OREANDA-NEWS. Fitch Ratings affirms the 'A+' long-term rating on approximately \$23.4 million of outstanding combined revenue bonds issued by Del Mar College District (DMCD).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of and first lien on a maximum of 25% of the tuition charges collected from all regularly enrolled students; a building use fee and a matriculation fee collected from all students based on credit hours; and revenues earned on certain district funds.

KEY RATING DRIVERS

POSITIVE OPERATIONS: The 'A+' rating continues to reflect DMCD's positive operating results over the past five years despite enrollment pressures and reduced state appropriations. The district has achieved consistent surpluses due to revenue diversity and expense management. Tuition and operating tax rate flexibility, adequate liquidity levels, and conservative financial management provide cushion that, to date, has offset enrollment pressures.

STABILIZING ENROLLMENT: The college's countercyclical full-time equivalent (FTE) enrollment has declined since fall 2010 due to economic growth and employment opportunities in the district's service area. Management reports that FTE enrollment appears to be stabilizing, though it remains below pre-recession levels.

MANAGEABLE DEBT BURDEN: The district's aggregate annual debt service was a high 11.3% of unrestricted fiscal 2014 operating revenues, including both revenue- and tax-supported debt. While high compared to similarly rated public educational institutions, the debt burden is manageable in light of the district's operating tax rate flexibility, sound 1.7x coverage of aggregate debt service from operations, and approximately 77% of debt being supported by a general obligation (GO) tax pledge. Legal coverage of revenue-supported debt service solely from gross pledged revenues has fallen in recent years but remains above 2.5x.

RATING SENSITIVITIES

PLEDGED COVERAGE: Fitch believes that stable or growing FTE enrollment would support solid coverage from pledged revenues, which could positively affect the rating over time. However, protracted weakening of enrollment and pledged revenue debt coverage could negatively pressure the rating.

CREDIT SUMMARY

Located in Corpus Christi, TX (GO bonds rated 'AA' by Fitch), Del Mar College was founded in 1935 and serves a population of over 350,000 in Nueces County and the surrounding area. The district is a two-year comprehensive community college and operates two campuses.

POSITIVE OPERATIONS DESPITE CHALLENGES; ADEQUATE CUSHION
The district has generated favorable operating results over the past five years (8.8% margins on average) in spite of moderate enrollment declines and reduced state appropriations. The district's ability to manage through these adverse trends is based largely on revenue diversity. Major operating revenues in fiscal 2014 included property taxes (46.7%, for both operations and debt service), state appropriations (18.6%), and net student fees (11.5%). The size and growth of the district's property tax base has helped support positive operating margins in recent years, with increased property tax revenues largely offsetting declines in other sources.

The district has substantial capacity within its operating tax rate, which is currently \$0.208 (per \$100 assessed value [AV]) relative to a statutory cap of \$0.500. The elected board also has authority to increase student tuition and fees, and has done so to support operating revenue. The district has also maintained strong operating results by managing operating expenses, including through early retirement incentive initiatives. Management's use of conservative budget assumptions and good financial controls provide further ability to maintain budgetary balance. In addition, the district's liquidity provides an adequate cushion against adverse trends, with available funds (defined by Fitch as cash and investments less certain restricted funds) of \$43 million, equal to 45.3% of fiscal 2014 operating expenses (\$95 million) and 43% of outstanding debt (\$100.1 million including GO debt).

ENROLLMENT DECLINES MANAGEABLE, STABILIZING
The college's countercyclical FTE enrollment has declined from a peak of 12,264 in fall 2010 to 10,557 in fall 2014. Fitch believes this decline, averaging 3.7% annually, has been manageable given the district's ability to offset it from other revenues sources. Declines in traditional enrollment have also been mitigated somewhat by the expansion of workforce training and dual high school-college enrollment. Enrollment now appears to be stabilizing, which Fitch views favorably. While below historical levels, FTE enrollment effectively leveled off in fall 2014, declining only 0.5% from the prior fall. Management reports that spring enrollment is also flat year-over-year. However, a substantial or protracted weakening of enrollment that materially reduces pledged revenues and pledged revenue bond coverage could negatively pressure the rating.

MANAGEABLE DEBT BURDEN
The district has approximately \$100.1 million in outstanding debt of which \$23.4 million are combined fee revenue bonds (affected by this rating action) and \$76.7 million are limited tax GOs of DCMD (rated 'AA+' by Fitch). The aggregate annual debt service (ADS) requirement for all of the district's debt is a high 11.3% of unrestricted operating revenues but is adequately covered (1.7x) from operations. Fitch notes that approximately 77% of the district's debt is supported by a dedicated GO tax levy.

The security for the revenue bonds is narrow. Legal (gross) coverage of revenue bond current debt service from pledged revenues is down from recent years but remained above 2.5x in fiscal 2014. Voters recently approved a \$157 million GO bond program to address capital needs over the intermediate term. There are no plans for additional revenue-supported debt at this time.