Fitch Ratings assigns an 'AAA' rating to the following Clear
Creek Independent School District, Texas' (the district) unlimited
tax (ULT) bonds:
--$170.3 million unlimited tax (ULT) school building and
refunding bonds, series 2015A.
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. (For more information on the Texas
Permanent School Fund see Fitch Affirms Texas PSF Rating at 'AAA';
Outlook Stable, dated Sep. 4, 2014.)
Fitch also assigns an 'AA+' underlying rating to the series
2015A bonds and to the $11.3 million series 2015B ULT refunding
bonds and affirms the 'AA+' underlying rating on the district's
$857.8 million (pre-refunding) in outstanding parity bonds.
The bonds are scheduled to sell the week of March 9th via
negotiated sale. Proceeds will be used to construct and equip new
school facilities, purchase school buses, refund certain
outstanding maturities for savings, and to pay related costs of
issuance.
The Rating Outlook is Stable.
SECURITY
The series 2015A and 2015B bonds are payable from an unlimited
property tax levied against all taxable property within the
district. The series 2015A ULT bonds are also insured as to
principal and interest repayment from a guaranty provided by the
PSF.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: Prudent planning and cost management
support a history of consistent surpluses and adequate policy-level
reserves, enabled by steady enrollment gains.
PART OF LARGE REGIONAL ECONOMY: The district is located in
Harris and Galveston counties, benefiting from a diverse economy
with prominence in the energy and petrochemical industries.
Moderate taxable assessed valuation (TAV) gains since the recession
have been fueled mostly by residential development underway in
Galveston County.
HIGH OVERALL DEBT: Overall debt is high and principal
amortization is slow; however, the district's fixed cost burden,
including annual debt payments and pension contributions is
moderate.
ABOVE-AVERAGE DEMOGRAPHIC PROFILE: The district's unemployment
rate historically trends below state and national averages;
measures of income and education exceed those of the state and the
U.S.
RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to material
changes in fundamental credit characteristics, including the
district's strong financial management practices and high overall
debt levels. The district's history of reserve adequacy and sound
financial management practices indicates expected rating
stability.
CREDIT PROFILE
Clear Creek ISD encompasses 120 square miles and is located
midway between Houston and Galveston. The district's main
population centers include League City and the Clear Lake area of
Houston. District income and educational attainment metrics are
well above-average.
DIVERSIFIED HOUSTON ECONOMY
The district's tax base is well represented by all segments of
the oil & gas industry characteristic of the region, but is
diversified with significant presence of the aerospace and other
manufacturing, retail trade and health service sectors. Diversity
of the local economy tempers the impact of the oil & gas price
volatility present in the Houston area economy. Substantial
downstream energy manufacturing additionally buffers the local
economy from oil & gas price declines.
Chemical and petroleum/coal products comprise the majority of
the region's sizable export market (second largest U.S. export
market behind New York according to IHS Global Insights), supported
by a strong multimodal transportation network which includes the
Houston Ship Channel (HSC). Located along the HSC is the massive
Bayport Industrial Development with 62 industrial plants in
operation.
A historically low unemployment rate reflects ready access to
the Houston employment market. For League City (the largest city in
the district), a local jobless rate of 3.5% as of December 2014 is
improved from the prior year despite 3.6% year-over-year job growth
and compares favorably to state (4.1%) and U.S. (5.4%) averages for
the same period.
The Houston MSA economy made a robust post-recessionary recovery
given many of the aforementioned major drivers that contributed to
recent population and employment gains. However, Fitch believes the
recent plunge in oil prices is likely to dampen the pace of growth
over the near term. It is also Fitch's opinion that the state's
various petrochemical centers should benefit from lower energy
prices, which may serve as a partial offset to any economic
softening. (see Fitch press release, 'Oil Price Decline Likely to
Have Targeted Effect on Local Texas Economies & Revenues',
dated Jan. 13, 2015).
CONTINUED, POSITIVE TAV MOMENTUM
The district's largely residential tax base continues to realize
steady growth after a two year period (fiscals 2011-2012) of
relatively stagnant TAV during the recession. A 5.5% TAV gain was
realized in fiscal 2015, which was fairly comparable to the prior
year's gain. Most of the year's gain was attributable to tax base
appreciation rather than new construction according to district
officials.
The top 10 taxpayers comprise a modest 6% of the district's
$17.4 billion TAV in fiscal 2015. Although much of the district is
mature, undeveloped pockets remain in the 40% represented by
Galveston County, where the district expects further TAV gains over
the next several years. Fitch believes TAV has some sensitivity to
oil prices although a level of modestly positive TAV growth also
appears feasible to Fitch over the near term given an active
housing market, ongoing retail and commercial investment, and
historical tax base performance.
