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Dallas ISD

Dallas Independent School District experienced a $60 million general fund shortfall in fiscal 2008, well in excess of original projections. This deficit has shrunk district general fund reserves by more than half; the fiscal 2007 unreserved general fund balance was $105.8 million, and the unreserved balance for fiscal 2008 was $43.6 million, a relatively low 3.4% of spending. District staff attributed the deficit to poor controls and inadequate communication between various district administrative departments, as the hiring of an estimated 750 teachers was not factored into the fiscal 2008 budget. Fitch also notes the numerous findings in the fiscal 2007 district audit, in which external auditors identified a number of weaknesses and deficiencies regarding internal controls, accounting procedures and financial oversight. These findings have further magnified the scope of the district's problems.

Budget concerns continue into the current fiscal year, as administrators have attempted to close an initial deficit for fiscal 2009 of more than $80 million through staff reductions and other spending cutbacks. The district declared a state of financial emergency in September 2008, which allowed it to lay off teachers presently under contract. The total number of employees terminated to date is 1,000, including approximately 700 teachers. District staff estimates the payroll savings from the layoffs will total roughly $26 million for fiscal 2009 and more than $50 million for fiscal 2010. Despite these and other measures, the district still expects an estimated $30 million operating deficit for fiscal 2009.

In response to the deteriorating financial position and identified internal control weaknesses, the district implemented several management changes, including hiring a new executive director of financial services, executive chief financial officer, director of accounting services, and director of budget services. District staff has developed a corrective action plan, which is envisioned to restore internal controls and procedures over a 3-year period, and a financial recovery plan aimed to restore operating reserves. Fitch believes these changes can help the district restore financial balance and rebuild reserves and continues to believe that further rating action is likely unless improvement in both financial management and reserves occurs over the near term.

Proceeds from the current offering will refund the district's outstanding series 1999 unlimited tax bonds for interest savings, the majority of which the district is taking in fiscal 2010. Fitch considers the district's direct debt burden moderate, although increasing with recent borrowings and a $1.35 billion bond authorization approved by voters in May 2008. Nearly $1 billion of this authorization remains to be issued, with the capital program including new and replacement schools, renovations and additions at existing campuses, and a variety of other improvements. This program, which is projected to meet district capital needs through at least 2014, is expected to have a debt service tax rate impact of roughly $0.08 per $100 of taxable assessed valuation (TAV) assuming modest tax base growth over the next decade. The pace of debt retirement has slowed considerably also as a result of recent offerings and now is well below average.

District officials caution that the district's fiscal 2010 TAV is expected to dip around 5%, reflecting the impact of the national recession on the metroplex economy. Prior TAV growth rebounded in fiscal years 2006-2008, after gains slowed appreciably from fiscal 2003-2005. The fiscal 2009 TAV of $81.8 billion represented a solid 12% increase from last year, and the average annual gain over the past five fiscal years exceeded 8%. Although the pace of housing starts has slowed noticeably in recent months, the most recent residential foreclosure and delinquency rates for the Dallas-Fort Worth area are below national averages.

The district is the second largest in the state, with an estimated 158,000 students. Enrollment, which has declined marginally over the past several fiscal years, is projected to stabilize around current levels. The district serves the majority of the City of Dallas, as well as all or portions of 11 area cities and towns, with a total estimated population of approximately 1.3 million. District facilities currently include 157 elementary schools, 31 middle schools, 23 high schools, and several magnet and alternative campuses. District staffing presently totals 20,000.

Austin ISD

Austin Independent School District serves the city of Austin with over 100 campuses and a current enrollment of approximately 84,000. The local economy continues to significantly outperform the nation, despite some softening with the area's higher than average exposure to high-tech industry job losses and the slowdown in the housing market. While unemployment has risen from 2008 levels as in much of the nation, the city's unemployment level remains below those of the metro, county, and state at 5.2% in April 2009 and still under its earlier high of 6.4% in 2003.

