Fitch Affirms Pampa ISD, Texas' ULTGOs at 'A+'; Outlook Stable
NEW YORK -- August 30, 2013
Fitch Ratings has affirmed Pampa Independent School District, Texas' (the
district) outstanding obligations as follows:
--Approximately $43.2 million unlimited tax general obligation (ULTGO) bonds,
series 2007 at 'A+'.
The Rating Outlook is Stable.
The bonds are direct obligations of the district and are secured by an
unlimited ad valorem tax pledge of the district. In addition, the bonds are
secured by the Texas PSF guaranty.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: The district's financial performance remains a
credit positive, highlighted by generally positive operating results over the
prior decade and maintenance of strong general fund unrestricted ending
MODERATE DEBT BUT CAPITAL PRESSURE EXISTS: Current debt levels are moderate,
but principal amortization is slow. The district does not prepare a formal
multi-year capital plan, thus creating uncertainty about future borrowing
needs. Fitch believes that recent economic and population growth could put a
strain on school district facilities already close to maximum capacity.
CONCENTRATED TAX BASE AND ECONOMY: The area economy remains substantially
concentrated in and dependent on chemical manufacturing, oil and natural gas
production and related industries, particularly given its fairly remote
location in the north Texas panhandle. The 10 largest taxpayers in the
district account for a very high 30% of taxable assessed value (TAV).
BELOW-AVERAGE SOCIOECONOMIC INDICATORS CONTINUE TO IMPROVE: Wealth and income
metrics in the region have been improving at a healthy pace but remain below
the state and national standard. High demand for oil has supported solid
employment growth over the prior decade and a low rate of joblessness.
STABLE CREDIT PROFILE: Fitch expects the school district to retain its strong
reserve position to counterbalance concerns over the concentrated economy, a
credit factor that Fitch believes limits the rating to its current level.
The district is located within Gray County (the county), about 56 miles
northeast of Amarillo, but also services portions of Roberts County.
Population within the district was 20,912 as of 2012, and district enrollment
in 2013 was 3,676.
RESERVE LEVELS UNDERSCORE STRONG FINANCIAL FLEXIBILITY
Following two fiscal years of general fund operating deficits (after
transfers) the district returned to positive operations in fiscal 2012 with a
large surplus of $1.5 million (or 6.1% of spending). The surplus increased the
unrestricted general fund balance to $9.4 million or a solid 38.2% of
operating expenditures and transfers out. The aforementioned operating
deficits, which were largely driven by increased capital spending, are the
only two recorded by the district dating back to fiscal 2002.
A lease agreement with the county for new drilling sites led to a one-time
revenue gain in fiscal 2012 to the school district of about $1 million that,
under the Texas state constitution, must be earmarked for either debt service
or capital improvements. If the new wells on the leased land successfully
begin producing oil, the district could receive ongoing royalty payments that
would not impact the state's funding formula for the district. Management is
conservative and does not budget for potential one-time revenues or royalties.
In addition to the stronger revenue, finances benefitted from management being
proactive in decreasing expenditures during fiscal 2012, deferring some
discretionary maintenance and choosing to not fill some staff positions. The
district's tax rate for maintenance and operations is not currently at its
maximum level, but the district would need voter approval in order to raise
the rate from current levels.
The district projects balanced results in fiscal 2013 that will maintain the
unrestricted general fund balance level. However, the district has budgeted
for a $2.9 million fund balance drawdown in fiscal 2014 to complete capital
improvements on a district administration building that went over budget.
Fitch believes that this one-time use of reserves for non-recurring capital
needs will not necessarily have a significant negative impact on the overall
strength of the district's finances, but reinforces concerns about the
district's capital planning deficiencies.
Including the fund balance draw-down, projections for fiscal 2014 indicate an
ending balance of $6.8 million or about 23% of spending. While reduced, the
balance remains adequate and, given management's history of conservative
budgeting, the ultimate fund balance drawdown may be less than budgeted. The
district has no other plans for fund balance use in the near term and expects
to build fund balance back up in the subsequent years.
TEXAS SCHOOL DISTRICT LITIGATION
In February 2013 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 funding system
to restore its constitutionality. Fitch would consider any changes that
include additional funding for schools a positive credit consideration.
CONCENTRATED, OIL-BASED ECONOMY HAS SEEN RECENT GROWTH
The school district's tax base is very concentrated and volatile, as
assessments for property owners in the oil/gas industry are closely tied to
commodity prices. The district's TAV has seen strong growth in recent years;
TAV for fiscal 2014 was $1.3 billion, a 19% increase from fiscal 2012.
Concentration among the top 10 taxpayers has also risen to a very high 30% in
fiscal 2013. The top taxpayer in the district, Halliburton Energy Service
(Halliburton Company's long-term Issuer Default Rating is 'A-' with a Stable
Outlook by Fitch), constitutes a large 8.3% of the total tax base.
BELOW-AVERAGE WEALTH AND INCOME INDICATORS
The district's per capita personal income is equal to 96.5% of the state and
92.7% of the U.S. norms, but grew at a rapid pace in recent years. The
unemployment rate in Gray County was 4.9% as of May 2013, which is below state
and national levels as has generally been the case for the prior decade.
POTENTIAL ENROLLMENT INCREASES COULD ADD TO DISTRICT DEBT
Overall debt is a moderate $2,637 per capita and 3.7% of market value in
fiscal 2013. Principal amortization is slow, with about 34% retired within 10
years. Debt service as a percent of operational expenditures is 11.8%.
The district's facilities are currently at or close to maximum capacity.
Management has indicated that they would bring in portable classrooms and
bring on additional teachers if their current enrollment projections are too
Fitch believes that increased regional housing starts as well as new business
expansions including a new methanol plant could lead to near-term enrollment
increases for the school district. While management has no immediate debt
issuance plans, future bonding for new school construction may become
necessary. The state ensures that bond issuance does not raise the debt
service tax rate beyond a $.50 cap, under which the district, which completed
fiscal 2012 with a rate of $.27, has ample capacity. Even with issuance of the
additional debt required for school construction, Fitch believes the
district's debt profile would remain moderate.
The district's pension liabilities are limited to its participation in the
state pension plan administered by the Teacher's Retirement System of Texas
(TRS). The district's low annual required contribution is based on salaries in
excess of the statutory cap. Other post-employment benefits (OPEB) are
similarly provided through TRS. The district's carrying costs are a low 12.5%
of non-capital governmental spending, reflecting a slow principal amortization
and low required OPEB/Pension contributions.
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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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526 (New York)
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