Houston school district plans $1.7 billion bond vote as problems mount

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DALLAS – Amid the threat of a state takeover, possible loss of 10 schools, a $115 million deficit, teacher layoffs, and ongoing recovery from Hurricane Harvey, Houston Independent School District is laying the groundwork for a $1.7 billion bond proposal.

The decision to proceed toward a May 2019 bond referendum came during a planning meeting Thursday.

HISD spokeswoman Lorena Cozzari said that assessing and affirming public trust in the district will be part of the process in deciding whether to go forward with the bond proposal.

"Over the next few months we will not only continue researching what the final bond package would include but also how the district’s ratings -- bond, financial, etc. would be affected by any outside factors including a board of managers, closing of schools, an interim superintendent, etc.," she said via email.

"What we do recognize is that there are capital projects and purchases needed now to ensure all students across the district have access to appropriate learning environments, that we must address safety issues that impact older schools and schools that have multiple entrances and exits, challenges associated with outdated equipment and we need to evaluate how we will handle growth in the south and west areas of the district," she added.

If the bond proposal does go to voters at its projected size, it would be the largest since 2012, when $1.89 billion was approved.

Even if the Texas Education Agency does decide to throw out the elected board of trustees and take over management of the district, the consequences wouldn’t necessarily impair HISD’s credit, Moody’s analyst Adebola Kushimo told The Bond Buyer.

“In instances where the state has stepped in, it hasn’t been negative,” Kushimo said. “The state stepping in will not impact the district’s ability to repay bonds.”

The Texas Education Agency is delaying any takeover under a waiver for school districts affected by Hurricane Harvey last August. TEA Commissioner Mike Morath has said he won't decide on any reprieves until June.

In an opinion following the hurricane’s devastation along coastal regions of Southeast Texas, S&P described HISD as the hardest hit of five large districts.

“The majority of its 284 campuses suffered damage, with seven sustaining severe damage that will not allow them to reopen until the spring semester of the 2017-18 school year,” analysts noted.

When 10 of its schools failed to meet state standards established under a 2015 law, the district faced a choice of closing the schools or handing them to a charter operator. When the nine board members met April 24 to vote on a charter operator, they faced angry and vocal opposition that led to two arrests and the clearing of the room.

The board voted not to turn over or close the schools, a decision that could lead the state to fire the elected board and select a replacement.

Safety and security will play a major role in any potential bond program going forward, HISD Chief Operating Officer Brian Busby said in a prepared statement Thursday.

“Our students and teachers need and deserve safe, secure learning environments that allow them to thrive. Our goal is to provide that to them.”

The discussion of security came one day before a student at nearby Santa Fe ISD shot and killed eight students and two teachers in the second massacre at a U.S. public school in two months.

“We offer our full support to Santa Fe ISD during this difficult time,” Houston ISD officials said in a prepared statement.

“The HISD Police Department has more than 200 officers assigned to schools and facilities across the district, and they work diligently every day to keep HISD students and staff safe,” officials added. “Today, the department is operating on high alert, and all available officers are on patrol.”

The district is operating with an interim superintendent, Grenita Lathan, after superintendent Richard Caranza announced in March that he was leaving to become chancellor of schools in New York City.

Also in March, HISD announced it would lay off 250 teachers because of the state’s recapture provisions designed to equalize funding between “property-rich” and “property-poor” districts. Although HISD serves predominantly poor students, its tax base is considered wealthy under state law.

A year ago, district voters voted to approve the purchase of state attendance credits, reversing a previous decision that would have shifted about $8 billion in commercial property from the district's tax base to the state.

When the district was classified as "property wealthy" under Chapter 41 of the Texas Education Code in 2016, voters opposed recapture payments in a November election.

Under Chapter 41, if a district's taxable assessed value per weighted average daily student attendance exceeds a certain level, the district must choose one of five options to return to the equalized level. The most common way is to purchase so-called "attendance credits" by which the district remits a portion of its local property tax revenue to "property poor" districts via the state.

“The electorate's support of these recapture payments resolves many of the uncertainties that surrounded the detachment process,” S&P analyst Joshua Travis wrote after the decision.

Through all the turmoil of the last year, the district has retained high bond ratings of Aaa from Moody’s Investors Service and AA-plus from S&P Global Ratings, with stable outlooks. With guarantees from the Texas Permanent School Fund, investors in Houston ISD’s bonds enjoy the security of triple-A ratings. Beyond the state guarantee, analysts point to the district’s strong and growing tax base as strong security.

“The stable outlook reflects the strength of the robust local economy that should continue to drive strong demand and enrollment over the long term,” Kushimo wrote in a March 2 credit update. “The outlook also reflects our expectation that the financial profile will remain stable over the medium term despite near-term fiscal challenges that include a projected budget gap in fiscal 2019.”

TEA has taken over other large school districts, including Beaumont and El Paso, but nothing on the scale of HISD, the state’s largest district.

“In those instances [Beaumont, El Paso], what we saw was a more widespread systemic issues,” Kushimo said. “In this case, it seems that it’s more isolated to these 10 campuses. It’s a relatively small number. Because it’s somewhat of an isolated issue, it’s difficult to say what is going to happen.”

In 2014 TEA seized control of Beaumont ISD after months of investigations showed the school board lacked the capability to gain management control over its finances and operations. The decision came after a series of financial scandals, including an FBI investigation and indictment of two officials on fraud allegations.

"The magnitude of the findings, the serious nature of the ongoing and systemic operating deficiencies facing the district, and the importance of preventing further harm to the welfare of the Beaumont ISD's students and to the public interest compel me to appoint a board of managers at this time," wrote the TEA commissioner at the time, Michael Williams.

This year, TEA is beginning the transition to an elected Beaumont ISD board, a process that is expected to take more than a year.

“The district has demonstrated significant progress and initiated changes in governance and leadership within the district,” wrote Morath in a letter to BISD leadership in February.

In the course of the state takeover, BISD’s Moody’s rating tumbled to Baa1 with a negative outlook in 2015 from A1 a year earlier. In 2016, Moody’s upgraded the district to A3 with a positive outlook in advance of a $140 million bond issue. Analysts cited the district's “improved financial operations and reserves as well as stabilized management environment after years of turmoil.”

On May 17, S&P upgraded BISD to A from A-minus, citing the improved finances and unqualified audits for fiscal years 2016 and 2017. Like Houston ISD, Beaumont ISD 90 miles to the east, was hard-hit by Harvey.

“The positive results in the last three fiscal years are due to concerted efforts by the state-appointed board of managers to rebuild the district's fund balance,” S&P analyst Joyce Jung wrote.

In 2013, TEA appointed a board of managers as it took over the El Paso ISD in the wake of a federal investigation that led to indictment of Superintendent Lorenzo García and fraud charges against other school officials. Garcia pleaded guilty and was imprisoned for his involvement in a cheating scandal and directing a no-bid contract to his mistress.

In 2015, the state’s 10thlargest district returned to an elected board as TEA ended its supervision. A year later, voters in the district approved a record $668.7 million bond proposal, the largest in El Paso County’s history.

In 2017, EPISD issued $184 million of bonds rated Aa2 by Moody’s with a stable outlook. Fitch Ratings this month assigned an underlying rating of AA to $16.4 million of general obligation bonds. Neither Moody’s nor Fitch mentioned the state takeover in their ratings reports.

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School bonds General obligation bonds Houston Independent School District Texas