Given its mature status, enrollment pressures appear manageable going forward, although comparable to other large, urban districts, the significant wealth and testing disparities between campuses will continue to challenge the district. Under the existing school finance system, the district is considered property rich, subject to wealth equalization under state legislative definitions. Therefore, voter-approved maintenance and operations (M&O) tax rate increases not subject to wealth equalization provide more impact to district operations than rising property values. The district maintains some financial flexibility with a remaining discretionary taxing margin. Fitch believes one of the district's most immediate challenges and a key rating driver is the need to restore operational structural balance. Continued drawdown on reserves that would weaken the district's financial position could negatively affect credit quality over the near term.

Audited results for fiscal 2008 were again solid and bettered budgeted numbers with the district adding approximately $6 million to reserves, which brought the unreserved/undesignated general fund balance amount to nearly $130 million or almost 17% of spending. Liquidity also remained substantial at $158 million or roughly 75 days of cash on hand. A drawdown of roughly $22 million from reserves was planned for fiscal 2009, which later grew into a larger operating gap during the year due to unplanned expenditures. Nonetheless, after implementing various cost-saving measures in conjunction with higher than expected student attendance, district officials report they now project the year's general fund results with a drawdown of no greater than $20 million or a still healthy unreserved/undesignated general fund balance of $110 million. Another $20 million drawdown is currently projected in the preliminary fiscal 2010 budget, although district officials anticipate this amount may decline somewhat after budgeting for further efficiencies and probable additional state and federal revenues. The district has no immediate plans to approach voters for additional M&O tax rate increases.

Fitch considers the district's debt level moderate and capital needs manageable. Recent strong tax base gains have mitigated the debt service tax rate impact of the district's capital plans. Given the relatively modest average annual enrollment growth over the past five years of slightly more than 1%, the district's capital needs are geared primarily toward renovations and additions to existing facilities. District voters approved a $344 million bond authorization in May 2008 by large margins that will reportedly last the district until 2011, which is slightly longer than previously anticipated. With this issuance, overall debt ratios are little changed from previous levels at about $2,400 per capita and 2.9% of taxable assessed valuation (TAV). Principal amortization remains above average at about 61% in 10 years, but below previously very rapid levels.

Grand Prairie ISD

Serving a population of nearly 140,000, the district boundaries cover 58 square miles that includes approximately 80% of the city of Grand Prairie. With a current taxable assessed valuation (TAV) of $4.9 billion, annual TAV growth has averaged roughly 7% in the last five fiscal years. Over half of the district's tax base is residential. In fiscal 2009, the district's enrollment reached roughly 25,600 students, up only 1.5% from prior year levels. Having grown at a rate of about 3% annually over the past five years, slightly lower rates of growth are projected over the next five years due to the softened housing market and economic recession. Easy access to major air and ground transportation routes has made the city of Grand Prairie a significant regional wholesale distribution center. Other economic sectors that have historically dominated the area include manufacturing, defense, and aerospace, although there has been recent growth in the retail and entertainment sectors. Wealth levels in Dallas County are above average, as measured by per capita income and median household buying income.

Although taxable values slightly outpaced enrollment gains, the district has historically received over half of its operating revenue from state support, as it is considered property poor for the purposes of state funding. The district also receives substantial state aid to service its outstanding bonds, accounting for about 35% of debt service in fiscal 2008. Following three years of structural deficits, through tight budgetary controls and conservative financial practices, the district was able to restore structural balance beginning in fiscal 2005 and increased general fund balance reserves to more adequate levels. For fiscal 2008, the district increased its general fund reserves by $6.5 million, ending the year with an unreserved general fund balance of $30.6 million, or 18.2% of spending. Results for fiscal 2009 are better than budgeted. The district adopted a $2.4 million deficit budget, but now expects to end the year with a $1.5 to $2 million surplus as a result of management's close budgetary oversight and implementation of overhead efficiency measures.

