OREANDA-NEWS. Fitch Rates Del Mar College District, Texas' 2016 Ltd Tax Bonds 'AA+'; Outlook Stable Austin Fitch Ratings has assigned an 'AA+' rating to Del Mar College District, Texas' (the district) limited tax debt as follows:

--$64.8 million limited tax bonds, series 2016.

The 2016 bonds are scheduled for negotiated sale July 13. Proceeds from the sale of the bonds will be used to construct and equip school facilities as well as pay issuance costs.

In addition, Fitch affirms the district's Issuer Default Rating (IDR) at 'AA+' and the 'AA+' rating on approximately $71.2 million in outstanding limited tax bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an ad valorem tax levied on all taxable property within the district, limited to $0.50 per $100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

The 'AA+' rating reflects the district's ample taxing margin, solid budgetary flexibility, and growing, albeit moderately concentrated economic base, which should allow for a sound reserve cushion to be maintained throughout economic cycles. Fitch expects the long-term liability burden to remain low given moderate population growth pressures and favorable prospects for continued economic expansion.

Economic Resource Base

Del Mar College District encompasses the city of Corpus Christi (the eighth largest city in Texas) and much of the surrounding MSA. Situated on the Gulf Coast, Corpus Christi serves as the regional economic center for a 12-county area. Key industries include petrochemical companies, refineries, associated oil/gas support services, and shipping/port activity. Tourism, military, and higher education are also major employment sectors. The district's 2016 population base is estimated at 356,000, having realized steady growth since 2000.

Revenue Framework: 'aa' factor assessment

Fitch expects future revenue growth (a portion of which is attributable to typically counter-cyclic enrollment trends) to be comparable to historical performance - in line with inflation, but below U. S. GDP - based on solid economic trends and the ability to capture that growth in property tax revenue. The district maintains superior revenue-raising flexibility as its property tax revenues remain well below the maximum allowed by state law.

Expenditure Framework: 'aa' factor assessment

Further revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically passed through in tuition should lead the pace of spending growth to be more or less aligned with revenues over time. Expenditure flexibility is sound, aided by employer retiree costs shared equally with the state, which should help to maintain moderate carrying costs.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low as a percentage of personal income. Fitch expects it will remain low given the area's population and economic trends.

Operating Performance: 'aaa' factor assessment

A high level of operational flexibility is derived from the district's ample taxing margin, moderate revenue volatility, and sound budgetary control. Use of this flexibility has preserved a strong and stable reserve cushion through the economic cycle while allowing for periodic pay-go capital investment. Fitch believes the district's operating cushion would remain consistent with an 'aaa' financial resilience assessment in a moderate economic decline.

RATING SENSITIVITIES

Financial Operations: Deterioration of the district's strong operating flexibility could negatively affect the rating.

CREDIT PROFILE

The district's resources are primarily influenced by local trends, including enrollment and the tax base. Enrollment trends are typically counter-cyclical to local economic conditions. A steady trend of enrollment declines over 2011-2015 reflects the area's relatively robust and rapid recovery from the recession, in contrast to some economic softening apparent in the district's approximately 7% student gain to date in fiscal 2016.

AV concentration is moderately high with notable petrochemical and energy sector presence; this lack of diversity constitutes a measure of risk to the district. Nonetheless, TAV gains have been steady and Fitch expects further moderate AV growth is likely to continue given numerous major commercial/industrial projects are underway, which will capitalize upon the area's traditional strength in the energy sector and associated industries.

Noteworthy development includes the Cheniere Energy, Inc. expansion adjacent to the Port of Corpus Christi, an $11 billion liquefied natural gas export terminal under construction that will employ 4,000 construction jobs and 300 permanent jobs. The Tianjin Pipe Company is constructing phase II of its $1 billion steel pipe mill and will employ at least 500 by 2017. M&G Resins will soon complete construction of its $900 million plastics factory and will employ 225. Voestalpine, an Austrian high-end steel producer, will commence operations of its $700 million iron processing plant in late 2016 and will top out at 147 employees.

