DALLAS — Bolstered by a rebound in its credit ratings, the Dallas Independent School District will price its first qualified school construction notes in a $143 million deal Thursday.
Ranked behind Houston ISD in terms of enrollment, the state's second-largest district has rebounded from a historic decline in its tax base since the 2008 recession. Resolution of a statewide court case over Texas's school funding formula could bring further improvement in the district's improving cash-flow scenario, analysts said.
DISD chief financial officer James C. Terry said the 20-year taxable notes will price Thursday if market conditions fit the district's parameters. Terry, who has held the CFO post for nearly two years, said that investors should be attracted to the district's strong fiscal position and improving outlook.
"We expect we will sell the whole issue on the first day," he said.
Terry is consulting with financial advisors Robert Henderson and Clarence Grier, managing directors at RBC Capital Markets, along with Estrada-Hinojosa & Co. co-founder Robert Estrada, and managing directors U.S. Williams Jr. and Dwight Burns.
Frank Reed, managing director at senior manager Loop Capital Markets, is lead banker on the deal. Co-managers are BOSC Inc., Citigroup and M.R. Beal & Co.
Bracewell & Giuliani partner Ben Brooks III serves as bond counsel, with West & Associates as co-bond counsel.
The finance team has guided the district through rough economic times that began with a 2009 downgrade by Standard & Poor's to A-plus from AA-minus and to A1 from Aa3 by Moody's Investors Service.
Now the trend continues in a positive direction with a Moody's upgrade to Aa1 from Aa2 with a stable outlook. That rating applies to this issue, as well as $2.5 billion of outstanding general obligation bonds.
"The upgrade to Aa1 reflects the district's significantly improved financial operations resulting from conservative budgeting and tightened expenditure controls supporting healthy reserve levels more consistent with the Aa1 rating," Moody's analyst Kristin Button said.
Fitch Ratings maintained its AA rating and raised the outlook to positive, indicating a future upgrade.
S&P raised the district's GO rating one notch to AA-minus from A-plus on Nov. 6, 2012. It had not rated this week's issue as of Monday.
Because the QSCB's do not require voter approval, the bonds will not carry the Texas Permanent School Fund's triple-A backing.
While 80 school districts in the state have issued QSC bonds or notes since their creation by Congress in 2009, this will be DISD's first use of the debt, which carries a federal subsidy.
QSCBs, established under the American Recovery and Reinvestment Act of 2009, are taxable, tax credit bonds, which can be issued by states and large, local educational agencies to finance school construction or rehabilitation.
They can be issued as traditional tax credit bonds, where investors receive tax credits, or as direct-pay bonds, where issuers receive subsidy payments from the Treasury Department equal to the actual interest rate on the bonds or the tax credit rate.
Under federal tax law, tax-credit bonds are given a three-year spending period "upon submission of a request."
The Dallas ISD has struggled along with the state's 1,240 districts to cope with cuts in funding from the Texas Legislature after the 2008 recession.
State funding to DISD was cut by $65 million in fiscal 2012 and $35 million in fiscal 2013. To ease the blow, the district's administration eliminated 1,442 positions and adjusted classroom sizes at the elementary level from 22 to 24 students per teacher.
The measures produced a year-end surplus for fiscal 2012 and increased the general fund balance to $201 million, according to Moody's.
Of that, $188 million is unassigned and represents a healthy 15.6% of general fund revenues, Button said.
"Favorable operations continued in fiscal 2013 with an $80 million operating surplus, which increased the total general fund balance to $281 million," Button said. "The healthy 23.4% of General Fund revenues reserve level is a vast improvement and is more aligned with the Aa1 rating category."
One indication of the improving cash flow is the fact that DISD did not have to issue Tax Revenue Anticipation Notes for the first time since 2008. From 2008 through 2012, the district issued TRANs to bolster cash flow in the beginning of the fiscal year because the cash levels were insufficient.
Each year, as the cash position improved, the TRAN amount decreased from a high of $125 million in 2008 to anticipated $50 million in 2013, which was ultimately not needed.
"Officials stated that TRANs will no longer be necessary, which is favorable and indicative of the district's willingness to maintain healthy reserve levels that are consistent with the Aa1 rating," Button said.
While population in the district has fallen to 1.2 million from 1.3 million in 2011, district officials said school enrollment has not declined.
From a peak of $81.8 billion in 2009, the district's tax base fell 8% to a low of $75.1 billion in fiscal year 2012. By fiscal year 2014, the assessed value is expected to reach $80.6 billion, about $1.2 billion below the 2009 peak.
Per capita taxable assessed value fell from $62,641 in 2009 to $58,015 in 2011. Since then, the figure has grown nearly 14% to $65,916.
Conservative projections for fiscal 2014 reflect another operating surplus of approximately $20 million, and officials anticipate more.
Officials have a goal to build the general fund reserve to $500 million over the next 20 years in anticipation of a $143 million bullet payment that will come due in 2033. There are also plans to formally adopt a general fund policy that maintains a General Fund balance at least equal to 25% of general fund expenditures.
School districts across the state are awaiting final resolution of a court case over the state's school funding formula that has been developing for years.
In February 2013, a district judge ruled the state's school finance system is unconstitutional. The case combined six lawsuits representing 75% of Texas school children.
State district court Judge John Dietz found the system "inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels." Dietz also cited inadequate funding as a constitutional flaw in the current system.
The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. A new trial was set for Jan. 6.
If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality.
"Fitch would consider any changes that include additional funding for schools a positive credit consideration," Fitch analyst Blake Roberts said.
