Downgrade Follows Thumbs-Up on Texas School Bonds

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DALLAS – Five days after winning voter approval of $155 million of bonds to keep pace with growth, the Anna Independent School District on the outskirts of Dallas took a two-notch downgrade from Moody's Investors Service.

"The elevated debt burden is a key driver in the downgrade," analyst Brady Olsen said after Moody's dropped the district's underlying rating to A3 from A on Thursday.

"The district's debt schedule is currently projected to be beyond what today's tax base can afford especially as the district is at the statutory cap for operating rates and the attorney general's debt rate test for additional bonds," Olsen said.

While the downgrade came after the May 7 bond election, Olsen said the voter approval did not trigger the new rating.

"The downgrade reflects the tax rate at the cap with future growth required to meet the escalating debt service payments and ongoing capital needs," he said via email.

Brian Grubbs, managing director at Samco Capital Markets, the district's financial advisor, noted that the Moody's rating was based on surveillance for previous issues and not the underlying rating the district will take to market this summer when it plans to price up to $19 million of the newly authorized debt.

"Standard & Poor's is still A-plus," Grubbs said.

Anna ISD chief financial officer Thomas O'Neal called the downgrade disappointing but said the district's financial metrics have actually improved since 2014, when Moody's rated $103 million of outstanding debt A1.

"We feel comfortable with this new issuance," O'Neal said. "We don't plan on issuing any new debt until we can afford it."

O'Neal said the district's demographer expects the population to double in eight or nine years.

"We're anticipating double-digit growth to our tax base each year," he said.

While S&P Global Ratings has a stable outlook on the district, its analysts say its debt ratio is high at nearly 11% of taxable assessed value.

"Officials will likely need to issue additional debt over the next few years with the rate of near-term tax base growth and the potential bond election likely determining the timing and amount," S&P analyst Alexander Laufer wrote in a 2015 report. "Due to the district's extended amortization schedule and additional capital needs, we expect the district's debt profile will likely remain very weak."

In 2015, Anna ISD voters approved an increased tax rate in a tax ratification election. The district plans to use a portion of increased revenue for debt service as needed.

Anna's debt outlook is typical of districts that were once rural but now swept up in suburban growth. Anna is 40 miles northeast of downtown Dallas, in booming and affluent Collin County.

The neighboring Melissa ISD has similar concerns after its voters approved the same amount of bond debt on May 7. Melissa's $155 million of bonds were approved by 87% of the voters, while Anna's were favored by more than 70%.

Melissa ISD has about $60 million of outstanding debt, according to Moody's.

"We believe the district's debt burden will remain elevated given the slow payout and the anticipated new debt on the horizon," Moody's analyst Denise Rappmund said.

Michelle Smith, executive director of a statewide advocacy group called the Fast Growth School Coalition, said that most of the bonds approved May 7 came in fast-growth districts.

"While we are proud of the passage of these bond elections, we also recognize that local taxpayers are taking on the vast majority of the burden for growth in the state of Texas, Smith said. "We need state funding to reflect the realities inherent in a state with such tremendous population growth and to allow for greater flexibility in how local communities manage and meet the demands of being a fast growth district."

The city of Anna was at one time issuing 100 building permits a month, according to officials. Development took a breather after the 2008 recession but has since picked up the pace, according to recent data.

Fortunately for districts such as Anna and Melissa, the underlying rating is not as important as the enhanced triple-A rating that comes with a wrap by the $36 billion Texas Permanent School Fund. The PSF has allowed many of the state's more than 1,200 school districts to lower construction finance costs since 1985.

One finance tool available to school districts like Anna – capital appreciation bonds – are now limited to 25% of an issuer's debt load under a 2015 state law. Maximum maturities, which were once 40 years, are now limited to 20 years.

CABs that did not pay interest until final maturity were used by districts that lacked the tax base to support the amount of debt needed for rapid growth. By the time the debt matured, according to the CAB scenario, the tax base would be well established.

While some parts of Texas have taken a hit with lower oil prices, the North Texas region has continued to boom, with several corporate relocations to Collin County, boosted by the North Texas Tollway Authority's Sam Rayburn Tollway.

Every school district in the Dallas-Fort Worth area won easy approval of bond issues in the May 7 election, including McKinney ISD, the largest district in Collin County. McKinney's voters approved $220 million of bonds with 62% in favor, including $60 million for a new football stadium.

In April, McKinney ISD announced that it planned to reduce its property tax rate by 4.5 cents, more than double the previously announced 2 cents.

The tax reduction was based on higher than previously estimated property value growth from the Collin County Central Appraisal District, combined with interest savings from recent bond refundings.

In addition, McKinney ISD will reduce the maturity of bonds authorized May 7 to 20 years instead of 25 years, enhancing an already aggressive debt payoff schedule.

"As of the April 2016 refunding, McKinney ISD has refunded approximately $225.38 million of bonds for a total savings of $31.7 million," McKinney ISD chief financial officer Jason Bird said. "True interest savings with no maturity extension is a win for our taxpayers."

Bird added that issuing 20-year bonds would reduce the district's interest expenses by approximately 23% compared to 25-year bonds, adding additional strength to the debt schedule. Under the new scenario McKinney ISD will have paid off over 60% of total debt within the next 10 years, while at the same time lowering the tax rate.

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