San Antonio schools bond in fight to reverse enrollment losses

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Facing falling enrollment and aggressive competition from charter schools, San Antonio Independent School District is applying its $450 million bond program to improve its competitive posture, officials say.

Serving a major portion of Texas’ second most populous city, San Antonio ISD ranks as the third largest in Bexar County and the 19th largest in the state with an enrollment of 48,720. Despite the city’s healthy economy, enrollment averaged an annual decline of 2% over the past five years, prompting cost cutting and layoffs this year.

“The district's operations are stable, supported by solid financial management practices but will remain pressured in the near term by declining enrollment and competitive charter schools, driving a strategic expansion of academic programs,” Moody’s Investors Service analyst Sarah Jensen wrote in a report about the district’s Aa2 underlying rating. It carries an enhanced Aaa rating because of support from the Texas Permanent School Fund.

The rating applies to $287 million of general obligation bonds the district is bringing to market Tuesday through book-runner Siebert Cisneros Shank & Co. and JP Morgan as co-senior manager.

Fitch Ratings rates the deal AA underlying and triple-A on the enhancement. The outlook is stable

As with previous issues, the district is inviting students from its business and economics magnet school to observe the pricing and hear presentations from underwriters, financial advisors and others involved in the sale, said Larry Garza, chief financial officer for the district.

The deal includes $172 million of new money and a $115 million current refunding of the district’s 2010 Build America Bonds and comes in a month that has seen a heavy presence of Texas ISD bonds, including $145 million from neighboring Northside ISD.

“In prior issues we’ve been oversubscribed,” Garza said. “I think we’re going to be safe in the market with Northside. We’re both triple-A.”

Indeed, demand for new issues across all ratings shows no signs of slackening amid a chronic lack of supply. Gilt-edged paper like that from SAISD offers strong security to the end of the yield curve, traders say. Bond volume from Texas hit a five-year low in 2018 and is running slightly behind last year’s pace in the first six months.

Amid new state laws on school finance, the onslaught of major charter operators and competition between districts, SAISD has rolled out a unprecedented series of new programs and student options in positioning for the future, Garza said.

Winning voter approval of $450 million of bonds in 2016 demonstrated support for the district and Superintendent Pedro Martinez, Garza said.

“The district is committed to investing in the future of our students, and that requires not only strong and innovative academic initiatives, but also a strong investment in facilities and technology,” Garza said. “These investments allow SAISD to directly compete with the challenge of charter school growth by offering 21st century facilities and a variety of innovative school choice models.”

Projects funded by the bonds include “smart” lighting and heating through ventilation and air conditioning systems that connect to the internet. SAISD is also using a $7 million federal E-rate grant and matching state funds to build an 80-mile fiber network that will link every campus. A technology expert compares the new system to expanding a two-lane highway to 100 lanes.

While competing with charter schools in its midst, SAISD is also surrendering 18 of its schools to charter operators under incentives from the Texas Legislature.

In 2017, the Texas Legislature passed Senate Bill 1882 providing financial incentives for traditional school districts to partner with an open-enrollment charter school or other eligible entity to operate schools.

By turning over 18 schools to five nonprofit charter operators, SAISD will see an increase in state funding for the partnered campus.

The SAISD board’s decision to partner with the charter operators faced objections from the San Antonio Alliance of Teachers and School Personnel who said the decision was rushed.

"There was no involvement of the community in the management agreement," said alliance president Shelley Potter. The alliance said that two of the nonprofits that the district agreed to partner with were in existence for only two days before the board vote.

“Our union raised concerns about the management agreements,” the alliance said. “As teachers and parents started to read the management agreements, they began to understand that these legal documents covered areas not discussed or understood from the charter application.”

Garza described the 2017-18 school year as “the most difficult challenge with charter school competition in terms of new schools opening and new seats being offered. Fortunately, that trend has since slowed as charters have begun to focus on districts, other than SAISD, within Bexar County.”

San Antonio ISD has positioned itself favorably to attract and retain families through a growing list of research-based academic programs at neighborhood schools, as well as specialized choice schools, Garza said. Investments include 48 schools with dual language programs, nine schools with the international baccalaureate program, increased opportunities for dual-credit and advanced placement courses, and career development.

“Some of our new and innovative choice school models include the city’s only public Montessori school, two 100% dual-language academies, three single-gender leadership academies and three career-themed schools,” he said.

Serving the relatively poor inner city, SAISD has faced not only the charter competition but the loss of families to the suburban school districts. New Braunfels in the northern suburbs is one of the fastest-growing cities in the nation.

“Fitch believes the district's revenue growth prospects are stagnant, driven by a 10-year history of enrollment decline and the state's enrollment-based funding formula, offset by periodic increases in state per pupil funding and a trend of solid taxable assessed value growth,” analyst Rebecca Moses wrote. “The district's independent legal ability to raise revenues is limited by state law according to the school funding system.”

Under House Bill 3 passed by the Texas Legislature this year, SAISD will reduce its fiscal year 2020 maintenance and operations tax rate to just under $1.07 from $1.17, but will see a net increase of approximately $37 million in general fund revenues as additional state aid more than offsets the loss of property tax revenues. Under HB3, the district must allocate at least 30% of the net gain in revenues to compensation increases for full-time employees.

All public school districts in Texas set two tax rates, one for maintenance and operations and another for debt service. HB 3 did not affect the rate for debt service.

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School bonds Charter schools Public school funding Northside Independent School District Texas