Fitch Ratings has assigned an 'AAA' rating to the following
unlimited tax (ULT) bonds of Pearland Independent School District,
Texas (the district):
--$43.1 million ULT refunding bonds series 2016.
The 'AAA' long-term rating on the bonds is based on a guarantee
provided by the Texas Permanent School Fund (PSF), whose bond
guarantee program is rated 'AAA' by Fitch. For additional
information on the Texas PSF rating, please see Fitch's Aug. 5,
2015 press release, 'Fitch Affirms Texas Permanent School Fund at
'AAA'; Outlook Stable', available at 'www.fitchratings.com'.
The bonds are scheduled for sale Feb. 9 via negotiation.
Proceeds will be used to refund a portion of the district's
outstanding ULT bonds for debt service savings.
Fitch also assigns an underlying 'AA' rating to the series 2016
bonds and affirms its 'AA' underlying rating on $198.6 million of
outstanding ULT debt.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied
against all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: Management's conservative budget
practices typically result in positive operating performance. The
district maintains sound liquidity and reserves.
DIVERSE REGIONAL ECONOMY: The district benefits from its close
proximity to the strong and diverse Houston metropolitan
statistical area (MSA). Wealth levels are above average and
unemployment is low.
MATURING DISTRICT WITH STABLE GROWTH: Previously rapid
population and enrollment growth have slowed as the district
approaches build-out. Tax base gains have been steady.
WEAKER DEBT PROFILE: The debt profile is characterized by high
overall debt and a moderate rate of amortization. High debt levels
are offset somewhat by modest post-employment benefit
liabilities.
RATING SENSITIVITIES
HIGH DEBT LEVELS: The rating is sensitive to maintenance of
budgetary balance and solid reserve levels, which mitigate credit
concerns over very high debt and capital pressures.
CREDIT PROFILE
Pearland ISD is located just south of Houston's outer loop,
mostly in Brazoria County. The district experienced high population
growth before 2010 which has moderated in recent years, resulting
in a 2015 population of 106,745.
MANAGEMENT PRACTICES SUPPORT HEALTHY FINANCES
The district maintains a sound financial profile with general
fund reserve levels in excess of its formal fund balance policy.
The district's policy is to maintain reserves equivalent to three
months (25%) of expenditures, which Fitch views as prudent.
Audited results for fiscal 2015 were essentially balanced in
contrast to a budgeted $10.4 million operating deficit.
Unrestricted general fund balance ended the year at a healthy $47.4
million, 31% of spending. Liquidity was strong at over three months
of spending.
The fiscal 2016 budget was adopted with a drawdown of $8.3
million (5% of budgeted spending), inclusive of conservative
revenue and expenditure assumptions. Positive year-to-date budget
performance supports management projections that reserves will
remain at the current healthy level.
The district plans to draw down general fund balance in fiscal
2017 by up to $5 million for facility construction. Fitch expects
that the district will maintain reserves in compliance with its
fund balance policy through conservative budget practices and sound
financial management policies.
RESIDENTIAL COMMUNITY WITH ACCESS TO HOUSTON
The district is located in a rapidly growing residential and
commercial area of the Houston MSA, with access to major
transportation arteries and the nearby Houston medical complex. The
City of Pearland (GO bonds rated 'AA' by Fitch with a Stable
Outlook) is located partially within the district, and has
experienced strong employment growth over the past decade. The
city's unemployment rate of 3.6% for November 2015 is well below
state and national rates. District wealth and educational
attainment are notably high in comparison with the region, state,
and nation.
TAV growth occurred at a compound annual rate of 3.4% over the
past five fiscal years, holding stable through the recession.
Near-term growth is expected to continue at a moderate pace, given
strong regional reassessment trends and some commercial and
residential construction underway. FloWorks International, an
industrial pipe and fitting supplier, recently broke ground on its
new office and distribution facility, and is poised to become the
district's largest taxpayer. The top ten taxpayers currently
comprise a low 4.3% of TAV.
The district's external demographer projects steady annual
enrollment growth of 2% - 3% over the near term, with the district
reaching build-out around 2023 - 2024.
ELEVATED DEBT RATIOS
The district's overall debt burden represents a high $5,825 per
capita and 8.4% of market value, driven by overlapping city and
municipal utility district (MUD) debt. Debt service comprised a
moderate 10% of governmental spending in fiscal 2015 after
factoring in state support for debt service. The amortization rate
is moderate with 58% of debt retiring in 10 years.
Management anticipates seeking voter authorization as early as
fall 2016 to add new classrooms. In the meantime, the district
maintains facility flexibility in its ability to move portable
classrooms and shift school attendance zones. The district's fiscal
2016 debt service tax rate of $0.376 per $100 of TAV maintains
sufficient margin below the state's $0.50 statutory cap for new
debt issuance.
The district participates in the Teacher Retirement System of
Texas (TRS), a cost-sharing multiple employer plan. The state
assumes the vast majority of Texas school districts' net pension
liabilities and the corresponding employer contributions. However,
like all Texas school districts, the district is vulnerable to
future policy changes by the state as evidenced by a relatively
modest 1.5% of salary contribution requirement effective fiscal
year 2015. Legislative changes in 2013 increased the state's annual
contributions, although it remains to be seen whether this improves
TRS's ratio of assets to liabilities over time.
Under GASB 68, the district reports its share of the TRS net
pension liability (NPL) at $16.3 million, with plan fiduciary
assets covering 83.25% of total pension liabilities at the plan's
8% investment return rate assumption (approximately 75% based on a
more conservative 7% rate assumption). The NPL represents
approximately 0.3% of the district's fiscal 2015 market value.
Carrying costs for the district (debt service, pension, OPEB costs,
net of state support) totaled a moderate 13% of governmental fund
spending in fiscal 2015, largely reflective of state support.
TEXAS SCHOOL DISTRICT LITIGATION
A Texas district judge ruled in August 2014 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 and was the second such ruling in the past
two years, found the system inefficient, inequitable, and
underfunded. The judge also ruled that local school property taxes
are effectively a statewide property tax due to lack of local
discretion and therefore are unconstitutional.
The Texas attorney general has appealed the judge's latest
ruling to the state supreme court. If the state school finance
system is ultimately found unconstitutional, the legislature would
likely follow with changes to the system to restore its
constitutionality. Fitch would consider any changes that include
additional funding for schools and more local discretion over tax
rates to be a credit positive.
Additional information is available at
'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local
government tax-supported criteria (Exposure Draft: U.S.
Tax-Supported Rating Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into
U.S. Local Tax-Supported Ratings). The drafts include a number of
proposed revisions to existing criteria. If applied in the proposed
form, Fitch estimates the revised criteria would result in changes
to less than 10% of existing tax-supported ratings. Fitch expects
that final criteria will be approved and published in the first
quarter of 2016. Once approved, the criteria will be applied
immediately to any new issue and surveillance rating review. Fitch
anticipates the criteria to be applied to all ratings that fall
under the criteria within a 12-month period from the final approval
date.
In addition to the sources of information identified in the
applicable criteria specified below, this action was informed by
information from CreditScope, Lumesis, and the Municipal Advisory
Council of Texas.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into
US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep
2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug
2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999226
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999226
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystShane
SellstromAnalyst+1-512-215-3727Fitch Ratings, Inc.111 Congress
Ave., Suite 2010Austin, TX 78701orSecondary AnalystRebecca
MosesDirector+1-512-215-3739orCommittee ChairpersonAmy
LaskeyManaging Director+1-212-908-0568orMedia Relations:Elizabeth
Fogerty, New York, +1 212-908-0526Email:
elizabeth.fogerty@fitchratings.com