Fitch Rates Texas Southmost College District, TX's Series 2015 Ltd Tax Rfdg Bonds 'AA-'
--$8.6 million limited tax refunding bonds series 2015.
The series 2015 bonds will be sold via negotiation Nov. 10. The bonds will be used to refund certain outstanding maturities for economic savings and to pay the costs of issuance.
In addition, Fitch affirms its 'AA-' rating on $56.3 million (pre-refunding) of outstanding limited tax bonds and maintenance tax notes.
The Rating Outlook is Stable.
SECURITY
The series 2015 bonds are direct obligations of the district payable from a continuing direct annual ad valorem tax on all taxable property within the limits prescribed by law, not to exceed $0.50 per $100 of taxable assessed value (TAV). Outstanding maintenance tax notes are subject to a separate limit of $0.35 per $100 TAV.
KEY RATING DRIVERS
STOUT CUSHION UNDERPINS INDEPENDENT OPERATIONS: Fitch believes the district is presently well-positioned to continue its evolution as a stand-alone institution while maintaining satisfactory finances. Spending remains closely aligned to revenue trends. Management continues to expand operations carefully. Sizeable fiscal 2014 reserves are largely a result of one-time sale of property. A flat, balanced budget for fiscal 2016 was adopted.
STABLE TAX BASE: The rating incorporates the district's modestly growing and relatively diverse tax base.
MIXED ENROLLMENT TRENDS: Enrollment reached an all-time low at the start of fiscal 2014 but has since modestly strengthened. Offsetting a portion of Fitch's credit concern is TSC's singular position to provide the programs and cost structure of a typical community college, which should be attractive to local students. Fitch will continue to monitor the district's enrollment trends as a key credit factor.
BORDER ECONOMY: Unemployment levels remain above state and national levels. Income levels have grown rapidly but remain well below average, which provides practical limitations to the district's tax and tuition-raising flexibility.
MODERATE LONG-TERM LIABILITIES: Overall debt levels are moderate. TSC maintains some start-up and intermediate-term capital flexibility given its ample reserve cushion. Carrying costs are presently manageable and are expected to remain so over the near term, although they will rise along with TSC's evolution as an independent operating entity.
NO RATING DIFFERENTIAL: Fitch does not distinguish between the maintenance tax and limited tax ratings given the district's ample taxing margin.
RATING SENSITIVITIES
BALANCED, STABLE FINANCIAL OPERATIONS: The 'AA-' rating incorporates Fitch's expectation that the district will experience some additional operating and enrollment pressures as it develops as a stand-alone institution. The rating remains sensitive to shifts in key credit characteristics, including the preservation of sound finances and reserves that provide important financial flexibility. However, the Stable Outlook reflects Fitch's expectation that material shifts are unlikely.
CREDIT PROFILE
TSC is a two-year comprehensive, open enrollment community college located in Brownsville on the Texas-Mexico border; it has operated jointly with UT Brownsville (UTB) since 1991. The district is in the latter stages of fully unwinding this long-term academic and operational partnership with UTB after both parties decided to dissolve the partnership in 2011.
INDEPENDENT OPERATIONS BEGIN IN FISCAL 2014
Fiscal 2014 results reflect the first year of TSC's independent operations. Financial performance in prior fiscal years was uniquely tempered by the existing partnership cost and revenue structure with UTB, which limits comparability to prior fiscal years. Through the partnership, UTB provided all academic and support services for both institutions while the district compensated UTB with financial support and facilities.
As Fitch expected, the district's key revenue streams (property tax, tuition/fee, and state funding) began shifting in fiscal 2014 as a result of reporting independent operations. TSC's previous partnership agreement required maintaining tuition in line with UTB; the district implemented a 1/3 reduction in its cost of full-time tuition/fees when it set tuition/fees independently in the fall 2013 semester (fiscal 2014). Net tuition subsequently contributed a lower 20% of total fiscal 2014 revenues compared to 34% in fiscal 2013, which also reflected the year's reduced enrollment.
TSC's revenue stream will also feature some additional diversity beginning in fiscal 2017 with federal, non-operating revenues (largely Pell Grant) received for low-income students; these revenues are currently recorded by UTB because TSC is not yet independently accredited. Fitch expects much of TSC's student population will qualify for the Pell Grant, as most receive some form of financial aid.
However, this revenue stream may create some susceptibility over time to shifts in federal support for the discretionary program and the possibility of reduced student eligibility (which could influence future enrollment trends). The Pell Grant program was previously exempt from automatic, across-the-board, sequestration cuts, but the program is not protected going forward.
SURPLUS RESULTS; RESERVES STRENGTHENED
A positive 14% operating margin was achieved in fiscal 2014, similar to prior fiscal years' performance. The positive results were reported despite the year's roughly 6% growth in total spending and were due in large part to increased property tax collections and enrollment-driven expenditure savings.
Available funds to expenses rose to a high 92% in fiscal 2014 from 43% the prior year with the receipt of a sizeable one-time cash payment from UTB ($29 million), the majority of which ($25 million) strengthened unrestricted reserves to $39 million or about 80% of total fiscal 2014 spending, (up from nearly $15 million or about 33% of total spending in fiscal 2013). Fitch believes this strong reserve cushion provides important cash flow flexibility given the likelihood of some further operating and enrollment pressures.
