DALLAS — Amid uncertainty in the bond market and painful belt-tightening by the state, two large Texas school districts are issuing a combined $235 million of bonds to keep up with demands from growing populations.
The Hurst-Euless-Bedford Independent School District in the mid-cities region of Dallas-Fort Worth is expected to lead off this week with $135 million of general obligation bonds. The Austin Independent School District will follow with $100 million, expected to price Aug. 8.
Both districts enjoy triple-A ratings through enhancement by the Texas Permanent School Fund, but their underlying ratings are just one notch below that.
The bonds are coming to market as investors grow increasingly concerned about the threat of default on U.S. Treasuries. But Jeffrey Timlin, principal and portfolio manager at Sage Advisory Services in Austin, said that the risk of a federal default is less important to investors than state funding issues.
“What we’re seeing in the market definitely adds uncertainty, and uncertainty is an investor’s worst enemy,” he said. “From a credit perspective I would think people would be more concerned about the reduction in state spending rather than this rather ambiguous debt ceiling. If it’s a longstanding issue, however, it’s going to affect everyone.”
Both districts will clearly benefit from their top ratings and a lack of traditional tax-exempt debt in the market, according to Timlin. The fact that the deals are negotiated also gives the issuers more room to maneuver, he said.
In a report issued Monday, Moody’s Investors Service analyst Kristin Button called the $4 billion in funding cuts approved by the Texas Legislature on July 19 a “credit negative,” although debt service for most districts will not be affected. Under state law, tax rates for debt and operations are separate.
“Our concern regarding the cuts from the state is the negative effects on operations,” Button wrote. “Districts with already narrow financial reserves will be challenged to make expenditure cuts and the failure to balance operations will stress credit quality.”
Texas has 1,029 public independent school districts. Legislators debated a complete overhaul of the funding system for the districts. However, the result was a temporary cut that expires Sept. 1, 2015.
In addition to the $4 billion that is being cut in the biennium, legislation also reduced the total state budget another $2.3 billion by deferring the August 2013 school district funding payment to September 2014, thereby forcing the $2.3 billion to be absorbed in the next biennial budget, Button said.
For Texas school districts, declining tax bases have added further pressure to the balance sheet. Hurst-Euless-Bedford ISD has experienced a 1.3% decline in taxable assessed value to $8.5 billion in fiscal 2011. District officials expect that values will continue to decline by about 1% in fiscal 2012 due to the national economy.
With stability from state government and the University of Texas, as well as a growing high-tech industry, Austin ISD has borne up better than most districts in the state. Its tax base of $63.6 billion is double what it was 10 years ago, even after several years of declines. With more than 85,000 students, Austin ISD continues to grow.
“The district’s financial position has trended very well for past several years,” said Standard & Poor’s credit analyst Kate Choban. “For fiscal 2010, the district ended the fiscal year with an operating surplus of $25.9 million in the general fund due to conservative budgeting and expenditure cuts.”
Austin ISD’s upcoming bonds come from a voter approval of $519.5 million in 2004 to alleviate overcrowding, keep up with the city’s growth, and improve campuses and facilities.
In May 2008, voters approved $343.7 million more for new health requirements and upgrading technology throughout the district. The 2008 bond program also provides relief for overcrowding and funds to build a district-wide performing arts center.
Austin ISD’s upcoming issue, approved by the school board last month, will refund commercial paper used to get construction projects up and running.
The HEB district’s issue this week represents all of the $136.5 million in debt authorization approved by voters in May. About $113 million will be used for school facility and technology improvements and the balance towards improving two high school activity centers, with debt service structured to match the useful life of the assets.
Fitch Ratings considers the expected tax rate impact “fairly sizable” at $0.14 per $100 of taxable assessed value, which will push the district’s total tax rate to a “moderately high” $1.42 per $100 TAV.
“However, Fitch notes the strong voter support for the authorization (75% approval for Proposition 1 and 62% approval for Proposition 2, respectively) helps to offset concerns over the tax rate impact,” wrote analyst Blake Roberts.
The HEB district is in Tarrant County and includes the primarily residential cities of Hurst, Euless, and Bedford within its 44 square miles. Due to its landlocked boundaries, the district’s enrollment of about 21,000 has grown modestly in recent years. Officials expect enrollment gains to continue at just above 1% annually over the near term.
Cuts in state funding to schools translate to an $8.6 million revenue loss in fiscal 2012 for the HEB and another $4.2 million decline in fiscal 2013. District officials have carved out about $5 million in savings in the fiscal 2012 budget, which includes the elimination of 34 positions, stipend and program cuts, a pay freeze, and other discretionary savings. With the cuts and added federal funds, the district expects a nearly $2.3 million operating surplus for fiscal 2012, according to Fitch.
Elsewhere in Texas, the impact of the cuts varies according to their status as property-rich or property-poor districts, Moody’s Button noted.
“Districts that receive more in target revenue are typically property-wealthy districts; therefore, these districts will be most negatively affected in the 2013 fiscal year,” she said.
For the affluent Northwest Independent School District, the funding formula cuts about 12% over two years. The property-poor Tornillo ISD will take a 3% cut in 2012 and 1.5% loss in 2013, totaling 4.5% for the biennium.
