Fitch Affirms South San Antonio ISD, TX's ULT Bonds at 'AA-' Underlying;
AUSTIN, Texas -- January 30, 2013
Fitch Ratings takes the following rating action on South San Antonio
Independent School District, Texas' (the district) unlimited tax (ULT) bonds:
--$117.5 million ULT bonds affirmed at 'AA-'.
The Rating Outlook remains Negative.
The bonds are direct obligations of the district, secured by an unlimited tax
pledge levied against all taxable property within its boundaries.
NEGATIVE OUTLOOK: Operating reserves have declined due to recurring general
fund deficits. Management restored current-year budget balance through
spending cuts, and adequate fiscal cushion remains, but Fitch is concerned
about the district's ability and political willingness to eliminate out-year
deficits that are presently forecast.
STRONG REGIONAL ECONOMY: The district's central location in the diverse
economy and broad employment base of the San Antonio metropolitan area is a
credit strength. The district's taxable assessed value (TAV) trend is positive
and long-term economic prospects are favorable.
LIMITED LOCAL RESOURCE BASE: Residents' income levels are below average and
poverty rates are elevated. The local tax base is concentrated and has a low
WEAK DEBT PROFILE: The debt to market value (MV) ratio is high, reflecting the
limited tax base. Debt levels will likely remain elevated given the slow debt
amortization and future capital needs.
WHAT COULD TRIGGER A RATING ACTION:
FUND BALANCE DECLINE: Fitch expects to resolve the Outlook within the next 12
months and views the district's ability to maintain balanced operations in the
short term and make structural adjustments to eliminate projected out-year
deficits as key to rating stability.
This primarily residential district comprises 21 square miles in the southwest
part of San Antonio (GO bonds rated 'AAA' with a Stable Outlook by Fitch).
Annual enrollment has fluctuated slightly in recent years and 2013 enrollment
is up 1% from last year to 9,840.
STRONG RESERVES HAVE DECLINED BUT REMAIN SOLID
Recurring operating deficits from fiscal years 2009-2012 resulted from
structural budget imbalance that was caused primarily by increases to staffing
levels in prior years that outpaced enrollment growth. The annual deficits
(2%-3% of spending) have typically been lower than the originally budgeted
deficits, but they have produced a cumulative 23% decline in operating
reserves during this four-year period.
In recognition of the negative fiscal trend, management commissioned an
external staffing study and local cost-savings committee and began
implementing the respective recommendations in fiscal 2011 to curb spending.
Budget savings have included a reduced FTE count (6%) through attrition and a
hiring freeze, as well as discretionary reductions to department and
administrative budgets, summer-school, overtime, and substitute usage.
Significant under-spending of the 2012 budget offset lost revenue from state
budget cuts and narrowed the operating deficit to $2.4 million (from $4.8
million budgeted). The unrestricted general fund balance declined to $18.3
million or a sound 24% of expenditures, just below the district's working fund
balance target of 25% of spending.
2013 BUDGET IS BALANCED; OUT-YEAR DEFICITS FORECAST
The district accelerated spending reductions for fiscal 2013 to adopt a
balanced budget, reducing appropriations by 3.3% ($2.6 million) from the
prior-year budget. Officials offered an early resignation stipend that yielded
additional personnel savings and were able to provide a non-recurring stipend
for employees. Interim results were not yet available but attendance is up 1%.
Fitch views positively the return to current-year budget balance, particularly
amid lower state funding levels, but remains concerned about the baseline
financial forecasts for continuing deficits (1%-2% of expenditures) through
fiscal 2016. The district does retain some budget flexibility, but Fitch
believes that some of the budget mechanisms on the table, including furlough
days, layoffs, and a voter-approved tax rate increase, will be politically
difficult to implement or altogether unlikely to occur.
The district's solid fund balances have historically been the key mitigant to
credit pressures from the below-average resource base and high debt levels.
Further budget imbalance and declines in reserves would likely cause a rating
LIMITED LOCAL RESOURCE BASE; SUBPAR SOCIO-ECONOMIC INDICES
District wealth indicators are well below average, with per capita income at
46% of the national average, per-capita market value at a low $33,000, and a
poverty rate (20%) that exceeds the national average (14%). The district's tax
base is also concentrated, with the top 10 payers comprising an above-average
21% of fiscal 2013 TAV. The top payer is Boeing Aerospace (long-term Issuer
Default Rating of 'A' with Stable Outlook) which alone comprises 6% of TAV.
The district's recent TAV trend has been positive, with stabilized housing
prices, positive re-appraisals, and development activity producing a nearly
12% cumulative TAV gain since fiscal 2010. Prospects for further gains are
favorable given anticipated development adjacent to a Texas A&M University
satellite campus and regional growth prospects.
LOCATION IN STRONG SAN ANTONIO ECONOMY
The district's location in the broad and diverse San Antonio economy is also a
credit positive. San Antonio is the second largest city in the state and
eighth largest in the nation, with an estimated population of 1.8 million.
Prominent sectors include military and government, domestic and international
trade, convention and tourism, medical and health care, financial services,
The San Antonio market shed jobs in 2010 as a result of the national recession
but has since recovered most of the job losses. Considerable growth in the
hospitality and energy sectors, the latter being driven by drilling activity
in the expansive Eagle Ford shale gas formation south of the city, improved
the unemployment rate to 5.9% from 7.2% for the 12-month period ending October
HIGH DEBT BURDEN MAY RISE FURTHER
Overall district debt is high at 8.5% of market value even after adjusting for
annual state debt service aid of about 60% of debt, reflecting the district's
low property wealth. The overall debt calculation includes the currently
accreted interest of outstanding capital appreciation bonds. Debt per capita
is moderate and the annual carrying cost is affordable at 5% of governmental
spending (excluding capital projects fund spending).
Debt levels will likely remain elevated due to slow principal amortization
(34% retired in 10 years) and future capital needs. Officials plan to seek
debt authorization from voters in the range of $30 million-$50 million as
early as November 2013. The proposed bond program would fund construction of a
new elementary school and major renovations to aging facilities. Management
notes that the debt issuance would be done in conjunction with approval of
state debt service aid. The current tax rate of $0.42 provides adequate
capacity below the state's $0.50 statutory tax ceiling for new debt issuance,
but continued growth in the tax base will be critical to supporting debt plans
and mitigating any impact to the tax rate.
PENSION AND OPEB LIABILITIES NOT A CREDIT PRESSURE
Pension and other post-employment benefits (OPEB) for retiree healthcare are
provided through the state's Teacher Retirement System, a cost-sharing
multiple employer plan. State subsidies pay the bulk of the required
contributions on behalf of school districts for both pension and OPEBs,
resulting in an affordable $1.1 million annual required contribution for the
district in fiscal 2012 that equaled 1.1% of governmental spending. Combined
debt service, pension, and OPEB costs totaled an affordable 6.1% of
governmental spending for the year.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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, Zillow.com, National Association of Realtors, and
Texas Municipal Advisory Council.
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
U.S. Local Government Tax-Supported Rating Criteria
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