Fitch Rates Rio Grande City CISD, TX's ULT Rfdg Bonds 'AA-'; Outlook
AUSTIN, Texas -- April 30, 2013
Fitch Ratings has assigned an 'AA-' rating to the following Rio Grande City
Consolidated Independent School District, Texas' (the district) unlimited tax
--$18.6 million in ULT refunding bonds, series 2013.
The bonds are scheduled for negotiated sale May 1. Proceeds will be used to
refund certain outstanding bonds of the district for interest cost savings.
In addition, Fitch affirms its 'AA-' rating on $126.9 million of outstanding
ULT bonds of the district.
The Rating Outlook is revised to Negative from Stable.
The series 2013 bonds and outstanding ULT bonds are secured by an unlimited ad
valorem tax pledge levied against all taxable property within the district.
KEY RATING DRIVERS
WEAKER ECONOMIC OUTLOOK: The Negative Outlook reflects Fitch's concerns over
the weakened economic profile, aggravated by significant and sustained taxable
assessed value (TAV) declines due to concentration in the oil and gas sector
as well as stubbornly high unemployment. Top payer concentration remains above
average despite some moderation.
PLANNED FUND BALANCE SPEND-DOWN: The Negative Outlook also takes into account
a large fund balance draw-down that is planned for new facility construction.
While Fitch has expected this draw-down for some time, the lower level of
fiscal cushion joined with the weaker economic trends could apply downward
STABLE OPERATING PERFORMANCE: Management has maintained balanced operations
and a solid level of operating reserves despite state budget cuts and while
using available resources for pay-as-you-go capital improvements.
WEAK SOCIO-ECONOMIC PROFILE: Unemployment and poverty rates are persistently
high and wealth measures, including per capita income and tax base market
value, are low.
SIGNIFICANT STATE SUPPORT: The district receives substantial state aid for
both operations and debt service due to its low wealth. This support offsets,
to a degree, concerns over tax base declines and concentration.
ABOVE AVERAGE DEBT: Debt ratios are high and amortization is below average,
but carrying costs are low and capital plans will be pay-go funded. Voter
support of prior bond authorizations has been strong.
AFFORDABLE RETIREE COSTS: Employee pensions and other post-employment benefits
(OPEB) are primarily a burden of the state, resulting in very low annual
retiree costs for the district.
DETERIORATION OF FINANCIAL FLEXIBILITY: Due to the district's weak
socioeconomic profile, tax base concentration, and revenue inflexibility, a
deterioration of financial flexibility to the magnitude currently forecast
likely would put negative pressure on the rating.
SUSTAINED TAV WEAKNESS: A continuing trend of TAV decline would also be of
The district, situated along the U.S.-Mexico border, is large and sparsely
populated. The district is located in Starr County and includes the county
seat of Rio Grande City (population 13,834).
LIMITED AREA ECONOMY; TAXPAYER BASE CONCENTRATED IN OIL/GAS
Starr County's limited economy is based on agriculture and oil and gas
production. Recent declines in mineral (oil and gas) valuations have produced
a cumulative 20.6% drop in the district's TAV from its peak value in fiscal
2010, inclusive of a larger than expected 9% decline in fiscal 2013. The
measurable drop in mineral values has been a function of weakness in the price
of natural gas, lower levels of drilling activity in the area, and resulting
lower well and equipment values. Exposure to this sector is high; oil/gas
properties make up 33% of TAV, though this is down from 43% two years prior.
Further TAV weakness is possible, although preliminary values for fiscal 2014
suggest some stabilization (a marginal 0.2% decline).
Top taxpayer concentration also remains a credit concern. The top 10 payers
comprise an above average 26% of fiscal 2013 TAV, with seven of the top 10
concentrated in the oil and gas industry. The top payer concentration levels
have lessened from 36% last year as a result of the overrepresentation in and
declining value of the oil and gas properties. Occidental Petroleum
Corporation (Oxy USA), an oil and gas exploration company, represents 7% of
the tax base, down from 16%.
The relatively high level of state aid provided to the district for both
operations and debt service lessens concerns, to some extent, over the
declining TAV and top taxpayer/industry concentration, as current state
funding formulas substantially backfill declines in local property tax
revenues from lower TAV. However, further TAV declines could result in lower
debt capacity, tax rate pressure, and lower tax base wealth measures that are
no longer commensurate with the rating category.
