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MOODY'S ASSIGNS Aa2 UNDERLYING AND Aaa ENHANCED RATINGS TO CONROE INDEPENDENT SCHOOL DISTRICT'S (TX) $84 MILLION UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011; Aaa ENHANCED RATING BASED ON TEXAS PSF GUARANTEE

08 Feb 2011

Aa2 UNDERLYING RATING AFFECTS $933.4 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT SALE

Primary & Secondary Education
TX

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

Unlimited Tax School Building Bonds, Series 2011

Aa2

Aaa

  Sale Amount

$84,000,000

  Expected Sale Date

02/09/11

  Rating Description

General Obligation Unlimited Tax/Texas PSF Guarantee

 

Opinion

NEW YORK, Feb 8, 2011 -- Moody's Investors Service has assigned a Aa2 underlying rating to Conroe Independent School District's (TX) $84 million Unlimited Tax School Building Bonds, Series 2011. Concurrently, we have affirmed the Aa2 underlying rating on the district's $849.4 million in outstanding parity debt. 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). Proceeds from the current sale will finance construction of new facilities as well as renovations and expansions to existing district facilities.

RATINGS RATIONALE - UNDERLYING

The bonds are secured by a continuing and direct annual ad valorem tax, levied against all taxable property in the district, without legal limitation as to rate or amount. The Aa2 rating reflects the district's sizeable tax base, healthy financial reserves, and elevated debt profile driven by rapid enrollment growth.

RATINGS RATIONALE - ENHANCED

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.

STRENGTHS

*Continued tax base expansion and diversification

*Favorable socioeconomic profile

CHALLENGES

*Elevated debt profile to accommodate rapid enrollment growth

*Reliance on excess General Fund revenues to cover annual debt service payments

DETAILED CREDIT DISCUSSION

TAX BASE GROWTH EXPECTED TO CONTINUE, ALBEIT AT A SLOWER PACE

Conroe Independent School District serves students in Montgomery County (general obligation rated Aa2). The high-growth area is located just north of Harris County (Aaa with a stable outlook). The 354 square mile district encompasses a portion of the Woodlands as well as the City of Conroe (Aa2). Growth in the Woodlands and in Conroe has helped diversify the district's tax base values with healthcare, manufacturing, retail and tourism. Ease of access to Houston's business center has recently improved with the widening of Interstate Highway 45, encouraging significant housing development along the corridor. As such, the district's population has increased approximately 49% since the 2000 U.S. Census to an estimated 250,000 residents. Wealth levels within the district are high with per capita income and median family income (from 2000 U.S. Census) approximating 135.4% and 139.9% of state levels, respectively.

The district's tax base has experienced a favorable 9.0% average annual growth rate over the past five years, reaching $20.3 billion in fiscal 2011. Although the pace of growth slowed to 3.8% in the most recent year, Moody's believes the continued growth in assessed valuation is a credit strength during a time when a majority of municipalities across the state and nation are experiencing declining property values. Officials conservatively project 1% growth in assessed valuation for fiscal 2012. Moody's believes taxable value growth may trend below historical levels over the near to medium terms; however, we expect healthy tax base growth will resume over the long term given the large amount of land remaining available for development.

STABLE FINANCIAL OPERATIONS; GENERAL FUND SUPPORT FOR DEBT SERVICE OBLIGATIONS

The district has historically maintained a strong financial position as a result of conservative budgeting practices and increasing operating revenues from tax base and student enrollment growth. The General Fund balance currently exceeds the adopted policy requiring reserves at 16% to 20% of budgeted operating expenditures. Beginning in fiscal 2008 when the debt service tax rate was not adequate to full cover debt service requirements, the district made a policy decision to support debt service payments with surplus revenues from the General Fund. Fiscal 2008 General Fund expenditures included a $16 million transfer to the Capital Improvement Fund as well as an $18 million transfer to the Debt Service Fund. As such, the General Fund balanced decreased $2.9 million to $76.2 million (23.2% of revenues). Fiscal 2009 reflects an $11.8 million surplus, inclusive of a $13 million transfer to the Debt Service Fund. The surplus was due in part to the receipt of approximately $8 million of additional state funds to offset costs associated with providing free lunches to students after Hurricane Ike. The General Fund balance at FYE 2009 was $88.0 million, or a healthy 26.2% of revenues. The district drew $12.3 million from reserves in fiscal 2010, decreasing the General Fund balance to $75.7 million (21.7% of revenues). Management notes the $33 million transfer to the Debt Service Fund in fiscal 2010 was to cover debt service requirements in both fiscal 2010 and fiscal 2011. Officials currently project a $20 million surplus for fiscal 2011 (prior to transfers out) and report the fiscal 2011 transfer to the Debt Service Fund will range from $16 million to $20 million. Thus, the General Fund at FYE 2011 is expected to remain flat, at a minimum. Although the unreserved General Fund balance is currently healthy at $72.4 million (20.8%) of revenues, the unconventional reliance on General Fund revenues to cover debt service obligations is a credit concern. Moody's notes that significant reduction in General Fund balance may result in negative pressure on the rating.

ABOVE AVERAGE DEBT LEVELS EXPECTED TO CONTINUE DUE TO GROWING FACILITIES NEEDS

The residential influx has spurred substantial enrollment growth. Enrollment has increased 3.8% on average annually over the past five years, resulting in 51,150 students for the 2010-201 school year. District officials project enrollment growth will continue at approximate 1,500 additional students per year over the medium term. Due to vigorous enrollment growth, the district has regularly issued debt to provide the infrastructure necessary to accommodate new students. As a result, the debt burdens are elevated at 4.6% direct and 9.6% overall, both expressed as a percentage of fiscal 2011 full value. The debt profile includes $33 million of variable rate debt (Series 2001B), which is currently in annual mode with August 15, 2011 as the next reset date. The variable rate bonds are supported by external liquidity through a standby bond purchase agreement with Depfa (expires November 1, 2011). Officials report plans to remarket the Series 2001B bonds in fixed rate mode at the next reset date. The rate of amortization is sluggish with only 34.8% of principal retired in 10 years. The district has $246 million in authorized but unissued debt remaining. The district plans to issue additional debt on an annual basis and expects to deplete the authorization by 2014. Moody's expects the district will prudently manage future debt issuance in line with tax base expansion in order to maintain a manageable debt profile.

WHAT COULD CHANGE THE RATING-UP:

*Continued tax base expansion coupled with strengthened socioeconomic indices

*Trend of operating surpluses, significantly boosting General Fund reserves

WHAT COULD CHANGE THE RATING-DOWN:

*Substantial additional debt issuance absent corresponding tax base growth

*Depletion of General Fund balance

*Trend of tax base contraction

KEY STATISTICS:

Estimated Population: 250,000

FY 2011 Full Value: $20.3 billion

Full Value per Capita: $81,092

Per Capita Income (2000 U.S. Census): $26,554 (135.4% of state; 123.0% of U.S.)

Direct Debt Burden: 4.6%

Overall Debt Burden: 9.6%

Payout of Principal (10 years): 34.8%

FY 2010 General Fund Balance: $75.7 million (21.7% of General Fund revenues)

Post-Sale Parity Debt Outstanding: $933.4 million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

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.

Analysts

Leslie Lukens
Analyst
Public Finance Group
Moody's Investors Service

Nathan Phelps
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS Aa2 UNDERLYING AND Aaa ENHANCED RATINGS TO CONROE INDEPENDENT SCHOOL DISTRICT'S (TX) $84 MILLION UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011; Aaa ENHANCED RATING BASED ON TEXAS PSF GUARANTEE
No Related Data.
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