Fitch Ratings assigns an 'AAA' rating to San Antonio Independent
School District, Texas (the district) bonds as follows:
--$50 million variable rate unlimited tax (ULT) refunding bonds,
series 2014A;
--$50 million variable rate ULT refunding bonds, series
2014B.
The 'AAA' rating on the bonds is based on a guaranty provided by
the Texas Permanent School Fund (PSF), whose bond guaranty program
is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of
'AA' to the series 2014A and series 2014B bonds.
The bonds are scheduled for negotiated sale the week of Aug. 25.
Bond proceeds will be used to refund outstanding notes and restore
capacity for the district's commercial paper program.
In addition, Fitch also affirms the following ratings:
--Approximately $595 million in outstanding ULT bonds at
'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are direct obligations of the district payable from a
continuing direct annual ad valorem tax levied by the district
without limit as to rate or amount. The bonds are further secured
by the Texas Permanent School Fund (PSF) guarantee, whose Insurer
Financial Strength is rated 'AAA' by Fitch.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: The district typically outperforms
the budget and achieves surplus results.
STATE FUNDING RELIANCE: The district relies on state funding for
the majority of its operations. Sound reserves and cost containment
measures help to mitigate the district's exposure to state funding
uncertainties.
MIXED DEBT PROFILE: Overall debt is high, but its impact on the
budget is manageable, reflecting state support for debt service.
Well-funded pensions also reflect strong state support.
SAN ANTONIO METRO ECONOMY: A low unemployment rate results from
the city's broad and growing economy. The district's inner city
service territory is characterized by low wealth and high poverty
levels.
RATING SENSITIVITIES
SOUND FINANCES DRIVE STABLE OUTLOOK: Fitch expects the district
to maintain its sound financial profile to counterbalance concerns
over high debt levels and below average wealth levels, credit
factors that Fitch believes limit the rating to its current level
in at least the near term.
CREDIT PROFILE
The district encompasses 79 square miles in downtown San Antonio
(the city, Fitch GO rated 'AAA'), which is located in Bexar County.
The district serves over 53,700 students.
BROAD ECONOMY WITH MILITARY PRESENCE
The district benefits from its location within the broad and
diverse city of San Antonio. The city's economy includes a sizable
military presence and strong representation by trade, tourism,
healthcare, finance, and telecommunication sectors. Employment
gains reflect the strength of tourism and construction activity, as
well as the impact of nearby Eagle Ford Shale drilling. The city's
unemployment rate of 5% as of June 2014 compares favorably to a
U.S. rate of 6.3% for the same period.
The district's median household income represents just 57.6% and
the poverty level about double the U.S. average, a profile not
dissimilar to other inner city districts. Fiscal 2014 taxable
assessed valuation (TAV) per capita is a low $44,000. After posting
gains through fiscal 2010, the district's tax base flattened over
the subsequent three years. TAV increased by a solid 3.4% in fiscal
2014 with an additional 4% gain expected in fiscal 2015.
SOUND FINANCES DESPITE ENROLLMENT DECLINES AND STATE FUNDING
CUTS
The district addressed financial pressure stemming from a recent
history of declining enrollment and fiscal 2012-2013 biennium state
funding cuts with school closures and leaner staffing levels. These
expenditure cuts achieved significant savings and have allowed the
district to consistently maintain structural balance.
The district completed fiscal 2013 with a $1.8 million net
surplus after a $9 million (2.3% of total spending) transfer
largely to the strategic initiatives fund and for facility
maintenance. The district established the strategic initiatives
fund for periodic compensation increases to address the competitive
labor market, deferred facility maintenance, and technology.
Fiscal 2013 unrestricted reserves of $63.7 million represent an
adequate 15.9% of spending. Officials estimate fiscal 2014
unrestricted reserves at a similar level. The fiscal 2015 budget is
structurally balanced and assumes flat enrollment.
ELEVATED DEBT; ONGOING CAPITAL NEEDS
Overall debt, including a sizable overlapping component, is high
at 8.1% of fiscal 2014 market value. However, the district's debt
service burden consumes a moderate 7.7% of fiscal 2013 governmental
expenditures and a lower 5.6% of spending considering state support
for debt service.
Fitch anticipates overall debt to remain elevated due to the
district's ongoing capital needs. The district expects to largely
complete its current capital program -- renovation of 21 schools --
by November 2015. Officials expect to issue about $200 million
($102.4 million in remaining GO authorization and up to $100
million of commercial paper) to complete the program. The district
does not anticipate seeking additional GO authorization prior to
2017.
The district established a commercial paper program in April
2014 with a $100 million capacity; Royal Bank of Canada serves as
liquidity provider. The variable rate refunding bonds now offered
represent the district's first variable rate unlimited tax
obligations (VRULTs), outside of the commercial paper program. The
VRULTs will restore capacity in the district's commercial paper
program.
Terms of the district's series 2014 VRULTs include three and
four year initial fixed rate terms, a soft put back to bondholders
in lieu of liquidity support and optionality to periodically reset
the rate to a long-term fixed basis. Fitch believes this structure
presents a manageable risk in terms of interest rate exposure.
These offerings plus the commercial paper program capacity comprise
26% of the district's debt total.
Fitch estimates the district's variable rate debt to remain
within the district's target of 30% based on issuance plans through
fiscal 2015. Variable rate debt at the maximum target level would
expose the district to a high level of interest rate risk,
especially for a school district. Fitch therefore views this
somewhat liberal policy with concern.
In the case of a failed remarketing for the series 2014 bonds,
the district would face a risk of paying an elevated interest rate,
expected to be capped at a fixed-rate ranging from 6%-8% as
applicable to the district's outstanding VRDOs. The district
maintains healthy reserves in its debt service fund (cash and
investments totaling $69.1 million at fiscal 2013 year-end), and
Fitch believes that this cushion serves as a mitigant to interest
rate exposure.
MANAGEABLE CARRYING COSTS
The district participates in the Teachers Retirement System of
Texas (TRS), a cost-sharing multiple employer pension plan. Other
post-employment benefits (OPEB) contributions paid by the district
are modest. Total carrying costs for debt service, pension, social
security, and OPEB, net of state support, are low at 10.9% of
fiscal 2013 governmental spending.
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 and districts'
inability to exercise 'meaningful discretion' in setting tax rates
as constitutional flaws in the current system.
The judge agreed to reopen testimony in January 2014 after the
Texas legislature restored $4.5 billion in school funding in its
2013 session. The increased funding levels apply to school district
budgets in fiscal years 2014 and 2015. The judge will determine if
the additional funding affected arguments made during the trial. It
is anticipated that the original ruling, if upheld, will ultimately
be appealed to the state supreme court.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=854894
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Fitch RatingsPrimary AnalystRebecca MeyerDirector+1
512-215-3733Fitch Ratings, Inc.111 Congress Avenue, Suite
2010Austin, Texas 78701orSecondary AnalystJose AcostaSenior
Director+1 512-215-3726orCommittee ChairpersonAmy LaskeyManaging
Director+1 212-908-0568orMedia Relations, New YorkElizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com