Fitch Ratings has assigned the following ratings to bonds of
Garland Independent School District (ISD), Texas:
--$185.3 million unlimited tax (ULT) school building and
refunding bonds, series 2015A at 'AAA';
--$21 million ULT school building bonds, series 2015B at
'AA+'.
The 'AAA' rating reflects the guarantee provided by the Texas
Permanent School Fund (PSF), whose bond guarantee program is rated
'AAA' by Fitch. Additional information on the Texas PSF is
available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms
Texas PSF Rating at 'AAA'; Outlook Stable', available at
'www.fitchratings.com'.
The bonds are scheduled for negotiated sale May 19. Proceeds
from the sale will be used to construct new facilities, improve
existing school facilities, and refund a portion of the district's
outstanding ULT bonds for interest savings.
In addition, Fitch assigns an 'AA+' underlying rating to the
series 2015A bonds and to $321 million in outstanding ULT
bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied
against all taxable property within the district. In addition, the
series 2015A bonds are approved for the Texas PSF guarantee.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The district's conservative financial
management practices have produced consistently healthy financial
results, accumulating ample reserves despite regular cash financing
of capital expenditures.
DIVERSE REGIONAL ECONOMY: The city is part of the broad
Dallas-Fort Worth (DFW) metropolitan statistical area (MSA)
economy. Residents have easy access to a diverse employment market
that continues to outperform the nation in terms of population,
employment, and income growth.
STABILIZED TAX BASE: Taxable assessed valuation (TAV) has gained
traction after a period of mild contraction from declining home
values. Moderate near-term TAV growth is likely given improved
reassessment trends and development underway.
MANAGEABLE DEBT, EXPANDED CAPITAL PLANS: Overall debt is
slightly above average and will likely increase with planned
issuance over the next five years. The rate of principal
amortization is above average and carrying costs are low due to
significant state support for debt service and pensions.
RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in
fundamental credit characteristics including the district's track
record of sound operating performance and healthy reserve
levels.
CREDIT PROFILE
The relatively mature district is located 17 miles northeast of
downtown Dallas and serves an estimated population of nearly
290,000 in the cities of Garland, Rowlett, and Sachse. District
enrollment is approximately 57,000 and is expected to remain flat
in the near term.
SOLID FINANCIAL POSITION
State revenue represents over 65% of the district's overall
revenue, followed by property taxes at about 30%. Prudent financial
management has enabled the district to maintain financial
flexibility despite state funding cuts for all Texas school
districts in fiscals 2012 and 2013. The district generated surplus
operating results in each of the past five fiscal years
(2010-2014), enabling the district to address various capital needs
while still adding to reserves.
Fiscal 2014 results bettered original projections and included a
healthy general fund surplus of $11.4 million (2.7% of spending),
benefiting from conservative revenue and expenditure assumptions.
These results were net of a $12 million transfer to the capital
projects fund to finance bus purchases and various capital
improvements. The unrestricted fund balance at fiscal year-end
totaled $151.8 million, or a stout 36% of spending and transfers
out.
District officials currently project a fiscal 2015 general fund
surplus of $5 million on an operating basis (1.2% of budgeted
spending). The district is expected to transfer $3 million to the
capital projects fund for bus purchases for a net surplus of about
$2 million. Fitch expects that the district will maintain reserves
in excess of its informal target for 25% of spending.
Fitch's concerns about previous TAV declines are largely
mitigated by the state's funding formulas, which backfill lost
local revenues with additional state aid. If TAV changed course and
declined further, the district's debt affordability and capacity
would be reduced, constraining its ability to address future
capital needs.
LOCATION IN BROAD DFW ECONOMY
The district benefits from its proximity to Dallas and its
location in the broader DFW metro area, which provides residents
with easy access to a large and diverse labor market. Dallas is
home to numerous corporate headquarters and prominent sectors
include transportation, financial services, wholesale trade,
manufacturing, oil/gas, and education and government. The district
contains two rail transit stations connecting residents to downtown
Dallas.
Employment growth in the city of Garland and the surrounding DFW
region has outpaced the U.S. since the recession ended in 2009.
Garland's February 2015 unemployment rate declined to 4.3% from
6.1% in 2014 despite a solid 2.5% labor force gain over the same
period. The city's unemployment rate is average for the state but
below the U.S. rate of 5.8%. Median household income in the
district exceeds the state and nation, though educational
attainment is below average.
TAX BASE GROWTH RESUMES
The district's tax base is primarily residential, with a stable
industrial/commercial representation and modest housing stock.
Garland's industrial market is the second largest in the MSA and
includes a diverse mix of manufacturing and distribution concerns.
The tax base is without concentration.
Recessionary declines produced sluggish TAV performance in
fiscal years 2009-2013, reflected in modest declines each year and
a cumulative loss of 7.8%. However, TAV regained footing with
marginal growth in fiscal 2014, evidence of an improving housing
market. Further improvement, coupled with new residential and
commercial construction, produced stronger TAV growth of 5.5% for
fiscal 2015. Retail and housing developments currently underway
support the district's projection for modest near-term tax base
growth.
MANAGEABLE DEBT PROFILE, EXPANDED PLANS
The overall debt burden is above average at 5.7% of market value
while debt per capita is moderate at $3,088. This burden is
expected to increase with planned issuance of $455 million through
2019, inclusive of this offering (offset by $165 million retiring).
The amortization rate is above average, with 64% of principal to be
retired within 10 years.
In November 2014 a large 62% of district voters approved $455
million of ULT bonds to finance a natatorium, a career and
technology education center, and various improvements to existing
school facilities. The district's last bond election was in 2012.
The planned bonds are projected to increase the district's debt
service tax rate by $0.17 per $100 of TAV to a total $0.38 in 2021,
well below the state's $0.50 threshold for new debt issuance. This
debt issuance follows a number of years in which the district
financed various capital expenditures with general fund resources.
Fitch views the increasing debt burden as a neutral trade-off with
the district's ability to fund capital needs.
LOW PENSION COSTS
The district's pension and other post-employment benefit (OPEB)
liabilities are limited to its participation in the state pension
plan administered by the Teacher Retirement System of Texas (TRS),
a cost-sharing multiple employer plan. The district's annual
contribution to TRS is determined by state law. The fiscal 2014
pension cost represented only 1.4% of governmental fund
expenditures, as plan contribution amounts are principally paid by
the state and district employees.
Fitch will continue to monitor the level of state support for
school district pension payments, noting the modest required 1.5%
local contributions that have recently been imposed by the state.
The district's combined carrying costs for debt service, pension,
and OPEB were very affordable at 6.5% of governmental fund spending
in fiscal 2014, although that amount will likely increase with
planned debt and the higher required pension contribution.
TEXAS SCHOOL FUNDING 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 intended to restore its
constitutionality. Fitch would view positively any changes that
include additional funding for schools and more local discretion
over tax rates.
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, the Municipal Advisory Council of Texas, and the 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
Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating
Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation
Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984228
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Fitch RatingsPrimary AnalystShane Sellstrom,
+1-512-215-3727AnalystFitch Ratings, Inc.111 Congress Ave., Ste
2010Austin, TX 78701orSecondary AnalystRebecca Moses,
+1-512-215-3739DirectororCommittee ChairpersonKaren Krop,
+1-212-908-0661Senior DirectororMedia Relations, New YorkElizabeth
Fogerty, +1-212-908-0526elizabeth.fogerty@fitchratings.com