Fitch Ratings downgrades the following Texas Southmost College District, Texas' (TSC or the district) limited tax bonds:
--$57.7 million outstanding limited tax general obligation (LTGO) bonds to 'AA-' from 'AA';
--$12.7 million outstanding maintenance tax notes to 'AA-' from 'AA'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
SUCCESSFUL TRANSITION TO OPERATING INDEPENDENCE UNCERTAIN: The rating downgrade and Negative Outlook reflects the current uncertainty regarding the district's ability to operate effectively as a stand-alone community college upon termination of its long-term partnership with the University of Texas at Brownsville (UTB) in 2015. Some of the district's challenges include creating a functional, operating structure to conduct academic activities, sustaining and growing student enrollment, and hiring new faculty and support staff.
TSC's STATE FUNDING LEVEL RISK: TSC is challenged to fully identify its student base separate from UTB, given TSC's lesser known status between the two parties. TSC's enrollment count may present some risk to its state funding levels in the next biennium (fiscals 2013 and 2014) as the upcoming base enrollment count will largely determine state funding.
STABLE TAX BASE; FINANCIAL FUTURE UNCERTAIN: The rating incorporates the district's stable tax base and a steady, slightly improved financial profile realized in fiscal 2011. Nonetheless, the Negative Outlook also reflects the district's financial profile as an evolving, independent operating structure.
FAVORABLE, LONG-TERM AREA DEMOGRAPHICS: The district's demographic trends are favorable, characterized by a young and growing population. As it steps out of the partnership, TSC's focus on the mission, programs, and cost structure as a typical community college should be attractive to local students.
BELOW AVERAGE ECONOMY: Unemployment remains high and exceeds state and national levels despite solid year-over-year employment growth. Wealth and income levels are below average.
MODERATE DEBT LEVELS: Overall debt levels are moderate including extensive underlying debt of the city of Brownsville (LTGOs rated 'AA-'; Stable Outlook by Fitch) and the Brownsville Independent School District ISD; (unlimited tax GOs rated 'AA', Negative Outlook). Start-up capital needs currently identified remain relatively manageable and are expected to be met thru pay-go spending.
The bonds and maintenance tax notes are direct obligations of the district payable from a continuing direct annual ad valorem tax on all taxable property within the limits prescribed by law. The bonds are subject to the district's limit of $0.50 per $100 of taxable assessed value (TAV) and the tax notes are subject to a separate limit of $0.35 per $100 of TAV. The district's total tax rate cannot exceed $0.85 per $100 TAV.
WHAT COULD TRIGGER A RATING ACTION
TRANSITION PLAN ESSENTIAL: Lack of a formal transition plan that addresses the expected pace of TSC's operating independence from UTB and incorporates key financial, facilities, and enrollment assumptions and projections could cause further negative pressure on the rating.
STABLE FINANCIAL OPERATIONS CRITICAL: The district's ability to maintain a balanced and stable financial profile as it prepares for and transitions to an independent institution, is key to maintaining the rating.
TRANSITION TOWARDS OPERATING INDEPENDENCE UNDERWAY
The district is a two-year comprehensive, open enrollment community college which has operated jointly with UTB since 1991. Preliminary steps have been taken by TSC towards establishing a framework that supports the unwinding of a long-term academic and operational partnership with UTB by 2015. Current projections are for TSC to operate independently by fall 2013. The board hired key college leaders including a president and an interim chief financial officer in 2011. Since then, community outreach by TSC leadership has been used to develop the institution's strategic plan; a key aspect of eventually receiving autonomous accreditation. Management reports that TSC will keep all of its academic programs in the near-term so as not to impair current students. It will also renew its focus on the mission, programs, and cost structure of a typical community college, which Fitch believes should provide an attractive option for local students.
Through the partnership, UTB provides all academic and support services for both institutions while the district compensates UTB with financial support and facilities. As a result, TSC maintains only a skeletal administrative staff. Fitch believes the current partnership also benefits the district through its association with the broader and better-known University of Texas system. However, Fitch recognizes there may also be areas of opportunity as a stand-alone institution including the ability to control instructional and operational costs, establish curriculum standards as well as set lower tuition rates to attract students.
