Fitch Rates Northwest ISD Texas' Series 2013 ULTs 'AAA' PSF/'AA' Underlying;
AUSTIN, Texas -- October 2, 2013
Fitch Ratings has assigned an 'AAA' rating to the following Northwest
Independent School District, Texas' (the district) bonds:
--$50 million unlimited tax (ULT) school building bonds, series 2013.
The 'AAA' long-term rating reflects the guaranty provided by the Texas
Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by
In addition, Fitch assigns an 'AA' underlying rating to the 2013 bond series
and affirms the 'AA' rating on the district's approximately $626.7 million (on
a non-accreted basis) in outstanding ULT bonds.
The series 2013 bonds are scheduled to sell the week of Oct. 7 via
negotiation. Proceeds will be used to construct, equip, and renovate school
facilities as well as to pay related costs of issuance.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem tax pledge levied against all
taxable property within the district and are further secured by the PSF
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE MAINTAINED: General fund reserves and liquidity
remain solid, maximizing the district's financial flexibility. Management's
sound and proactive fiscal practices have historically enabled annual
operating surpluses despite a trend of ongoing, rapid enrollment growth.
TAV DECLINES: Decreases in mineral values have led the cumulative, moderately
declining taxable assessed value (TAV) trend that was only partially offset by
modest, positive gains in residential and retail/commercial construction. The
district has historically realized very strong TAV gains due to the district's
proximity to the Dallas Fort-Worth (DFW) metro area, availability of
affordable land, and rising natural gas values.
TAX BASE CONCENTRATION: Taxpayer concentration remains above average and
highly concentrated in mineral reserves due to the district's location over
portions of the Barnett Shale formation, one of the largest natural gas fields
in the U.S.
WEAK DEBT PROFILE: Capital needs from the rapidly growing enrollment will
continue to drive already high debt levels. Amortization is slow. Carrying
costs are expected to remain manageable despite an ascending debt service
schedule. The fixed cost burden is tempered in part by the district's overall
financial flexibility and some remaining tax rate cushion below the statutory
$0.50 tax rate ceiling for new debt.
DETERIORATION OF FINANCIAL CUSHION, TAX BASE: Material deterioration of solid
reserve levels that provide a high level of financial flexibility and/or
prolonged, significant weakening of the tax base could signal a fundamental
shift in the district's credit profile, leading to negative rating action. The
Stable Outlook reflects Fitch's expectation that such shifts are unlikely over
The district is located in the northwest part of the Dallas-Fort Worth (DFW)
metropolitan area and encompasses a large 232 square miles that includes 16
rural communities in Denton, Tarrant, and Wise counties.
RAPID ENROLLMENT EXPANSION CONTINUES IN DFW METRO DISTRICT
Population and enrollment growth has been rapid since 2000 given the
availability of affordable land and the subsequent residential and attendant
retail/commercial development. Enrollment growth moderated slightly due to a
weaker housing market since the recession, but remains rapid. The district
typically adds between 1,000-1,500 new students per year. Annual enrollment
gains have remained in line with demographic studies that project steady
increases in student enrollment of about 7% through fiscal 2018; district
enrollment totals just over 19,000 students in fiscal 2014.
UNEMPLOYMENT IMPROVES ALTHOUGH TAV TRENDS REMAIN WEAK
The local economy is linked closely to that of the larger DFW metropolitan
area and its major employment centers, since much of the district is within
commuting distance. Area unemployment has consistently tracked better than the
state (6.7%) and nation (7.7%) and the year-over-year decline in unemployment
from 6.6% in July 2012 to 5.8% in July 2013 remained in line with that trend
despite solid labor force gains. Income/wealth and educational attainment
metrics are generally above state and national averages.
Sizeable growth was previously realized in the district's tax base due to its
location over workable portions of the Barnett Shale field, one of the largest
natural gas formations in the U.S. Rising mineral values coupled with rapid
residential development led to about 15% average annual TAV growth from fiscal
2005 - 2010. However, weakness in both sectors since then, particularly
declines in mineral values, has contributed to modest annual average TAV
declines of nearly 2% over fiscals 2011-2014.
Fitch believes it is reasonable that slower-paced, but continued residential
and retail/commercial development should add modest TAV growth over the
near-term. However, Fitch also believes it is likely that the district's tax
base will remain subject to some additional variability going forward. This is
due to its above-average exposure to the energy sector and the potential for
fluctuating mineral values through build-out, although Fitch notes this
exposure has fallen in recent years. Mineral values contributed about 10% of
the district's TAV in fiscal 2014, which was down from a high 22.5% in fiscal
2010. A declining TAV environment could pressure the district's debt profile
and capital plans, but poses relatively minimal operational risk given the
current school funding formula that offsets declines in property taxes with
additional state aid.
Taxpayer concentration is down slightly but remains high at 25% in fiscal 2013
(specifically in the oil and gas sector) and remains a credit concern. The
list of the district's top taxpayers is led by Devon Energy Corp at a sizeable
11% (Fitch Long-term Issuer Default Rating 'BBB+' with a Stable Outlook).