Unaudited fiscal 2015 results anticipate another year of surplus operations with a very modest addition to net position at year-end. Expenditure savings of roughly $2 million largely offset the year's initial reporting of the college's long-term pension liability pursuant to GASB 68.
The $32.5 million fiscal 2016 primary operating budget is flat and structurally balanced. The year's $1.2 million state appropriation decline was largely offset with a comparable gain in property tax revenue for operations. The district anticipates further enrollment traction from its early college high school program implemented in fiscal 2015 in five local high schools. The program should allow for additional state funding for TSC over the near-term at a relatively modest cost.
The district slightly increased its portion of the operating tax levy (up to a rate of roughly $0.11 per $100 TAV in fiscal 2016), well below the locally-imposed operating tax cap of $0.35 per $100 AV; the total tax rate remained essentially unchanged from the prior fiscal year. Operations are reportedly running comparable to budget year-to-date. Fitch believes this continued, careful expansion in the third year of independent operations should allow for essentially break-even results by year-end.
MIXED ENROLLMENT PICTURE
Enrollment may have bottomed out in fiscal 2014, as semester credit hours (SCH) rose by a modest 3% in fiscal 2015. Nonetheless, the college's enrollment patterns remain mixed and Fitch believes they are still evolving. Initial data for fiscal 2016 (fall 2015) reflect 2,660 full-time student equivalents (FTSE) or a modest 2% year-over-year decline, although this level of enrollment is stable when compared to the same period in fiscal 2014. Management believes its continuing education and workforce training programs should also strengthen this trend over the near to medium term.
TSC is presently accredited jointly with UTB and is pursuing accreditation as a separate institution given the unwinding of the partnership. District officials report both internal and external experts are assisting TSC in this process, and they do not anticipate any impediments to meeting the July 2016 accreditation target. Fitch believes this plan appears reasonable, and therefore does not expect accreditation to become a credit issue.
SOME CAPITAL FLEXIBILITY
The property settlement finalized in 2014 between TSC and UTB addressed all of the shared campus facilities, land, and amounts owed by UTB to the district. The settlement also provides a measure of capital flexibility to the district. Some key facilities such as the performance hall, library, and recreation center will be shared between the two institutions over the intermediate term with the greater portion of operating costs attributable to UTB given its larger enrollment base. TSC and UTB have entered into various two to four year lease options whereby UTB uses certain facilities at a cost of approximately $2.4 million annually. TSC maintains some flexibility within the leases to readjust its portion of facility usage periodically if enrollment growth necessitates.
MODERATE LONG-TERM LIABILITIES
The district has no near-term borrowing plans given these property agreements, and management believes it will have sufficient near-term facility capacity to accommodate further enrollment growth. In addition, management has prioritized its accreditation efforts over establishment of a firm capital improvement plan (outside of budgeting roughly $1 million in pay-go capital spending annually for various facility maintenance needs).
This refunding is projected to provide modest, roughly level, annual debt service (ADS) savings over the life of the bonds without extending existing maturities. Overall debt levels remain moderate at about $2,750 per capita and 4.5% of market value due to substantial issuance by the city of Brownsville and Brownsville ISD. Principal payout of the district's tax-supported debt is rapid with 83% retired within the next 10 years. Another $15 million in revenue bonds issued by TSC for previous facility needs are also outstanding (not rated by Fitch). Annual debt service for the college's outstanding revenue and tax-supported debt (pre-refunding) is level at $7.3 million through fiscal 2027, declining rapidly thereafter. Carrying costs for debt service (net of self-supporting debt) was manageable at 13% of total expenses in fiscal 2014.
The college participates in the state-administered Teachers Retirement System of Texas (TRS) for pension and other post-employment benefits (OPEB). TRS is a cost-sharing, multiple-employer plan in which the state has historically provided the bulk of the employer's annual pension contribution. The college's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan.
TSC's direct pension costs have historically been negligible given the very minimal staffing necessitated by the partnership agreement. Fitch expects this liability to increase over the near term given the additional faculty and staffing required for independent operations but to remain moderate. The employer's pension contribution is shared at 50-50% with the state as of the 2014 - 2015 biennium, which for TSC equaled approximately $2 million in fiscal 2015 or roughly 6% of budgeted spending.
MODEST TAX BASE GROWTH IN BORDER ECONOMY
The taxing district encompasses approximately 530 acres in the eastern portion of Cameron County and includes all of the Brownsville, Los Fresnos and the Port Isabel Independent School Districts. Most students reside within the district. TAV gains since fiscal 2010 have been modest at no more than 2% annually; TAV remained relatively stable at $11.5 billion in fiscal 2016 with a slight 1% gain due primarily to new development. Concentration among the top 10 taxpayers remains minimal.
The area economy is based on agriculture, fishing, manufacturing, trade and tourism, and has benefited from its trade links with Mexico. Cameron County's population has realized steady annual increases of around 2% since 2000. Area demographic trends, characterized by a relatively young population base, favor the district. County unemployment remains high and at 6.8% exceeded the state (4.4%) and U.S. levels (5.2%) in August 2015. Wealth levels remain low but comparable to other border communities, at roughly 60% of state and national averages, but they have registered healthy gains since 2007.
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