DALLAS – The Houston Independent School District returns to the muni market with $683 million of general obligation bonds that carry nearly perfect ratings.
Standard & Poor's assigns an underlying AA-minus rating to the district, and Moody's Investors Service has affirmed its Aaa rating.
Backing from the Texas Permanent School Fund brings HISD's enhanced ratings to triple-A.
The school district's bonds are expected to price Tuesday through bookrunner JPMorgan and co-senior manager RBC Capital Markets.
First Southwest Co. and YaCari Consultants are co-financial advisors.
The bonds will mature serially through 2041.
With this deal, the district will have $2.4 billion of general obligation bonds and $175.7 million of lease-revenue debt outstanding, according to Moody's.
"The district's debt profile is significantly elevated when compared to Aaa peers," Moody's analyst Adebola Kushimo wrote.
After this issue, HISD will have $640 million in unissued bonds from a 2012 approval of $1.89 billion by district voters.
"At this moment we have more construction going on in our district than at any time in our history," Ken Huewitt, interim superintendent and former chief financial officer of the district, said at a community State of the Schools event in early March. "In four years, Houston Independent School District will have the most modern portfolio of high schools in the nation."
Huewitt agreed to fill the top post March 1 when Superintendent Terry Grier resigned after six years in the job.
Grier's departure came after discovery of a $212 million budget shortfall in the bond program, meaning the district would need another $212 million of debt to complete the projects promised to voters in the 2012 election.
While Grier attributed the shortfall to inflation in construction costs, an internal auditor disputed that contention.
The district's internal auditor found that school officials skirted a state law that requires board approval for job orders exceeding $500,000.
One example the auditors cited involved North Forest High School, recently added to the district after the previous operator North Forest ISD was forced to close.
HISD issued two job orders to the same contractor on the same day at North Forest High School in June 2013,
Since the contracts were part of the same project, the district should have sought school board approval for a $960,000 job, auditors said.
The audit noted that state law says districts should not make "separate" or "sequential" purchases to avoid a process that involves buying at once.
In its response to the audit, HISD's construction department said the work resulted from an "immediate need" to repair North Forest facilities after the state ordered the district to take over the school system that summer. The construction department also said that it believed the district's procurement department supported its approach, based on a memo issued later, in April 2014.
In January, district trustees approved a contract with auditing firm KPMG to assess the internal audit.
KPMG indicated it could prepare a draft audit in three months and produce a final report three months after that.
The district is also struggling to meet its operating costs under the state's legally contested funding formula.
"This is a crisis that has been years in the making," Huewitt said in his speech.
HISD is facing a $107 million shortfall for the 2016-2017 school year because the current school finance plan deems the district property-wealthy and requires it to send $165 million of local tax dollars back to the state.
The process is formally known as "recapture" and informally as "Robin Hood."
Though nearly 80% of HISD students come from low-income families, the district is considered property-wealthy because of rising property values throughout the city.
Huewitt said the district can cover about $58 million of the $110 million shortfall.
"That's a lot of money," Huewitt said, "and it will require significant cuts."
The existing formula of dividing up revenue between property-poor and property-rich districts will remain in place unless the Texas Supreme Court upholds lower court rulings that the system is unconstitutional.
A court order that the system violates the state constitution's ban on a statewide property tax and the rights of pupils to an equal education could lead to a special session this year, according to some experts.
Standard & Poor's analyst Omar Tabani called the state's "frequently changing school funding formula" a factor that "we believe will continue to limit the district's ability to fully leverage its broad and diverse property tax base."
That tax base is beginning to show signs of weakness in Houston, a major petroleum industry hub.
Although the price of oil has rebounded in recent weeks, the prolonged slump that began in mid-2014 is beginning to have an impact.
"The area economy will remain challenged, placing downward pressure on the rating, as oil prices remain low," Kushimo wrote.
Assessed values have seen double-digit growth in the past three years as commercial and residential development yielded a total increase of 34.3% to $154.4 billion in fiscal year 2016, Kushimo reported.
In fiscal year 2016 assessed value grew 10.6%, and the five-year average annual increase came to 8.1%.
"However, recent economic performance will challenge assessed valuation growth over the next two to three years," Kushimo warned.
In fiscal 2017, officials are anticipating a 7% increase in assessed values for operating purposes.
Current estimates provided by the appraisal district reflect a 3% increase.
"We could lower the rating if the ISD's financial position deteriorates materially," S&P's Tabani wrote. "But we do not view that scenario as likely within the next two years."
The school district's boundaries overlap with a city that took two downgrades a week before.
The city of Houston's general obligation bonds fell a notch to Aa3 from Aa2 on Moody's scale and AA from AA-plus on Standard & Poor's. Both agencies kept the city's outlook negative.
Despite those downgrades, Houston enjoyed strong demand for its bonds, with net present value savings of $49 million on $506.7 million of refunding.
