OREANDA-NEWS. Fitch Ratings has affirmed its 'AA-' underlying rating for Bridgeport Independent School District, Texas' $23.8 million unlimited tax bonds outstanding. The rating does not consider the bonds' guarantee by the Texas Permanent School Fund.

Fitch also affirms the district's Issuer Default Rating (IDR) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district. The bonds are also backed by a guarantee from the Texas Permanent School Fund, whose guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

Fitch expects Bridgeport ISD to rely on staffing flexibility and currently healthy reserves to counter revenue volatility associated with the energy sector, which dominates the local economy. Enrollment over the intermediate term is expected to be flat to declining absent a marked turnaround in oil and gas exploration activity.

Economic Resource Base

The district is located in north-central Texas in Wise County, an area that witnessed substantial natural gas extraction after 2000 when exploration in the Barnett Shale accelerated. Economic fortunes locally have ebbed and flowed with the fortunes of the energy industry, and energy-related and power generation entities currently dominate the district tax and employment bases.

Revenue Framework: 'bbb' factor assessment

The district's uneven revenue history reflects both energy sector exposure and fluctuating state funding levels. Near-term growth prospects are modest given the possibility of further enrollment and tax base declines. While the district has no ability to increase its operating tax rate without voter approval, state support of K-12 education is a stabilizing factor.

Expenditure Framework: 'aa' factor assessment

Projected flat or declining enrollment will result in generally stable operating spending levels, keeping expenditure growth generally in line with projected stagnant revenue totals. Carrying costs are expected to remain affordable given no current borrowing plans and limited retiree benefit contributions.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are expected to remain moderate given the size and growth prospects of the area, as well as likely continuation of limited pension responsibility.

Operating Performance: 'aa' factor assessment

The district is expected to maintain sound financial resiliency through weak economic conditions, given its expenditure flexibility, solid reserve levels, and ongoing state support.

RATING SENSITIVITIES

Maintenance of Structural Budgetary Balance: Deterioration or prolonged presence of what has been to date a relatively modest gap between ongoing revenues and spending could pressure the current rating.

CREDIT PROFILE

The district serves the city of Bridgeport and surrounding areas, with an estimated population of 12,000. Energy service companies and utilities are the largest employers and taxpayers in the district. Volatility in the energy sector has produced some enrollment losses recently, with the current student count of 2,050 down from a peak of 2,350 in 2008-2009.

Revenue Framework

Local property taxes comprise the largest component of operating revenues for district, increasing from 75% to 80% of the total over the past three fiscal years as taxable values have climbed. That trend will reverse somewhat due to a roughly 4% taxable assessed valuation (TAV) decline in fiscal 2016 and another 7%-8% decline expected for fiscal 2017, the result primarily of downsizing by energy service companies. The state funding formula will offset loss of local property tax revenues by increasing funding for operations; this increase, designed to ensure per pupil funding at a target amount, lags one year behind TAV changes.

Future revenue growth is likely to be consistent with the modest 1% annual average increase registered from fiscal 2005 to fiscal 2014, which trailed both inflation and national GDP over the same period.

The district's operations and maintenance tax rate of $1.04 per $100 of TAV is $0.13 below the statutory maximum, but any increase beyond the current rate would require voter approval. Management reports no current plans to approach voters about a tax rate increase.

Expenditure Framework

As is typical for school districts, instructional outlays comprise more than 50% of general fund spending for Bridgeport ISD. Operating expenses have included capital outlays the past several years, as the district has spent proceeds from $5.9 million in maintenance tax notes issued in fiscal 2013.

General fund spending (excluding capital items) has been relatively flat over the past several years, reflecting lower enrollment and moderating spending pressures. This trend is expected to continue, given flat enrollment projections, suggesting the pace of spending will generally track expected revenue changes.

Management reports a sufficient amount of flexibility in spending, including staffing, to accommodate the current modest growth projections. Workforce flexibility is enhanced as a result of individual employee contracts. Carrying costs of 13.5% of fiscal 2015 governmental spending do not pressure operations, and these costs should remain affordable given no current borrowing plans. Bridgeport ISD's pension contributions are currently limited to the 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $457,000 in fiscal 2015).

Long-Term Liability Burden

The district's long-term liability burden (overall debt plus pension liability), currently 12.4% of personal income, is expected to remain moderate given the lack of any district capital or borrowing needs. The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68, TRS's assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption.

The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts that state statute requires districts to assume. Like all Texas school districts, Bridgeport ISD is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts, as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

Operating Performance

Fitch believes the district would utilize a combination of its budget flexibility and currently sound reserves to adjust to a moderate recessionary revenue decline; these attributes are critical given the district's energy sector exposure and resulting revenue volatility.

The district's financial performance is linked to the fortunes of the local energy sector, with enrollment and taxable values shifting with the health of the oil and gas industry. Management has weathered the current energy downturn well, maintaining solid reserves and spending flexibility. Fitch expects the district would promptly restore any reduced financial flexibility during periods of economic recovery.

The district has reported moderate operating losses the last several years, due primarily to capital items. Management anticipates a modest loss or break-even results for fiscal 2016, and looks to using a modest amount of reserves ($500,000-$750,000) in balancing the fiscal 2017 budget. TAV dipped by roughly 4% in fiscal 2016 to $1.4 billion, and fiscal 2017 is expected to see a 7%-8% decline as local energy companies scale back operations. As mentioned previously, reductions in local property tax revenues for operations are made up by increased state funding pursuant to the current state K-12 funding framework.