. In addition, the district benefits from natural gas royalty payments on its property; annual payments that range from $500,000 to more than $2 million are set aside for one-time special projects or capital expenditures rather than being built into the operating budget. The fiscal 2011 net surplus of $9.3 million reflected the district's prudent fiscal management and increased the unrestricted general fund balance (committed, assigned and unassigned balances under GASB 54) to a sizeable $96 million (45% of spending). The district has mitigated fiscal 2012 state funding cuts of $13.4 million with cost reductions, including attrition-based savings, combined with one-time federal EduJob monies. Management estimates a minimal $.5 million deficit for fiscal 2012, which includes $7 million in one-time capital expenditures. To address fiscal 2013 state funding cuts of $14.5 million, the district anticipates additional cost savings, combined with an estimated $7.7 million use of reserves. Management communicated the district's commitment to maintaining unrestricted general fund balances in compliance with its target of 3 1/2 to 4 months of spending. ABOVE-AVERAGE DEBT OFFSET BY LACK OF POST-EMPLOYMENT BENEFIT LIABILITY Debt ratios are above average, with overall debt approximating 8% of market value ($5,654 on a per capita basis). Scheduled principal amortization remains below average with about 34.8% of principal retired in 10 years. District voters continue to show public support for the district's capital program. This is evidenced by the successful authorization in November 2011 of $198.5 million in ULT bonds to fund the rebuilding of five elementary schools and various campus improvements and upgrades. The current plan of finance includes up to three additional bond issues through fiscal 2015 from the November 2011 authorization. The plan assumes modest growth in TAV and enrollment, use of I&S; funds, and a pledge of Tier One (operating) monies to meet the attorney general's test of a $0.50 per $100 of TAV for new debt issuance. The district's I&S; tax rate is now at the $0.50 level and projected to remain at that level even assuming modest tax base growth. Fitch views the debt service tax rate (at the statutory cap for new debt issuance) and below-average principal repayment as credit concerns. However, the district's solid financial profile somewhat offsets credit concerns and the district's moderating enrollment growth pressures and capacity in existing facilities provides some flexibility regarding the schedule of new debt issuances. Future deterioration of its financial strength and erosion of its debt issuance flexibility could apply downward pressure on the rating. 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 other post-employment (OPEB) benefits to retirees. As such, the district has no liability for pension or OPEB costs, which Fitch views as a notable offset to the high debt levels. The district's debt service, pension and OPEB contributions represent an affordable 21.8% of fiscal 2011 general government expenditures. STABLE ECONOMY The district experienced solid annual gains in TAV over four of the past five years, due initially to growth in residential property values and more recently to increasing commercial and mineral values. Various properties within the district's boundaries are located over workable portions of the Barnett Shale, one of the largest natural gas fields in the U.S. Gains in mineral values beginning in fiscal 2007 diversified the tax base; oil/gas business concerns are now some of the district's larger taxpayers. However, concentration remains manageable with the top 10 taxpayers comprising less than 8% of the fiscal 2012 total. While fiscal 2011 TAV registered a modest 1% decline, the tax base expanded in fiscal 2012 by over 6% to $9.4 billion. Total market valuation remains substantial at roughly $10.5 billion. The district serves an estimated population of 146,603 residing in southeastern Tarrant County and northeastern Johnson County that includes the city of Mansfield (GO bonds rated 'AA' with a Stable Outlook by Fitch). City wealth levels are generally above state and national averages. The city's unemployment rate of 6.1% as of July 2012 remains below regional, state, and national averages. The district benefits from its proximity to the ninth largest metropolitan area in the nation (Dallas Fort-Worth-Arlington) and connections to the DFW International Airport and surrounding communities by a robust and expanding transportation network. Affordable land spurred residential development over the past two decades. This in turn fueled rapid population and enrollment growth. Management anticipates more modest 2% annual enrollment growth over the next several years, which Fitch considers reasonable based on recent trends. The district's fall 2012 enrollment was approximately 33,000 students.

 
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