The district's direct and overall debt ratios are high even after factoring in state support for debt service. Amortization is slow with about 26% of principal maturing in 10 years. Proceeds of the current sale will be utilized to refund all of the district's outstanding variable-rate bonds. The district sold its final installment of its $222 million bond package approved by voters in 2007. Various projects are still under construction and the district is in the process of assessing future capital needs mostly to address renovations to existing facilities and technology improvements.

Leander ISD

Leander Independent School District is issuing $27.6 million in tax school building bonds. Bond proceeds will be used for the acquisition of land for five future elementary schools and one middle school, design of two elementary schools and one high school, road infrastructure for one middle school and one high school, and technology investments.

Future capital pressures on the district are expected to decline, due to a delay in the school construction projects for two elementary schools and one high school as a result of lower than projected enrollment numbers. As a result, Fitch believes that the district's debt burden will decline, as future debt issuances slow down and the tax base continues to grow. Enrollment, currently totaling 28,300-plus students, has grown by nearly 10% annually for the past five fiscal years, with 7.4% growth in 2009. Despite pressures associated with historical high enrollment, the district added to its healthy reserve levels.

The district serves a nearly 200-square-mile area in southwestern Williamson County and western Travis County and is part of the Austin metropolitan area and is largely residential in nature. The availability of affordable housing continues to attract buyers from all parts of central Texas. As a result, demographic projections suggest enrollment will increase to 52,000 fiscal 2018/2019. The district's taxable assessed valuation (TAV) growth rate slowed somewhat in fiscal years 2004 and 2005; however, spurred by strong residential construction, TAV growth expanded rapidly over the past three fiscal years, averaging annual gains of 16% since fiscal 2005.

Financial results continue to be strong, reflecting the conservative nature of the budgeting and planning practices of the district. The district consistently has recorded operating surpluses, and another operating surplus is projected for fiscal 2009. At the close of fiscal 2008, the unreserved general fund balance totaled roughly $61.7 million, which represented 32% of spending and transfers out. This result handily exceeded the district's optimum unreserved general fund balance target of 25% of expenditures. Healthy reserve levels enhance the district's financial flexibility. In addition, the district uses $0.03 of its O&M tax levy for major maintenance projects, which provides additional flexibility.

District debt levels, as measured on a per capita basis and as a percentage of TAV, are very high. In addition, amortization is slow, reflecting the use of capital appreciation bonds (CABs) to minimize tax rate impacts and to shift the debt burden to future taxpayers. In addition, recent debt offerings (including the bonds) have been structured with a payout exceeding 30 years in order to meet the district's capital requirements while keeping the debt service tax rate below the Texas attorney general's limit of $0.50 per $100 of TAV debt service tax rate cap. Debt ratios will likely remain high for some time; however, pressure on the debt ratios to decline as enrollment pressures have declined, and the tax base growth is projected to continue to grow while at a somewhat lower rate.

Mesquite ISD

Mesquite Independent School District encompasses 60 square miles in eastern Dallas County. Enrollment, currently around 37,000 students, has grown at an annual average of roughly 1.3% over the past five fiscal years. Located in a maturing, middle-class area, the cities of Mesquite and Balch Springs, both of which lie within the district, benefit economically from three interstate highways that traverse the district. The district's economic base includes retail, manufacturing, warehousing, and distribution enterprises. Residential development is strongest in the southern portion of the district near Interstate 20, where the new Achziger Elementary School is located.

Fitch considers the district's financial profile as strong. Management has achieved positive operating results in each of the last six fiscal years. Most recently, the district reported net income of $10.2 million in fiscal 2008, increasing the unreserved, undesignated general fund balance to nearly $56 million or about 23% of spending. The district is expected to maintain these fund balances levels for fiscal 2009. The fiscal 2010 budget does not anticipate any major change to reserve levels as approved pay hikes, totaling about $5 million, will be offset by the state's increase in the district's per student basic allotment.

