Fitch Affirms Corpus Christi Independent School District, TX's ULTGO Bonds at 'AA+'; Outlook Stable

Fitch Ratings has affirmed the underlying rating on the following Corpus Christi Independent School District (ISD), Texas' (the district) unlimited tax general obligation (ULTGO) bonds:

--$160 million unlimited tax (ULT) bonds, series 2008A, 2009 and 2009A at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy of the district.

In addition, the series 2008A bonds are supported by the Texas Permanent School Fund (PSF) whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014.)

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: The district's financial position is healthy, with robust reserves, consistently balanced operations and solid liquidity driven by conservative budgeting and proactive expenditure control.

STABLE ECONOMY: The district's economy has shown strong performance over the past decade relative to the state and nation as evidenced by sustained employment growth and continued increases in taxable assessed value (TAV). The local economy does show some concentration in the military and oil and gas sectors.

MODERATE DEBT: Debt levels and overall carrying costs remain moderate, although principal amortization is average. Manageable future needs are expected to keep debt moderate.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL MANAGEMENT: Continued solid management practices are a key credit factor given possible risks to enrollment and finances associated with economic concentration in the petrochemical and military sectors.

CREDIT PROFILE

Corpus Christi ISD serves a large portion of the City of Corpus Christi (population of 316,381). Corpus Christi is the county seat of Nueces County and is located on the Gulf of Mexico coast. After several years of growth fiscal year 2015 enrollment declined modestly to 38,736. The district is projecting enrollment to be flat in fiscal year 2016, with expected improvement in the near term as two new schools open in the city's expanding south side.

SOLID OPERATING PERFORMANCE; HIGH RESERVES

The district's strong fiscal management is reflected in solid reserves and liquidity. In recent years, unrestricted general fund balances have been over the district's policy of 20% of spending and it is expected to remain close to these levels in the near term. Transfers totaling $27 million from the general fund to the capital projects fund in fiscal years 2013 and 2014 covered construction cost overruns related to the construction of a new high school and middle school on the city's south side. Due to the transfers ($18 million in fiscal year 2013), fiscal year 2013 ended with a general fund deficit of $11.2 million (or 3.9% of spending), which reduced the unrestricted general fund ending balance to a still solid $70.9 million, or 24.7% of spending. Fiscal year 2014 ended with a modest surplus of $5.5 million after transferring an additional $9 million for construction related overruns. The fiscal year 2014 general fund unrestricted ending balance was $75.8 million or 25.8% of spending.

The fiscal year 2015 general fund budget assumes a $6.6 million deficit (2% of spending) that reflects about $9.3 million in one-time spending on capital and equipment. Continuing the district's strong expenditure management and conservative revenue forecasting, actual fiscal year 2015 general fund operations are expected to be close to balanced. With major capital projects continuing in the near term, there is the potential that fund balance may be drawn on in the future for pay-go construction costs.

The district has a history of budgeting deficits with actual results outperforming estimates. Conservative budgeting practices include budgeting vacant staff positions and related salary and benefit costs at 100%.

The district will not meet its 2015 budgeted enrollment figure of 39,600 students given current estimates are for 38,736 students. Any resulting decline in average daily attendance (ADA) driven state funding is expected to be offset by lower than actual spending. In the near term, the district is expecting to recapture students once it opens a new high school and middle school in August 2015. These schools were built to address population shifts and the need for more schools in the city's growing south side.

MODERATE DEBT DESPITE SIZABLE ISSUANCES

The district's debt profile is manageable and expected to remain so even with the anticipated issuance of $100 million of unlimited tax bonds approved by voters in November 2014. Overall, debt levels are moderate with total debt to full value at 3.3% and total debt per capita of $2,363. Fiscal year 2014 debt service requirements (net of state support) represented less than 6.6% of governmental spending. Amortization is moderate with 40% of principal retired within the next 10 years. Fitch expects the district's overall debt profile to remain moderate and manageable in the near term.

The district is expected to issue at least $50 million of the recent voter authorization in August 2015 and the remaining debt in 2016. The bonds will construct two new elementary schools and consolidate two existing schools into one. Proceeds will also fund security improvements, new classrooms, athletic tracks and roof/air-conditioning replacements. The district has indicated that the issuance will not require a tax rate increase, as the recent trend of TAV growth is expected to continue. Although the debt service fund ran deficits between fiscal years 2012 and 2014, management has indicated these draws on fund balance were planned usage of reserves rather than increasing the tax rate. The district has an informal unassigned debt service fund balance policy of 15% of spending. The fiscal year 2014 balance of $6.3 million (21%) exceeded the requirement. The fiscal year 2015 debt service fund is expected to be balanced with no draws on reserves planned.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer plan. Overall carrying costs for debt service, pensions and other post-employment benefit costs are low at 7.5% of net governmental fund spending given the state's sizable support.

GROWING ECONOMY; SOME VULNERABILITY

The economy of Corpus Christi is shaped by a mix of military, port activities, health care and tourism. The Army Depot of Corpus Christi (one of world's largest helicopter repair facilities) and the U.S. Naval Air Station are the largest employers in the area with over 8,600 combined employees. Although sequestration has not had a notable negative impact on the local economy, significant cuts to these major local employers could affect the district's credit profile.

A local development project of note is the $2 billion Tianjin Pipe project (a steel pipe mill) located adjacent to the Port of Corpus Christi that is projected to be one of the largest Chinese investments in the U.S., adding 600 permanent jobs to the area. Another large industrial development project, a plastics company facility, (M&G Corporation) is also projected to be fully built over the next few years.

The city is a major petrochemical center and the Port of Corpus Christi ranks as the fifth largest in the U.S. and 44th in the world in terms of tonnage. Despite the recent decline in oil prices, various expansion projects related to local refineries such as Valero (Fitch rated 'BBB' Stable outlook) and Flint Hills are ongoing. Furthermore, the significant presence of the government, healthcare and education sectors afford some stability to the local economy as indicated by low unemployment rates and consistent job growth. Income levels are below the state and national averages.

CONCENTRATED TAX BASE

The district's TAV has generally experienced steady growth (a 3% drop in 2011 was due more to an increase in exemptions than an actual decrease in market values). TAV has increased in each fiscal year 2014 and 2015 by more than 9% annually. TAV is expected to continue to expand due to additional economic development activity in the area. The tax base is somewhat concentrated as the top 10 taxpayers represent 15.9% of total valuations in fiscal year 2014; six of the leading taxpayers are oil refineries, including Valero Energy Corp., which accounts for 5% of the tax base.

TEXAS SCHOOL FUNDING LITIGATION

A Texas district judge ruled in August 2014 that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children and was the second such ruling in the past two years, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature would likely follow with changes intended to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985248

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