Nonetheless, the transformation of the district back to an independently run community college poses significant challenges for management. Many of the hurdles, which include creating a functional, operating structure to conduct academic activities, effectively competing for students with UTB, and the hiring of faculty and support staff have yet to be realized. Also, as TSC owns a majority of campus facilities in the partnership, the use, and payment for campus land and facilities between the two institutions, in an environment of protracted negotiations, remains uncertain.
MODEST ENROLLMENT GAINS
The taxing district encompasses approximately 530 acres in the eastern portion of Cameron County and includes all of the Brownsville, Los Fresnos and the Port Isabel Independent School Districts (ISD). The majority of students reside within the district and most received some form of financial aid. Tuition and fee-paying enrollment trends rebounded somewhat in fiscal years 2010 and 2011 after experiencing moderate enrollment declines due primarily to UTB's implementation of minimum academic standards, which applied to both institutions. In the partnership, enrollment is reported to the state for both institutions by UTB. Combined, the institutions saw a modest 2% gain in full-time, lower division students in fall 2011 (fiscal 2012) which was comparable to 2007 enrollment levels. Contributing to the total was a more volatile dual enrollment base (largely tuition exempt local high school students taking college coursework) that declined by double digits for the second year.
STABLE FINANCIAL PROFILE REMAINS UNTESTED BY INDEPENDENT OPERATIONS
Fiscal 2011 financial operations remained relatively stable and slightly improved from the prior year, generating a 7.2% operating margin, up from 4.6% in fiscal 2010. Results were assisted by nearly $4 million in additional net tuition revenue that provided roughly 50% of total revenues and largely offset the year's less sizeable $1.5 million increase to its UTB partnership contractual expense and $1.5 million state appropriation decline.
Net tuition revenues predominate as the district's largest revenue source due to TSC's partnership agreement to maintain tuition in line with UTB. Contract payments to UTB constitute nearly 80% of total expenses and have risen by $9.3 million or about 21% over the past four fiscal years while other direct district costs are minimal. Liquidity improved moderately as available cash and investments represent about 40% of current liabilities in fiscal 2011, up from 28.5% the prior year. Unrestricted reserves totaled approximately $7.8 million in unrestricted reserves or 12% of spending at fiscal 2011 year-end. Management anticipates fiscal 2012 will add a sizeable $5.4 million cushion to unrestricted reserves, reaching a total of $13 million by year-end; this is due largely to a combination of one-time operating and capital expenditure savings attributable in part to the unwinding of the partnership. The fiscal 2013 budget is currently under development and is expected to be presented as a balanced budget.
STABLE TAX BASE DESPITE ECONOMIC DOWNTURN
TAV gains have remained modest at no more than 2% annually beginning in fiscal 2010; management anticipates a comparable gain per preliminary values in fiscal 2013. TAV expanded rapidly between fiscals 2006 and 2009, increasing at an average annual rate of 11%. Concentration among the top 10 taxpayers remains minimal. The district's overall tax rate has increased modestly in fiscals 2010 through 2012, primarily due to growing debt service requirements. However, ample taxing margin and financial flexibility remains under the total $0.85 per $100 TAV (local limit) with an overall rate of $0.164 per $100 TAV in fiscal 2012.
The area economy is based on agriculture, fishing, manufacturing, trade and tourism, and has benefited from its trade links with Mexico. Cameron County population has expanded consistently over the past decade, growing at an average annual rate of 2%. County unemployment remains high, exceeding the state (6.9%) and U.S. levels (7.9%) at 10.4% in May 2012 despite a nearly 3% year-over-year gain in employment. The area's low wealth levels and high unemployment rates are not unlike other Texas border communities.
MODERATE LONG-TERM LIABILITIES
Overall debt levels are moderately high at roughly $2,700 per capita and 4.9% of full market value due to substantial issuance by the city of Brownsville and Brownsville ISD. The district services a manageable $70.5 million in direct, tax-supported debt with carrying costs totaling 9% of spending in fiscal 2011. Principal payout is average with about 56% of principal retired within the next ten years. In addition, TSC is obligated for nearly $25 million in revenue bonds outstanding (not rated by Fitch), which are supported by pledged tuition and fees generated from UTB and TSC students. Enhancing the district's technology has been identified as the most pressing of start-up capital needs; management recently contracted for the development of a comprehensive IT system, distinct from UTB. Roughly $6 million in one-time, pay-go capital spending is expected over the near-term for this project; consequently, there are no plans to issue additional bonds at this time.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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