STRONG FINANCIAL PERFORMANCE
The district's financial performance remains sound and stable.
Conservative budgeting of enrollment-related revenues and tightened
spending in prior years to address state aid cuts has allowed the
district to typically outperform budget. Operations have generated
annual surpluses since fiscal 2009. This is notably net of a
sizeable transfer to the capital projects fund for one-time capital
outlays. In line with the district's two-month (16% of spending)
fund balance policy, such transfers are made annually from any
amounts in excess of the policy level. General fund transfers to
the capital projects fund totaled approximately $47 million between
fiscal 2009 and fiscal 2014, lending added financial
flexibility.
Year-end fiscal 2014 performance continued this trend. District
operations generated a $5.8 million operating surplus due to
favorable spending trends throughout the year and higher
student-related revenues. Unrestricted reserves increased modestly
and totaled $53.8 million or 19% of operational spending at fiscal
2014 year-end with the bulk of the surplus ($5.4 million or 2% of
general operations) transferred to the capital projects fund.
The adopted fiscal 2015 $302.6 million general operating budget
was balanced, supported in part by a modest $2.8 million transfer
from the capital projects fund to the general fund. The year's
budgeted spending also provides for the second year of building up
a comparably-sized ($2.2 million) reserve for future technology and
maintenance capital needs. Management reports enrollment is
tracking higher than projected which should produce balanced
operations and stable reserves without need of the transfer. Fitch
believes this is a reasonable projection as prior years' fiscal
performance has generally been positive relative to the budget and
does not foresee substantial changes to the district's strong
financial position.
HIGH OVERALL DEBT BURDEN
The district's overall debt (including overlapping debt of
municipalities) is high at $7,480 per capita or 8% of market value,
although down slightly as a percentage of market value given recent
TAV gains. Principal amortization of the district's direct debt is
below average at 40% repaid in 10 years. The new money portion
included in this offering exhausts the district's $367 million bond
authorization approved by a high 68% of voters in May 2013 and
should not require further increase to the presently moderate debt
service tax rate of $0.36 per $100 TAV (well below what was
promised voters for the entire authorization) according to
management. The tax rate leaves sufficient capacity in relation to
the statutory rate of $0.50 for new debt issuance.
Preliminary plans for a future GO bond authorization as early as
2017 and estimated at approximately $150-$170 million, are
presently under consideration by management, reflective of somewhat
more moderate capital needs in the near-term.
AFFORDABLE RETIREE COSTS
Fitch's concern about the elevated level of the district's
overall long-term liabilities is lessened by its low retiree cost
burden. Retiree pension and healthcare benefits are provided
through 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 as is the
contribution for the state-run post-employment benefit healthcare
plan; the district consistently funds its annual required
contributions.
District employees contribute to TRS for pensions at 6.4% of
annual payroll, and the state pays the local district's
contributions (6.4% of payroll in fiscal 2013), with the exception
of district contributions for probationary employees and for
benefits on employees' salaries that exceed the TRS statutory
minimum. Other post-employment benefit (OPEB) contributions paid by
the district are nominal as the state and employees also pay the
bulk of these costs. Total pension and OPEB contributions made by
the district in fiscal 2014 totaled less than 1% of governmental
fund expenditures.
TRS reported a funded ratio of 80.8% as of Aug. 31, 2013, though
Fitch estimates the funded position to be lower at 72.8% when a
more conservative 7% return assumption is used. The state's payment
of district pension costs is an important credit strength as it
keeps overall carrying costs manageable in the face of an elevated
debt burden.
Carrying costs for the district (debt service, pension, OPEB
costs, net of state support) were manageable at 13% of governmental
fund spending in fiscal 2014 due in large part to the slow pace of
principal amortization. Pension contributions for all districts in
the state rose to 1.5% in fiscal 2015 on the statutory minimum
portion of payroll, from zero, increasing carrying costs further.
Increases in district funding requirements beyond fiscal 2015,
while not presently anticipated, could create additional budget
pressure, which Fitch will monitor.
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, 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.
Following a similar ruling in February 2013, the judge granted a
motion to reopen the lawsuit four months later after state
legislative action that partially restored state funding levels and
made other program changes. 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 will be directed to make changes to the system 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, Texas Municipal Advisory
Council, 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=980499
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Fitch RatingsPrimary AnalystRebecca C. MosesDirector+1
512-215-3739Fitch Ratings, Inc.111 Congress Ste. 2010Austin, TX
78701orSecondary AnalystRebecca MeyerDirector+1
512-215-3733orCommittee ChairpersonKaren RibbleSenior Director+1
415-732-5611orMedia Relations:Elizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com