Fitch Affirms DeSoto ISD, TX's $150MM General Obligation Bonds at 'A+'; Outlook Negative

2009-11-10 22:24:04 -

As part of ongoing surveillance, Fitch Ratings affirms the ratings on DeSoto Independent School District, Texas' (DeSoto ISD) approximately $150 million outstanding unlimited tax general obligation bonds at 'A+'.

The Rating Outlook is revised to Negative from Stable.

The 'A+' rating reflects DeSoto ISD's adequate but declining financial reserves, large and mostly residential tax base, and favorable location next to major

transportation corridors within the Dallas-Fort Worth metroplex, balanced against a high overall debt burden offset by limited capital needs. The bonds are secured by unlimited ad valorem taxes on all property within the district.

The Negative Rating Outlook is based on a recent structural imbalance that is projected to significantly reduce the district's financial flexibility. Solid reserves remained after a large planned drawdown in fiscal 2009 (unaudited); however, another large budgeted drawdown in the fiscal 2010 budget, due mainly to teacher salary increases given in 2008 and flat enrollment (which drive state aid revenues), may notably alter the district's financial profile. Despite a rapid decline in enrollment growth, resulting from an abrupt fall-off in residential building, the district has not taken significant action to realign revenues and expenditures. Fitch will monitor the district's financial performance for fiscal 2010 and beyond; if structural deficits are not met with additional sizeable budget cuts, further erosion of general fund reserves, and possible downward rating pressure, could result.

After several consecutive years of general fund (GF) operating surpluses and increasing fund balances, the district's finances have been pressured by slowing enrollment growth and growing instructional costs.

Although modest, fiscal 2008 posted an operating deficit of $1.8 million, due mostly to large salary increases designed to retain personnel, and the opening of a new school during the fiscal year.

Fiscal 2008's reserves still totaled a strong $14.7 million or 23.5% of spending. Fiscal 2009's unaudited results point to a large, planned $4.7 million drawdown, reducing reserves to a still solid $10 million or 15% of spending. However, the fiscal 2010 budget projects another large operating deficit of $3.6 million, reducing reserves to about $6.5 million or a satisfactory 10% of spending. While management has made some cuts to miscellaneous operations for 2009 and 2010, more significant budget cuts will be necessary to fix the structural deficits in fiscal 2010 and beyond.

The district's mostly residential tax base is large and diverse. Strong development trends allowed the district's taxable assessed values to expand annually until fiscal 2009 in which it contracted by 4.5%. More importantly, the related slowdown in building activity caused enrollment growth to slow to only 1% in fiscal 2009. The district has budgeted only 1% enrollment growth in fiscal 2010. The district's debt burden is a moderate $3,750 per capita, but remains high at 9.6% of net taxable value. With taxable values growth rates tempered, and limited additional capital needs, Fitch expects debt levels to remain on the high side.

Additionally, the district's principal payout rate is below average at 42% in 10 years.

DeSoto ISD is located approximately 15 miles southwest of downtown Dallas in a suburban residential area covering 23 square miles. Serving primarily the cities of DeSoto and Glenn Heights, enrollment is currently estimated to be around 9,000 students. Most residents commute to work throughout the Dallas-Fort Worth metroplex. Median income levels remain slightly above the national average.

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Fitch RatingsAndrew DeStefano, +1-212-908-0284 (New York)Rebecca
Moses, +1-512-215-3739 (Austin)orCindy Stoller,
+1-212-908-0526(Media Relations, New York) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com