SUBPAR SOCIOECONOMIC INDICATORS
Personal income of Starr County residents, measured by per capita and median
household income, is lower than state and national averages and the poverty
rate is 2.4x the nationwide rate. The county's unemployment rate has
historically trended much higher than the state and nation's, and February's
16.4% unemployment rate is no exception. The unemployment rate is unchanged
from a year-prior due to both employment and labor force contraction. The
below average wealth and employment indicators are negative credit
considerations but are typical of many Texas border communities.
District enrollment is about 11,000 and grew by an annual average of 2% from
2007-2011 before stalling in 2012 and 2013. Enrollment has been impacted by
cross-border safety dynamics as well as the migration of families to other
parts of the south Texas region for oil and gas jobs in the large Eagle Ford
shale play. Fitch views management's conservative budgeting for enrollment
SOLID FINANCIAL CUSHION MAINTAINED DESPITE STATE FUNDING CUTS
Annual gains in student attendance-based state aid, which provide about 75% of
annual operating revenues, coupled with conservative expenditure budgeting has
produced operating surpluses (after transfers) in five of the past six fiscal
years. A modest net operating deficit of $511,000 in fiscal 2010 was due to
significant general fund contributions to capital projects.
The district achieved a $1 million operating surplus after transfers (1.1% of
spending) in fiscal 2012 despite state budget cuts causing a 6% decline in
general fund revenues. District officials reduced spending to maintain budget
balance with an early retirement incentive program (eliminating about 50
positions, or roughly 2.5% of total personnel), department and stipend cuts,
and continuing attrition savings. Officials also used $1.9 million of one-time
federal education aid to fund salaries normally paid from general fund
resources. The year-end surplus increased unrestricted general fund balance to
$32.7 million or 35.5% of spending. Liquid general fund assets also increased
to cover current liabilities more than 13x.
The fiscal 2013 budget picture is somewhat improved from last year. State
revenues are forecast to increase by $1.9 million, or 2.2%, due partly to
slightly higher attendance. The $82.2 million general fund budget also
includes some additional personnel and pay raises for staff. Management
presently expects to end fiscal 2013 with break-even to slightly positive
operating results, a projection Fitch views as realistic given past financial
SIGNIFICANT FUND BALANCE SPEND-DOWN PLANNED FOR FACILITY CONSTRUCTION
Construction of a new, replacement high school began in January and is
primarily being funded with bond proceeds on-hand but will also require up to
$13 million of general fund balance (40%) to subsidize total project costs.
Management has committed/reserved about $10 million of general fund balance
for this project since fiscal 2009 and plans to use these funds, plus up to an
additional $3 million of unassigned general fund balance, by the close of
fiscal 2014 towards the project. Residual fund balance after this draw-down
would equal about $20 million or 22% of spending. When considering the above
average debt, weaker economy, and concentrated tax base risk factors, Fitch
would view a decline in the district's fiscal cushion of this magnitude as no
longer consistent with the 'AA-' rating category.
TEXAS SCHOOL DISTRICT LITIGATION
In February, a district judge ruled 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 unsuitable and arbitrarily funds districts at
different levels...' The judge also cited inadequate funding as a
constitutional flaw in the current system.
Fitch will monitor the appeal process of the suit, which may go directly to
the state supreme court. If the supreme court upholds the lower court ruling,
the state legislature will be directed to make changes to the system to
restore its constitutionality. Fitch would consider any changes that include
additional funding for schools a positive credit consideration.
AFFORDABLE LONG-TERM LIABILITIES DUE TO GENEROUS STATE SUPPORT
Fitch considers the district's debt burden high without consideration of state
support at $4,351 per a 10.9% of full market value. However, servicing costs
are low relative to non-capital governmental funds expenditures at only 4% in
fiscal 2012. State debt service aid pays about 60% of debt service costs
annually. Principal amortization is below average following this issuance,
with 43% of debt retired within 10 years.
This issuance is a refunding for interest cost savings, with the savings to be
taken over the life of the bonds. District officials do not maintain a formal
capital improvement plan but note that current facilities have adequate
capacity to accommodate continuing enrollment gains, if realized, over the
near term, and presently have no new debt plans.
Long-term liabilities related to pensions and OPEB are not a credit pressure
and are each limited to the district's participation in the statewide Teacher
Retirement System. The state pays the bulk of pension and OPEB costs on behalf
of the district, and the district's aggregate costs were less than 1% of
fiscal 2012 governmental fund spending. Combined fixed costs for debt service
and retiree costs was a low 4.6% of fiscal 2012 governmental fund spending.
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
U.S. Local Government Tax-Supported Rating Criteria
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