Fitch Rates Palestine ISD, TX's $64MM ULT Bonds 'A'; Outlook Stable

2009-07-08 19:54:09 -

Fitch Ratings initially assigns an 'A' rating to Palestine Independent School District (ISD), Texas' (the district) $64 million unlimited tax (ULT) school building bonds, series 2009 (the bonds). In addition, Fitch assigns an initial 'A' rating to the district's $2.9 million in outstanding maintenance tax notes. The Rating Outlook is Stable.

Scheduled for a negotiated sale on July 16, 2009, the

bonds are direct obligations of the district, payable from an unlimited ad valorem tax levied against all taxable property within the district. The outstanding tax notes are also direct obligations of the district, payable from the maximum $1.17 per $100 taxable assessed valuation (TAV) tax rate levied by the district for operations and maintenance (O&M). Series 2009 bond proceeds will be used to finance various school facility projects and pay costs of issuance.

The 'A' rating reflects the district's historically strong reserve levels, new, more conservative financial management, and steadily growing, although small tax base. These key rating drivers are offset by a trend of modest enrollment declines, now high debt levels, a long history of deferred capital needs, and a fairly limited local economy in conjunction with below-average area wealth levels. The district's ability to manage expenditures and maintain solid general fund reserves consistent with the current rating category - in light of a declining student enrollment trend - will be integral to maintaining the current rating level. Current financial performance suggests, however, that the district will be able to maintain its financial profile satisfactorily over the next several years.

This predominately rural district is located in Anderson County, approximately 95 miles southeast of Dallas and 135 miles north of Houston. Encompassing 220 square miles, the district includes the city of Palestine, which is located at the intersection of various major highways. Government, retail trade, and transportation/warehousing are some of the largest non-agricultural employment sectors. County unemployment levels historically exceed those of the state and nation, and the April 2009 unemployment rate continued that trend at 7.2%.
Wealth levels are below those of the state; however, this is somewhat mitigated by the lower cost of living of the region. Roughly one third of the district's tax base is residential with another one third commercial/industrial. Reaching a total of $1 billion in fiscal 2009, tax base growth has been steady over the past five fiscal years, averaging annual gains of approximately 8% during this time period.

The area's population has remained fairly stable with minimal growth since the 2000 Census at an average annual rate of less than 1%, which was below that of the state. Ongoing demographic patterns have led to a trend of flat to modestly declining enrollment. With a small enrollment base of approximately 3,300 students in fiscal 2009, the district's enrollment has fluctuated in recent years, with a slight decline of less than 1% on average annually since fiscal 2004. District officials project ongoing, modest enrollment declines over the near term, although new and improved school facilities may draw more students to the district.

The district has typically maintained strong financial reserves, although urgent capital needs have pressured prior years' operating results, assisted by maximum O&M tax rate levies and new, more conservative financial management. Audited results for fiscal 2008 continued the positive trend and the district reported a healthy solid unreserved general fund balance of $7.9 million or almost 32% of spending in fiscal 2008, which exceeded the district's operating reserve policy amount of at least three months of expenditures. Despite an originally budgeted operating deficit, district officials anticipate closing fiscal 2009 with positive operating results and a modest addition of $450,000 to general fund reserves. Preliminary information regarding fiscal 2010 includes the expectation of a balanced budget, even with modestly declining enrollment assumptions.

Prior to the current authorization of $64 million approved by voters in May of 2009, the district had very little general obligation debt outstanding. With a history of failed bond elections, deferred capital needs have been pressing. The current offering represents the entire authorization passed by 60% of the voters, which should position the district well to meet a substantial portion of its deferred capital needs. The authorization will be used for renovation, expansion, and improvement to all district facilities and it is expected to meet the district's capital needs for the next 10 years. With the current issue, debt levels are high, reaching 6.8% of TAV on a direct basis or almost $3,900 per capita without consideration of possible state support on this issuance. Under somewhat optimistic tax base growth assumptions, the district's debt service tax rate is projected to remain near the maximum allowed by state law to issue new debt. Amortization is below average at 22% in 10 years.

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Fitch Ratings, AustinRebecca C. Moses, 512-215-3739Gabriela
Gutierrez, 512-215-3731Cindy Stoller, 212-908-0526(Media
Relations, New York) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com