Last week S & P upgraded Leander ISD’s bond rating from
AA- to AA with stable outlook noting the district’s recent efforts to reduce
reliance on Capital Appreciation Bonds (CABs).
An improved bond rating means lower interest rates on new bond issues
and lower overall costs for capital projects going forward. The S & P report summarizes the rating upgrade as
follows:
“The higher rating reflects the district's implementation of
a more robust planning framework to moderate its long-term exposure and
reliance on capital appreciation bonds (CABs) to fund growth-related capital
needs. Although we consider the district's overall net debt profile and debt
service levels to be high, in our view, the district demonstrates the
willingness and capacity to institute revenue-raising practices, including
over-levying the interest and sinking (I&S) tax rate to retire debt
earlier, lessening future debt service requirements. Furthermore, the
district's school board set forth directives to reduce CABs to 25% of the
district's overall debt portfolio by converting them to current interest bonds
(CIBs).” (Source http://www.leanderisd.org/users/0001/docs/FinancialTrans/SP-Ratings-Direct_1617.pdf)
The district’s steps to reduce its reliance on CABs is the
significant contributor in the improved bond rating. The Texas legislature in its last session
passed legislation (HB 114) setting a cap on school districts’ use of CABs at
25% of total debt. Leander ISD was at an
especially high level of 78% at the time.
CABs effectively shift debt burden to future tax payers, and the
legislation was passed amid growing concerns for the long term financial health
of school districts such as Leander.
Earlier in May of this year Fitch affirmed Leander ISD’s AA-
bond rating stating:
“The ‘AA- ‘ rating reflects Fitch’s
expectation that the district will maintain financial flexibility throughout
the economic cycle due to its solid expenditure control that assists in
maintaining a robust reserve cushion. Weighing on the unlimited tax bonds and
IDR is the district’s large long-term liability burden which Fitch expects to
remain a sizable burden on resources.” (Source:
http://finance.yahoo.com/news/fitch-affirms-leander-isd-txs-215600889.html;_ylt=A0LEVw9bYfBXHIkAD_hx.9w4;_ylu=X3oDMTE0bDAxZGhwBGNvbG8DYmYxBHBvcwM3BHZ0aWQDVUkyRkJDMV8xBHNlYwNzcg)
Also noted in the 2016 Fitch report was the district’s recent
efforts to reduce reliance on CABs. “The
district implemented a 10-year plan to reduce the CAB portfolio to 25% by 2025,
and has made headway by lowering the total CAB portfolio to a still-high 67%
currently from 78% in 2014.”
Looking back to 2010 Fitch had rated some Leander ISD bonds
with the highest level of AAA based on a guaranty provided by the Texas
Permanent School Fund, although citing underlying AA- for other bonds. “Fitch
considers the district's debt levels very high. Including this issuance,
overall debt levels are approximately 12% of market value and $16,000 per
capita. In addition, amortization is slow, reflecting in part the use of
capital appreciation bonds (CABs) to minimize tax rate impacts and shift the
debt burden to future taxpayers.” (Source http://www.businesswire.com/news/home/20100317006621/en/Fitch-Rates-Leander-ISD-TX-ULT-Bonds)
In May 2012 Fitch downgraded Leander ISD bonds from AA to
AA-. Key factors cited in the report
were “high debt burden, sluggish tax base growth, and continued capital
pressures...Debt levels are very high
and amortization of principal is slow. The current debt structure and debt
service tax rate leave little flexibility for issuance of new money debt for
additional facilities.” (Source http://www.businesswire.com/news/home/20120518005985/en/Fitch-Downgrades-Leander-ISD-TXs-ULT-Bonds)
The board has been praised in reports for its ability to
control expenditures and maintain reserve funds. Moderated population growth and continued tax
revenue growth have also allowed the outlook to remain stable. Without these factors the bond ratings would
downgrade creating much higher debt service costs and limit funds for new projects. Downgrades are not currently
expected in the next two years according to S & P unless a material change
occurs. Leander ISD continues to be one
of the fastest growing school districts in Texas.
