Fitch Rates Del Mar College District, Texas' 2015 Ltd Tax Rfdg & Improv Bonds 'AA+'; Outlook Stable

Fitch Ratings assigns an 'AA+' rating to the following Del Mar College District, Texas (the district) limited tax debt:

--$23.8 million limited tax refunding and improvement bonds, series 2015.

The bonds are scheduled to sell the week of Feb. 2 via negotiation. Proceeds will be used to construct and equip school facilities, refund certain outstanding maturities for economic savings, as well as pay related costs of issuance.

In addition, Fitch affirms the following rating:

--$69.7 million in outstanding limited tax bonds (pre-refunding) at 'AA+'.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by an ad valorem tax levied on all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Positive operating margins and solid reserve levels characterize the district's sound financial profile despite a modestly declining enrollment base. The revenue base is relatively diverse; healthy revenue and more moderate expenditure flexibility remain.

EXISTING SECTORS DRIVE ECONOMIC GROWTH: Much of the commercial/industrial development underway or planned revolves around the petrochemical industry, including refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored the Corpus Christi (the city) economy. Unemployment is below state and U.S. averages.

TAV CONCENTRATION AND GROWTH PERSIST: Tax base concentration remains moderately high with notable petrochemical, energy sector presence; this lack of diversity constitutes a measure of risk to the district. TAV gains have steadily strengthened after a brief recessionary decline.

DEBT AND OTHER LONG-TERM LIABILITIES MODERATE: Fitch expects the overall debt burden to remain moderate given the district's measured debt plans, the manageable size of its new GO authorization relative to the current tax base, and some level of modestly positive TAV growth assumed feasible over the near term. Carrying costs are manageable.

RATING SENSITIVITIES

SHIFT IN CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial position and conservative fiscal practices. The Stable Outlook reflects Fitch's expectations that such shifts are unlikely.

CREDIT PROFILE

Headquartered in Corpus Christi (GO bonds rated 'AA', Stable Outlook by Fitch), Del Mar College District is a two-year comprehensive community college serving a population of roughly 350,000 primarily in Nueces County and the surrounding area. Income levels remain below state and national averages by about 10%-15% as measured by median household income. Population gains since 2000 have been relatively modest at a 1% annual average, which is comparable to the nation, but about half of the state's rate of growth.

ECONOMIC GROWTH LED BY LONG-STANDING INDUSTRIAL SECTORS

Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic center for a 12-county area. The area's economic base consists primarily of petrochemical and shipping, tourism, agriculture, and the military. The deep-sea Port of Corpus Christi (the port) ranks as the fifth largest in the nation and 44th in the world based on tonnage. Relatively low area unemployment rates reflect a strong local economy. Unemployment in the MSA was 4.7% in November 2014 and comparable to the state (4.6%) while below the U.S. (5.5%).

Various large commercial/industrial projects underway or planned will capitalize upon the area's aforementioned economic underpinnings. They include a number of liquefied natural gas (LNG) plants. Also of note is the $2 billion Tianjin Pipe Corporation (TPCO America) steel pipe mill plant located adjacent to the port that is presently moving into its second phase of construction. In addition, the M&G Corporation anticipates the construction of two plastics (PET resin) plants in the port, which represents a roughly $800 million investment. These large-scale industrial projects as well as Corpus Christi's key role in the energy sector with proximity to the large and productive Eagle-Ford Shale oil/gas formation in neighboring counties have boosted overall local economic activity since the recession.

Fitch believes the area may realize some modest economic softening in the near to intermediate term given the interconnectedness of the energy sector and the resulting effects from subdued exploration activity due to persistently low oil prices. However, it is also Fitch's opinion that the state's various petrochemical centers should benefit from lower energy prices, which may serve as a partial offset to any economic softening. (see Fitch press release, 'Oil Price Decline Likely to Have Targeted Effect on Local Texas Economies & Revenues', dated Jan. 13, 2015).

CONCENTRATED TAX BASE GROWS

The district's tax base has historically experienced solid growth and TAV quickly regained its footing after registering a modest, one-year recessionary decline. Annual TAV growth averaged about 4.3% over fiscals 2008-2015 and reached a total of $21.7 billion in fiscal 2015 with a strong 10% year-over-year gain. Most of the year's gain was attributable to tax base appreciation rather than new construction according to district officials. Top taxpayers consist of a generally stable list of refineries, energy and petrochemical businesses and provide moderately high taxpayer concentration of approximately 15% (fiscal 2015), led by a Flint Hills refinery at 4.1%. Fitch believes TAV has some sensitivity to oil prices although a level of modestly positive TAV growth also appears feasible to Fitch over the near term given an active housing market, ongoing commercial/industrial investment, and historical tax base performance.

MODESTLY DECLINING ENROLLMENT TREND

Enrollment as measured by either instructional (contact) hours or full-time student equivalents (FTSEs) is down modestly with declines realized in about half of the last 11 years. This is due in large part to enrollment trends that have occurred counter-cyclic to a strong local economy. Total FTSEs declined about 1% over fiscals 2003-2014 and contact hours that incorporate much of the district's non-traditional enrollment base yet count equally for state funding declined by about 2% over the same time period.