The various large projects are expected to help mitigate the impact of job losses within the nearby Eagle Ford Shale that has curtailed exploration and drilling activity due to reduced oil prices. IHS Economics expects regional job growth, personal income, and real gross metro product to outstrip that of the U. S. over the medium term with the greatest growth in the construction, natural resources, mining, and professional and business services sectors.

Revenue Framework

Property taxes, levied for both operations and debt service, presently provide about half of total revenues. Del Mar's operations have become significantly more dependent on the local tax base in the past decade. Additional tax revenue has largely offset moderate declines in enrollment-related revenues, such as federal (largely Pell grant) revenue, state appropriations, and tuition, as well as some recessionary cuts to state funding.

Future growth trends should align with historical revenue performance, which was in line with inflation.

The district's total tax rate is limited to $1.00 per $100 TAV according to state statute, of which no more than $0.50 per $100 TAV can be for debt service. The current total tax rate is well below this ceiling at roughly $0.25 per $100 TAV in fiscal 2016 ($0.21 for operations and $0.04 for debt service). If a proposed operating tax rate change results in an 8% year-over-year levy increase, the rate increase may be subject to election if petitioned by voters. Fitch does not view this as a significant hindrance to revenue-raising flexibility. The district also retains the ability to independently raise its tuition and fee charges without any legal limit.

Third-party funding support stems from the long-standing commitment of the state (rated 'AAA'/Stable) and U. S. to fund higher education. Nonetheless, these revenue streams remain susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures.

Further revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases should lead the pace of spending growth to be more or less aligned with revenues over time.

Fixed carrying costs - the combination of debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits (OPEB), net of state support - consumed a moderate 14% of total operating/non-operating expenses in fiscal 2015. Fitch expects carrying costs will increase somewhat given planned tax-supported debt issuances, but remain moderate given manageable retiree costs shared with the state. Debt service (which represented the bulk of carrying costs) totaled $11.5 million in fiscal 2015, and is projected to peak in 2020 at roughly $15 million.

The district maintains sound flexibility to adjust instruction (its largest operating expense) to evolving enrollment trends. The district retains strong control over its workforce costs and can adjust employee headcount and compensation accordingly, enabled by the absence of multi-year, contractual agreements or collective bargaining with labor. This expenditure flexibility is tempered by the district's need to recruit and retain a sufficient number of highly educated professionals for instructional purposes.

The district demonstrated its ability to respond relatively quickly in the last downturn to revenue losses and, subsequently, enrollment declines during the economic recovery, with reductions in workforce, salary and hiring freezes. The district carved out further, multi-year salary savings with its targeted initiative to offer retirement incentives in 2012 and 2014 to some of its more highly paid workforce.

Long-Term Liability Burden

Most of the district's debt is supported by ample taxing margin under a separate levy of up to $0.50 per $100 TAV. Voters strongly approved a $157 million bond authorization in 2014 for various campus improvements and expansions, for which a maximum 3-cent tax rate increase to the current $0.04 per $100 TAV rate is currently projected under moderate annual TAV growth assumptions.

Including this issuance, the long-term liability burden is low at 8.6% of 2014 county personal income, derived largely from overlapping debt of the city and local school district. Fitch expects the burden to remain consistent with a 'aaa' assessment despite the district's future issuance plans, aided by moderate population growth and favorable prospects for continued economic expansion that should drive additional income growth.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides roughly half of the community college's (employer) annual pension contribution. Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $9.2 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL adjusted for 7% IRR remains small at less than 1% of personal income.

Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects there will be modest growth in net pension liability even if investment returns meet assumed rates, although not outside of expectations for the 'aaa' assessment given how small the pension liability is relative to overall debt. In addition, the district remains vulnerable to future policy and funding changes by the state, similar to all Texas community colleges. The district also provides OPEB through the state-run, post-employment benefit healthcare plan.

Operating Performance

The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves through the economic cycle in light of its moderate revenue volatility and superior inherent budget flexibility. Steady operating surpluses have fueled moderate levels of pay-go capital spending in recent years despite continued enrollment decline. Fiscal 2016 performance is projected to again generate a healthy operating surplus (roughly 6% of operational spending), positive to budget. Management expects these results will restore the portion of the district's unrestricted net position internally set aside as an operating cushion to about 20% of current year spending at year-end (in line with policy).