FINANCIAL PROFILE A CREDIT POSITIVE
Financial performance has been strong historically, characterized by operating
surpluses, solid reserves, and ample liquidity. Sound management has helped to
navigate the operating pressures associated with rapid enrollment growth,
large wealth equalization payments, and recent cuts to state funding.
Conservative spending and budgeting practices enable year-end results that
typically improve upon budgeted expectations.
Audited fiscal 2012 results were comparable to prior years with the district
generating a very healthy $8.2 million operating surplus (roughly 6% of the
year's spending). These positive results were due in part to spending cuts as
well as the offsetting of some general fund spending with one-time use of $2
million in federal EduJobs funding. Unrestricted general fund reserves at
fiscal 2012 year-end rose to a solid $56 million or nearly 39% of spending,
which exceeded the district's informal target of 33%.
Liquidity strengthened in fiscal 2012 with general fund cash and investments
totaling $78.4 million or about 6.5 months of general operational spending at
year-end. Further financial flexibility and added liquidity come from the
maintenance of reserves outside the general fund: $34 million in transferred
fund balance (about 25% of operational spending) is within the capital
projects fund and available for reallocation to the general fund as needed.
The district's fiscal 2013 $151 million budget was adopted with a modest $2.7
million draw on reserves to provide salary increases. Given the year's
reportedly tighter budgeting, year-end results are expected to slightly better
budget and may improve to break-even performance according to management. The
adopted $152 million budget for fiscal 2014 includes about $2.1 million for
salary increases, additional hiring in support of the year's enrollment
growth, and another modest $2.7 million draw on reserves. Much of the increase
in the year's general operational spending was offset by elimination of the
wealth transfer payment requirement (which totaled $11 million in fiscal
2013). The district is not required to make the payment as it fell below the
property wealthy status threshold in fiscal 2014 for the first time in many
years, which Fitch views as a credit neutral.
The district's current financial forecast projects modest annual operating
gaps (no more than 6% of budgeted spending) over the near-term (fiscals
2015-2017) under moderate TAV growth assumptions; the gap widens in fiscal
2018 assuming non-continuation of current state funding provided for tax
relief. Fitch recognizes the modest nature of the imbalance, the conservative
nature of the projections, and management's history of maintaining reserves
well above its informal target level.
DEBT LEVELS TO REMAIN ELEVATED
Overall debt levels (on an accreted basis) approximate a very high $9,200 per
capita and 7% of market value. Principal amortization is very slow with about
28% retired in 10 years. Inclusive of this issuance, annual debt service is
projected to rise steadily from nearly $42 million in fiscal 2014 to reach
maximum annual debt service (MADS) at $60.6 million in 2028. The district's
debt profile is primarily comprised of fixed-rate debt with some use of
capital appreciation bonds and a low amount (2% of outstanding principal) of
variable rate bonds. While the high debt burden is a credit concern, Fitch
notes that the fixed cost burden is mitigated in part by the district's
overall financial flexibility as reflected in ample reserves and some
remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new
debt (the district's debt service tax rate was $0.41 per $100 TAV in fiscal
The district maintains $45 million in unissued bond authorization from its
2008 election with no near-term issuance plans as construction savings allowed
management to complete all planned bond projects at a reduced cost. This
issuance is the first piece of a 2012 $255 million bond authorization for new
school facilities. The margin of voter approval was relatively thin (just
under 56%) due to the roughly $0.07 increase to the debt service tax rate
promised voters, which was implemented in fiscal 2014. (The district's last
bond authorization in 2008 was approved by a strong 72% margin; a negligible
tax rate impact was promised given strong TAV growth trends).
Annual issuance of the full 2012 authorization over the near-term is supported
by the use of some existing debt service fund balance (roughly $15 million
earmarked to pay a portion of future debt service payments) under assumptions
of a return to moderate annual TAV gains that Fitch believes are feasible
given both enrollment and residential/commercial development trends. Absent
higher than projected TAV gains, increases to the unlimited debt service tax
rate required to support an ascending debt service schedule and planned new
money issuances will be determined in part by management's decisions on the
amount and structure of future debt and its effect on the tax rate.
Management currently maintains modest flexibility in its debt and capital
plans and expects to push back construction of a new middle school by about a
year. Fitch will continue to assess the district's capital needs and debt
plans and their effect on the already high key debt ratios, diminishing tax
rate capacity for new debt, and overall budget flexibility. The 2012
authorization is expected to meet the district's capital needs over roughly
the next five years, a large portion of which is for construction of the
district's third high school that is expected to open in fiscal 2016.
OTHER LONG-TERM LIABILITIES MANAGEABLE
The district's pension and other post-employment benefit (OPEB) liabilities
are limited because of its participation in the state pension plan
administered by the Teachers Retirement System of Texas (TRS). TRS is a
cost-sharing, multiple-employer plan in which the state rather than the
district provides the bulk of the employer's annual pension contribution. The
district's annual contribution to TRS is determined by state law as is the
contribution for the state-run post-employment benefit healthcare plan; the
district consistently funds its annual required contributions. Carrying costs
for the district (debt service, pension, OPEB costs, net of state support)
totaled nearly 20% of governmental fund spending in fiscal 2012, reflective
largely of the district's annual debt load.
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, IHS Global Insight, 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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Fitch Ratings, Inc.
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