Expansion of workforce training and dual high school-college enrollment has slowed declines in the district's student base. Contact hours stabilized between fiscal 2013 and 2014, reflective of expanded student participation in these two areas. This served to offset the year's loss in student enrollment as measured by FTSEs totaling 7,262 in fiscal 2014, which was down about 5% but slightly improved from the fiscal 2013 8% decline. Management largely attributes much of the FTSE loss to higher-paid employment opportunities that has resulted in fewer full-time students. Nonetheless, Fitch believes the district's trend of solid annual financial performance and management's ability to right-size a portion of its spending to enrollment trends should enable the district to successfully navigate any related financial pressure over the near term. In addition, management continues to expand its contracted workforce training, which currently includes some of the area's larger industrial firms.

REVENUE DIVERSITY

The district benefits from a diverse revenue stream comparable to other community colleges in the state, which includes property taxes for operations and debt service (the largest revenue source at about 47% of total revenues or $49 million in fiscal 2014), followed by federal (largely Pell grant) revenue and state appropriations, and lastly, tuition at 10%. About 19% or $19.5 million of total revenues came from state funding in fiscal 2014, which was down from about 23% in fiscal 2009 given cuts to state appropriations that have occurred in prior fiscal years.

The district's tuition rates remain competitive despite recent increases, and along with above-average taxing margin for operations, they provide a measure of financial flexibility. Unlike many other Texas community colleges, the district's operating tax rate is not limited by local statute. The district's overall tax rate has remained moderate and totaled $0.25 per $100 AV in fiscal 2015. This is well below the state's statutory ceiling of $1.00 per $100 AV tax rate (not to exceed $0.50 for debt service).

CONSISTENTLY POSITIVE FINANCIAL PERFORMANCE; RESERVES STRENGTHENED

District operations have generated solidly positive margins in all of the last six fiscal years despite state funding cuts and counter-cyclic, modestly declining enrollment trends. Management's conservative and proactive fiscal practices have typically allowed the district to outperform its structurally balanced annual operating budget.

For fiscal 2014, the operating margin remained strongly positive at 9.9%. This was due in large part to delayed re-staffing after early retirements in prior fiscal years as well as increased tuition/fee charges and property tax revenue. Liquidity levels, as measured by available funds at fiscal year-end, remained adequate at 45.3% of total operating/non-operating expense in fiscal 2014. The year's favorable operating results allowed management to improve reserves; unrestricted operating reserves rose by $1 million to total $21 million or roughly 25.6% of the ensuing fiscal year's budget at fiscal 2014 year-end, which was slightly above the upper end of management's formal 20%-25% policy level. Management also added a larger $7 million at fiscal 2014 year-end to bring the plant fund reserve to a total of $12 million in order to address future deferred maintenance and capital improvement priorities.

FISCAL 2015 OPERATIONS BALANCED

The adopted $82 million fiscal 2015 budget grew by roughly 5% year-over-year and is structurally balanced. Budget assumptions of a stable state appropriation, flat enrollment, and an additional $3.2 million (4% of the year's budget) in property tax revenue supported additional staffing and an across the board salary increase that totaled about $2.2 million. Approximately $1.2 million or 1.5% of the operating budget is maintained as a contingency reserve. A $7 million operating surplus (roughly 8.5% of the year's budgeted spending) is presently estimated by management as likely by year-end due primarily to salary savings from personnel vacancies as well as 1%-2% enrollment growth.

MODERATE DEBT AND OTHER LONG-TERM LIABILITIES

Overall debt levels remain moderate at approximately $3,225 per capita or 4.1% of market value, inclusive of this issuance. Principal amortization of tax-supported debt is favorably rapid with 88% repaid in 10 years. In addition to its tax-supported debt, the district has approximately $23.4 million in outstanding self-supporting revenue bonds (rated 'A+', Stable Outlook by Fitch).

The new money included in this issuance (about $8 million) is the first portion of a new $157 million GO bond authorization approved by a strong 60% of voters in November 2014. Fitch does not expect issuance of the full GO bond authorization to have a significant impact on overall debt ratios. About half of the bond package funds four new campus buildings while the remainder is directed towards various repurposing/renovating needs at existing facilities. District officials anticipate annual issuance of the bond authorization through fiscal 2019 that is expected to require a maximum 2.5 cent tax rate increase under what Fitch believes to be feasible but somewhat optimistic TAV assumptions given the recent direction of oil prices.

The college's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the college historically provided the bulk of the employer's annual pension contribution. TRS is adequately funded at 80.8% as of Aug. 31, 2013, though Fitch estimates the funded position to be lower at 72.8% when a more conservative 7% return assumption is used. The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. The employer's contribution is shared at roughly 50% with the state. Carrying costs (debt service, pension, OPEB costs, net of state support) were approximately 9.4% of total expenses in fiscal 2014 which is due largely to annual debt service for tax-supported debt.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978694

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