The current offering represents the second issuance from a $180 million authorization approved by approximately 74% of voters in May 2007. The district will have $105 million in remaining authorization after this issuance. Additional issuances are expected each year of approximately $25 million from the remaining authorization, which will fund the district's capital improvements through 2014. The majority of the authorization will be used for the renovation or expansion of existing facilities plus construction of a new elementary school.

District debt levels are moderate, and are expected to remain so considering planned issuances, after factoring in state support for a portion of existing debt service. The district's debt burden is moderate at 3.75% of taxable assessed value (TAV) and $1,583 per capita, after adjusting for approximately 45% state support of outstanding general obligation debt. Overall debt is manageable on a per capita basis of almost $2,300, or 5.45% of TAV. Amortization is slightly above average with almost 56% of principal retired in 10 years.

El Paso ISD.

E l Paso Independent School District is the seventh largest school district in the state. It encompasses over 250 square miles and serves the majority of the City of El Paso. The area's economy is based on international trade and manufacturing, copper mining, and ore smelting. Stability is also provided by the large military presence (Fort Bliss and Biggs Army Airfield) and educational concerns (the University of Texas at El Paso and Texas Tech University Medical School). As a result of base realignment and overall expansion of the armed forces, Ft. Bliss is expected to receive 24,700 additional troops with the majority of school-age troop dependents enrolling in the district. By 2013, the increased troop strength is expected to boost district enrollment by about 5,000 in military and civilian personnel dependents, down from previous estimates due to troop arrival delays.

Substantial troop additions to Ft. Bliss will add significantly to the El Paso Independent School District's historically stable enrollment base and is spurring residential and commercial development in the northeastern part of El Paso (the city). The district will be challenged in providing sufficient instructional space for military and civilian dependents, facilitated by the passage of two major bond authorizations in 2003 and 2007. Despite these large authorizations, state debt support will keep debt levels manageable at a moderate tax rate due to the district's expansive tax base. The accurate timing of enrollment increases has proven difficult, leading management to rely mostly on existing staffing levels to operate four new schools opening this fall 2009 despite ongoing normal growth of its enrollment base. Notably, a large shortfall of anticipated troop dependents in the current fiscal year did not result in an operating deficit due to improved attention to district-wide staffing patterns. The maintenance of solid reserve levels through the impending enrollment boost will be a key factor in maintaining credit quality.

The district's tax base is diverse with taxable values increasing again after years of stagnant growth. Taxable assessed valuation (TAV) grew by a notable 16% and 13% in fiscal years 2007 and 2008, respectively, increasing by $3.1 billion over that period. For fiscal 2009, TAV growth moderated to a still strong 6.7% increase over the prior year, or nearly $900 million. The ongoing $5 billion expansion of Ft. Bliss has spurred the development of off-base housing as about 65% of the additional troops are expected to live off-base. Furthermore, the relocation of air cavalry and armored aviation units to Ft. Bliss is expected to attract high-technology companies for both services and research and development. The city's unemployment rate has trended downward to record lows in recent years but has trended up during the current recession. For April 2009, the city's 6.9% unemployment rate was higher than the state's 6.4% but below the national unemployment rate.

The current offering is a refunding with a projected 2.0% net present value savings. The district has exhausted its $230 million bond program approved by 53% of voters in May 2007, mostly for new schools and classroom additions. This was the second key authorization approved by voters since 2003, allowing the district to address the majority of its total capital needs, including its most pressing deferred maintenance needs. The tax rate impact from this authorization has been modest and less than projected due to reasonable TAV growth assumptions.

The district's direct debt profile remains modest at $1,005 per capita and 2.5% of TAV after adjusting for state support. Overall debt ratios are now moderately high as a percentage of TAV at 6.6% but moderate on a per capita basis at $2,612. The district's principal amortization rate was previously rapid but has trended down to a below average rate of 40% in 10 years. Because of the slower pace of enrollment growth of Ft. Bliss dependents, the district does not expect to seek another bond election for about three years.

