From fitchratings.com
Fitch Ratings has assigned a ‘AAA’ rating based on the Texas Permanent School Fund (PSF) guarantee and a ‘AA’ underlying rating to the following Lubbock-Cooper Independent School District, Texas unlimited tax (ULT) bonds:
–$63.47 million ULT school building bonds series 2022.
In addition, Fitch has affirmed the following district ratings at ‘AA’:
–Issuer Default Rating (IDR);
–More than $400 million in outstanding ULT bonds.
The Rating Outlook is Stable.
The bonds are expected to be sold on a negotiated basis on or around Aug. 24. Proceeds will be used to finance various district capital improvements.
SECURITY
The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further backed by a guarantee from the Texas Permanent School Fund (PSF) bond guarantee program. A change in Fitch’s ‘AAA’ assessment of the PSF bond guarantee program would automatically result in a change in the PSF rating of Lubbock-Cooper ISD’s series 2022 ULT bonds and outstanding PSF-guaranteed ULT bonds. For more information on the PSF, see “Fitch Affirms Texas PSF Rating at ‘AAA’; Outlook Stable,” published Jan. 5, 2022 and available at www.fitchratings.com.
ANALYTICAL CONCLUSION
The ‘AA’ IDR and ULT rating reflect the district’s strong operating performance and ability to manage rapid enrollment growth. Facility capacity needs may cause long-term liabilities to rise in the near term, although Fitch believes the liabilities will remain a moderate burden on resources which also rise with population gains. Strong residential growth is likely to continue through the medium term, driving revenue growth through enrollment gains and concomitant pupil-based state funding.
Economic Resource Base
The district has an estimated population of over 45,000 and serves the southern portion of the city of Lubbock (GO bonds rated AA+/Stable by Fitch) and the unincorporated community of Woodrow. The district is experiencing fast population growth, leading to rapid enrollment gains. The five-year compound average growth rate (CAGR) through 2021 was 4.5% for average daily attendance and 11% for taxable assessed value (TAV).
KEY RATING DRIVERS
Revenue Framework: ‘a’
Revenue growth has been strong, in excess of the national GDP and CPI during the 10-year period ending in 2021. Growth over the next several years will likely mirror this trend given the expectation of solid tax base and enrollment gains. As is the case with most school districts, Lubbock-Cooper ISD’s independent legal ability to raise revenues is limited by state law.
Expenditure Framework: ‘aa’
Fitch expects spending growth to remain in line with revenue growth, reflecting operating costs for new schools. State support for retiree benefits helps keep the fixed-cost burden moderate, which, along with the flexible labor framework results in solid expenditure flexibility.
Long-Term Liability Burden: ‘aa’
Fitch estimates long-term liabilities to be a moderate burden on resources at 16% of resident personal income, partly due to above-average income metrics. Additional debt plans to address growth-related capital needs may increase the burden on resources somewhat, but Fitch expects levels to remain in the moderate range due to continued growth in the resource base and the district’s adherence to the 50-cent debt service rate cap for new issuances.
Operating Performance: ‘aaa’
Fitch expects high reserve levels relative to low expected revenue volatility and midrange budget flexibility will enable the district to maintain a sustained healthy financial position through economic cycles. Conservative budgeting practices have helped management navigate the recent rapid growth.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–A sustained decline in the long-term liability burden at or below 10% of personal income.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–A severe and prolonged decline in the rate of enrollment growth — a principal driver for state funding;
–Sizable and continual declines in operating reserves, weakening the district’s financial flexibility;
–Sustained increase in the long-term liability burden in excess of 20% personal income.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
CURRENT DEVELOPMENTS
While many districts experienced declines or slowdowns in student enrollment as a result of the pandemic, Lubbock-Cooper ISD continued to register enrollment gains. Average daily attendance (ADA) in fiscal 2021 was 6,839, reflecting an increase of 5.4% (or 343 students) from the prior year. Based on demographic projections, management expects the district to realize an enrollment increase of 300 to 400 students annually over the next five to seven years. According to officials, the district is not expected to reach buildout for well over a decade.
Like many school districts, the district is eligible for American Rescue Plan Act (ARPA) funds, codified as ESSER I, ESSER II and ESSER III funds. Per management, the ESSER I and II funds were largely used to for one-time expenditures. According to representatives, of the district’s $3.4 million ESSER III allocation, approximately $1 million remains unspent. Over the next 12 to 18 months, management expects to use the remaining allocation to finance nonrecurring needs, including but not limited to learning loss/intervention programs.
The district has ended the past several fiscal years with an unrestricted general fund balance that accounts for no less than 15% of operating expenditures. At the close of fiscal 2021, the district posted about a $4 million surplus, net of transfers, and its available fund balance totaled $21 million, or 34% of general fund expenditures. Officials adopted a balanced budget for fiscal 2022, and management expects fiscal 2022 audited results to reflect at least a $3 million operating surplus.
The district’s fiscal 2023 adopted budget reflects a $2 million deficit. While the district’s year-end results are typically better-than-budgeted, even if the $2 million deficit were fully realized, unrestricted reserves would still account for a strong 31% of general fund expenditures. Fitch expects the district will continue to prudently manage its costs in order to maintain operating performance that is consistent with the current rating.
In November 2021, voters authorized a $420 million bond package to support the district’s growth. After this issuance, the district will have approximately $300 million in authorized, but unissued debt remaining. District representatives have confirmed that the district will issue the remaining authorization incrementally over the next several years. The district’s fiscal 2021 debt service tax rate is at the statutory new money issuance limit of $0.50 per $100 TAV. Future tranches from the most recent bond election will be issued as tax base growth can support the additional debt.
CREDIT PROFILE
Lubbock-Cooper ISD’s tax base and enrollment growth trends have been very strong. Despite slower-than-normal enrollment growth for many school districts, as a result of the coronavirus pandemic, the district has experienced sizable gains in its student population each year for the past decade. The five-year CAGR for average daily attendance, a key driver of state funding, was 5.2% for the period ending in fiscal 2020 and 4.5% for the period ending in fiscal 2021.
Since fiscal 2019, TAV has increased by more than 50% to $5.1 billion in fiscal 2023. The district’s continued growth prospects are strong given the availability and affordability of land and continued developer interest in the district, as evidenced by the pace of housing starts. Management indicates that there are several residential subdivisions underway and forthcoming.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- FAST Econometric API – Fitch Analytical Stress Test Model, v3.0.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Lubbock-Cooper Independent School District (TX) | EU Endorsed, UK Endorsed |
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