AUSTIN, Texas - (Business Wire) Fitch Ratings assigns an 'AAA' rating to Red Oak Independent School District, Texas' (Red Oak ISD, or the district) $45 million unlimited tax school building bonds, series 2008, based on the guaranty of the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch assigns an underlying rating of 'A-' to the series 2008 bonds and affirms the 'A-' rating for the district's approximately $56.3 million in outstanding unlimited tax bonds. The series 2008 bonds are scheduled for a competitive sale July 23rd. The Rating Outlook is Stable.
The bonds are direct obligations of the district, payable from and secured by an unlimited ad valorem tax levied against all taxable property within the district. The bonds are secured further by the PSF guaranty. Proceeds will be used to construct a new replacement elementary school, a new high school, and district-wide expansion and maintenance projects.
The 'A-' rating is based on the district's expanding tax base, below-average amortization, a slowing housing market, and proximity to the larger economy of the Dallas-Fort Worth metro area. The outlook for continued development appears good with expanding transportation corridors that traverse the district, including the expansion of Interstate 35. Following earlier operating losses, district financial reserve levels have improved and additional improvements are expected. Maintenance of solid reserve levels, consistent net income, and continued taxable assessed valuation (TAV) growth remain important to credit quality.
Red Oak ISD is in northern Ellis County, about 20 miles south of Dallas. Encompassing 41 square miles, it serves primarily the city of Red Oak as well as the cities of Glenn Heights, Ovilla, Pecan Hill and Oak Leaf. Interstate 35-E bisects the district from north to south. The southern expansion of the Dallas-Fort Worth metropolitan area has spurred population growth in both Ellis County and the city of Red Oak, although more moderate student enrollment increases for the district. The city of Red Oak's population has grown by almost 8% annually since 2000. Student enrollment has grown yet remains manageable at an annual average rate of almost 1.6% over the past five fiscal years.
The economic base of the district is shifting away from an agricultural basis to a bedroom community with affordable residential prices. Tax base growth of nearly 9% annually over the past five years continues to outpace student enrollment gains. Many residents commute to work in the nearby Dallas-Fort Worth metro area. Over the past year, residential construction and home closing activity has slowed sharply. Fitch expects that TAV growth over the near term likely will be slower than what was experienced recently and could lead to declines or a slowdown in enrollment growth; however, the proximity of the district to the Dallas/Fort Worth metro-plex and the recent widening of Interstate 35, are positive long-term growth indicators.
The current offering is the second installment of a $95 million authorization, the largest so far in district history, approved by 68% of the voters in May 2007. A bond election for comparable capital projects failed in 2006. Debt levels are high even after factoring in state support for almost 30% of the district's debt service, and will increase substantially with this issuance. It is expected that this authorization will meet the district's capital needs through fiscal 2012.
The district incurred operating losses in fiscal 2006 and 2007, reducing fund balances. In fiscal 2007, the district moved its fiscal year end to June 30th from August 31st, in order to better match its revenues and expenditures. This shift provided a one-time boost to the district's operations. For the 10 months ending June 30, 2007, the district reported net income of $1.4 million and unrestricted/undesignated fund balances of $2.6 million. The district expects to produce a modest $250 thousand-$350 thousand surplus for fiscal 2008 and a general fund balance of $2.9 million. By fiscal 2009, the district expects to meet its 12.5% of spending general fund balance policy target. The district plans to return to voters for a roll-back election later this year to raise the O&M tax rate to $1.17. These funds will be used for teacher salaries, operating expenses, and additions to fund balances.
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Fitch Ratings, Austin
Andy Kaaz, 512-215-3730
Steve Murray, 512-215-3729
or
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