A2 UNDERLYING RATING AFFECTS $115.7 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT SALE
Primary & Secondary Education
Unlimited Tax Refunding Bonds, Series 2010
Expected Sale Date
General Obligation Unlimited Tax/Texas PSF Guarantee
NEW YORK, Oct 18, 2010 -- Moody's Investors Service has assigned an A2 underlying rating to
Donna Independent School District's (TX) $7.4 million Unlimited Tax Refunding
Bonds, Series 2010. Concurrently, we have affirmed the A2 underlying rating on
the district's $108.3 million in outstanding parity debt. Proceeds from the
current sale will refund a portion of the district's outstanding debt for a net
present value savings and no extension of the final maturity.
The bonds are secured by a direct and continuing ad valorem tax levied on all
taxable property within the district, without limitation as to rate or amount.
The A2 rating reflects the district's moderately-sized tax base, below average
socioeconomic profile, narrow financial reserves, and elevated debt profile
substantially supported by state aid.
In addition to the underlying rating, we have assigned a Aaa enhanced rating to
the current sale provided by a guarantee of the Texas Permanent School Fund
(PSF). The Aaa rating reflects our assessment of the PSF's ability to make
payments on the guarantee relative to the substantial value of the fund corpus.
Additional credit considerations include: the PSF's constitutionally protected
corpus, the general obligation credit quality of the Texas school district
guaranteed by the fund, an investment portfolio that provides satisfactory
coverage and liquidity given our estimated probability of calls on the
guarantee, and strong legal mechanics that facilitate timely reimbursement to
the PSF should guarantee payments occur. The enhanced rating also reflects
an expected increase in PSF leverage to no more than 3.5 times PSF cost value.
For additional information on the PSF program, please see Moody's High Profile
Ratings Update "Texas Permanent School Fund (PSF)" dated April 2010.
MODERATELY-SIZED TAX BASE LOCATED IN RIO GRANDE VALLEY
Located 15 miles east of the City of McAllen (Aa2 general obligation
rating), Donna ISD encompasses 89 square miles in Hidalgo County (Aa2). The
local economy is largely driven by agriculture and oil and gas production. The
tax base experienced a healthy 6.4% average annual growth rate between fiscal
years 2006 and 2010, reaching $900 million. Reflective of the economic downturn,
taxable values declined 2% to $882 million for fiscal 2011. Moody's notes these
taxable values differ from district's July 2010 report because the
previously provided information included frozen taxable values, which have been
deducted in the current analysis. Officials anticipate stable growth will return
as the economy recovers, especially given the expected November 2010 completion
of the Donna-Rio Bravo International Bridge. Resident wealth levels are below
average as measured by per capita income and median family income (from 2000
U.S. Census) that approximate 39.7% and 47.4% of the state averages,
respectively. Consistent with historical data, the August 2010 unemployment rate
of 12.2% was well above the state (8.4%) and the U.S. (9.5%) for the same time
period. Although the district's socioeconomic profile is significantly below
average, we acknowledge this is typical for the Rio Grande Valley region.
NARROW FINANCIAL RESERVES EXPECTED TO IMPROVE
The district utilized $1.4 million of General Fund reserves in fiscal 2009 to
cover general operating costs, which management attributes to overstaffing in
the special education department and increased costs associated with lengthening
the pre-K program to a full day. The General Fund balance at FYE 2009 (August
31) was $7.3 million, or a narrow 5.8% of revenues. Operating revenues are
largely derived from state program revenues (78%), property taxes (9%), and
federal revenues (8%). The district increased the fiscal 2010 maintenance and
operating (M&O) tax rate to the maximum allowable rate of $11.70 per
$1,000 of assessed valuation. Additionally, staffing was reduced by
approximately 125 positions. The increased property tax revenues and salary
savings allowed the district to adopt a $2.7 million surplus budget for fiscal
2010. According to management, favorable budget variance is expected to yield an
FYE 2010 General Fund balance of approximately $10 million. The fiscal 2011
budget projects a $4.3 million surplus. The district has recently adopted a
strategic plan with a target General Fund balance of $25 million by FYE 2013.
Future rating actions will reflect the district's ability to continue positive
financial operations and meet the strategic fund balance goal, which will bring
the district's financial reserves to a level more consistent with A-rated
ELEVATED DEBT BURDENS MITIGATED BY SUBSTANTIAL STATE AID FOR DEBT SERVICE
The district's debt burdens are high at 13.7% direct and 20.3% overall (both
expressed as a percentage of fiscal 2011 assessed valuation). However, when
taking into account state aid covers approximately 80% of annual debt service
requirements, the debt burdens are reduced to 3.2% direct and 9.8% overall.
Given the low wealth levels of the district, officials expect the state will
continue approximately the same level of support over the long run. Amortization
is below average with only 43.9% of principal retired in ten years. With no
remaining debt authorization post-sale, officials indicate the possibility of
holding a bond election within the next five years to build a new elementary
school. The district has no exposure to variable rate debt or interest rate
swaps. Given the expected continuance of state aid for debt service, we believe
the district's debt profile will remain manageable.
FY 2011 Full Value: $882 million
Full Value per Capita: $16,028
Per Capita Income (2000 U.S. Census): $7,794 (39.7% of state; 36.1% of U.S.)
Direct Debt Burden (excluding debt supported by state aid): 3.2%
Overall Debt Burden (excluding debt supported by state aid): 9.8%
Principal Payout (10 years): 43.9%
FY 2009 General Fund Balance: $7.3 million (5.8% of General Fund revenues)
Post-sale Parity Debt Outstanding: $115.7 million
WHAT COULD CHANGE THE RATING-UP:
*Trend of operating surpluses, substantially bolstering financial reserves
*Significant tax base expansion and diversification
WHAT COULD CHANGE THE RATING-DOWN:
*Trend of tax base contraction, socioeconomic profile
*Reduction of financial reserves, whether it be to cover general operations or
one-time capital costs.
The principal methodology used in rating Donna Independent Schoo District, TX
was General Obligation Bonds Issued by U.S. Local Governments rating methodology
published in October 2009. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found on Moody's
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
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MOODY'S ASSIGNS A2 UNDERLYING AND Aaa ENHANCED RATINGS TO DONNA INDEPENDENT SCHOOL DISTRICT'S (TX) $7.4 MILLION UNLIMITED TAX REFUNDING BONDS, SERIES 2010; Aaa ENHANCED RATING BASED ON TEXAS PSF GUARANTEE
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