The district's financial performance has improved notably since a new board and administration implemented improved cost controls and budget cuts, leading to operating surpluses in fiscal years 2006 and 2007. However, fiscal 2008 posted a large operating deficit due mostly to a sizeable differential between projected and actual average daily attendance (ADA) associated with shifting deployment patterns at Ft. Bliss. As a result, available reserves declined to a still adequate $50 million or 11% of spending in fiscal 2008. Similarly, the fiscal 2009 budget was based on an ADA surge of 1,300 or 2.4%, due mostly to the arrival of military troop dependents, plus natural growth and new attendance initiatives. However, ADA grew by only about half of the projected increase. Notably, projected fiscal 2009 results do not point to an operating deficit due to flat staffing patterns. The projected modest drawdown of reserves, totaling $6 million in fiscal 2009, is attributed to the expenditure of maintenance tax note proceeds and the settlement of disputed retirement contribution rate increases.

The proposed fiscal 2010 budget, based on an ADA increase of 985, also projects a modest drawdown of $4.2 million due to the district's decision to shore up its self-funded health insurance fund and the impact of state-mandated teacher pay hikes. Increased attention to sustainable staffing patterns is evident in the budget's addition of only 30 new teachers despite the opening of four new schools, two of which will serve to reduce overcrowding in existing schools. Apart from normal growth, the projected ADA increase includes only 300 additional troop dependents.

Paris ISD, Texas

The service area of Paris ISD includes most of the city of Paris, Texas, which is the county seat and major economic center for Lamar County. Paris and Lamar County are located northeast of Dallas and the county's northern boundary borders the Red River and Oklahoma. The estimated 2008 population of Paris is about 25,500 and the district's fiscal 2009 enrollment totaled 3,765, a 2.2% decline from fiscal 2008. District enrollment has been declining modestly over the past five fiscal years as the district is approaching full maturity with limited ongoing residential development. The county's primary employment sectors are manufacturing, educational and health services, and trade, with many of the major manufacturing employers being located in Paris. The unemployment rates in the city have increased to 7.0% as of May 2009, which is above the state, but below the national average. Per capita income for the county is lower than both the state and national levels.

The current offering is the final installment of a $53.8 million authorization approved by voters in May 2007 in the form of three propositions. The first offering ($38 million) was issued in July 2007. The authorization includes $37.5 million for a replacement high school, $10.3 million for district-wide renovations, and $6 million for a multi-purpose stadium. All propositions were approved by a minimum of 61% of voters despite the prospect of a large debt-service tax rate increase totaling $0.33 per $100 taxable assessed valuation (TAV), bringing the rate to $0.405. The debt service tax rate is expected to increase to $0.50 in later years.

The district's debt burden is moderate to high at 7.4% of TAV but a more moderate $2,152 per capita, after adjusting for state support of 15.3% of outstanding general obligation debt. Overall debt is also moderate on a per capita basis at $2,561 but still moderate to high as a percentage of TAV at 8.7%. The principal pay-out is slow at 23.3% in 10 years. The district has no remaining voter approved authorization.

After nearly depleting its financial cushion in fiscal 2001, the district posted general fund operating surpluses annually through fiscal 2006. The district has reported deficits of ($941 thousand) in fiscal 2007 and ($1.2 million) in fiscal 2008, due to enrollment declines and low state targeted revenue levels for the district. In addition, the district provided salary increases for its teachers per the state's 65% rule, whereby 65% of the district budget is expected to be utilized for instructional salaries. The district's unreserved fund balance has declined to $2.4 million or 9.0% of expenditures and transfers out in fiscal 2008 from $3.6 million or 14.6% in fiscal 2007. District officials project another draw-down of $1 million for fiscal 2009, and another draw-down in fiscal 2010. The fiscal 2009 general fund balances are expected to be approximately $1.1 million-$1.3 million.

The district has been proactive in reducing non-salary expenditures and expects to continue adjusting staffing levels through attrition, which resulted in 16-20 fewer employees in fiscal 2009. In addition, the district plans to consolidate two campuses, including a kindergarten campus, which should allow for greater efficiencies.