Fitch downgrades BISD to BBB+
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades Beaumont Independent School District, Texas' (the district) outstanding unlimited tax (ULT) bonds as follows:
--$398 million outstanding ULT bonds to 'BBB+' from 'A'.
The Rating Outlook is Negative.
The bonds are secured by an unlimited property tax levied annually (distinct from the district's operating levy) against all taxable property within the district. Additional security is provided by the Texas Permanent School Fund (PSF) guaranty, whose bond guaranty program is rated 'AAA' by Fitch.
KEY RATING DRIVERS
INVESTIGATIVE FINDINGS; STATE OVERSIGHT: The Texas Education Agency (TEA) released a final investigative report of the district on April 1, 2014 highlighting severe financial management issues that were triggered by an FBI embezzlement investigation. TEA subsequently escalated the supervisory role of a previously assigned special education monitor to that of conservator to oversee general operations in advance of installing a board of managers to replace the current school board trustees and superintendent. The downgrade to 'BBB+' from 'A' reflects both Fitch's concern and comfort provided by the state's involvement.
NEGATIVE OUTLOOK REFLECTS CONTINUED UNCERTAINTY: Fitch remains concerned about the district's liquidity and financial position given the lack of available disclosure and timely management updates. Financial consultants currently managing district finances confirmed availability of sufficient revenue to cover expenditures at Fitch's last review two months ago, but were piecing together details following the FBI's confiscation of documents.
CONCENTRATED TAX BASE: Underpinning the district's credit quality is a tax base heavily concentrated in the petrochemical industry, although this concern is mitigated to a degree by industry diversification in both production and end users as well as the key role oil refineries play in the national economy. Taxable assessed values (TAV) have grown in recent fiscal years. The leading taxpayer, Exxon Mobile Corporation, provides a high 25% of TAV.
OVERALL DEBT HIGH; SLOW AMORTIZATION: Overall debt levels are high and principal amortization of the district's direct debt is slow.
FUTURE TEA INVESTIGATION, REPORTING IMPACTS: The rating is sensitive to potential findings from further TEA investigations, including but not limited to any material impact on the district's financial resources, particularly if student attendance records are found inaccurate.
ADEQUATE DISCLOSURE: Fitch has requested documentation showing adequate funding of obligations for the current fiscal year to confirm district statements. Fitch will review available documents over the coming months. If the financial position proves materially worse than previously indicated and/or sufficient documentation is not available, the rating may be downgraded and/or withdrawn.
BOARD OF MANAGERS APPOINTMENT APPEARS LIKELY
The TEA Education Commissioner announced his decision April 14 to install a board of managers and conservator to Beaumont Independent School District after conducting various district-wide, town hall meetings. The supervisory role of TEA's previously assigned special education monitor was escalated to that of conservator to oversee general operations with ultimate veto power over the current board and superintendent. Fitch believes this presently heightened level of state control is a stabilizing credit factor given the broad and severe nature of financial management concerns highlighted by TEA and other external investigations.
Full implementation of this state-imposed management structure would replace the existing school board trustees and current superintendent by June 15. The board of managers is to be comprised of a majority of members from the Beaumont community and can remain in place for up to two years. Fitch believes this path is likely despite the district's formal appeal of this decision that will result in a month-long, internal TEA review. There has been public support of the decision from a variety of community stakeholders and TEA's recent determination of the district's lower, 'accreditation probation' status permits external management to be appointed according to state statute.
ADDITIONAL CHALLENGES IN FISCAL 2014
Fitch believes the district will be nonetheless quite challenged to plug gaps in its $157.8 million fiscal 2014 budget despite state involvement. The initial $3 million operating deficit expected for the year has subsequently widened to a total of $7.2 million (about 5% of spending) according to mid-year budget documents provided by the district's financial consultants. The deficit reported resulted from a miscalculation of property taxes from one of the district's larger taxpayers reflecting previous changes to the state school funding formula. Management has indicated recent curtailment of spending and availability of reserves in other funds as solutions for gap closing.
NARROW LIQUIDITY ANTICIPATED
Fitch remains concerned about the district's liquidity. The Negative Outlook signals Fitch's continued concerns about the present lack of formal liquidity reporting as well as timely management updates. Fitch has requested monthly cash flows from the district to support the unaudited bank statements previously provided. At the time of Fitch's review two months ago, financial consultants reported sufficient cash flow through the remainder of fiscal 2014 to narrowly meet its financial obligation, but were unable to provide an update. Also, the financial consultants reported some reserves available in other funds, namely bond funds that might be used for reimbursement of general fund capital spending.
HISTORICALLY STABLE FINANCES
The district's solid and stable reserves have historically been a credit strength. Unreserved/unrestricted general fund balance had been no less than 20% of spending or $31 million over fiscals 2007-2011. Audited district fund balance remained healthy at fiscal 2012 year-end, totaling $30.9 million or 18.7% of spending in unrestricted reserves, down from 24% of spending in fiscal 2011. The net fund balance drawdown of $11.3 million that year was attributable to approved budget amendments for capital spending as well as one-off revenue losses from an increase in exempt foreign-trade zone properties.
UNEXPECTED DRAW IN FISCAL 2013
The fiscal 2013 balanced budget included no change in fund balance over fiscal 2012. However, fiscal 2013 results worsened first with the release of the adopted fiscal 2014 budget, estimating a $3.4 million operating deficit after transfers in fiscal 2013, and again with recent projections reported by financial consultants of $11 million in fiscal 2013 unencumbered reserves (or 7% of spending). Also, the amount estimated as embezzled by the former finance director and comptroller rose to $4 million (2.5% of spending). The one year use of roughly $20 million in reserves is reportedly due to a combination of unbudgeted pay-go capital spending, embezzled funds, and higher than budgeted spending on personnel throughout the year.
It is uncertain when the external audit will be complete to confirm the district's year-end financial position, particularly in light of the district's evolving management structure. Extensive timing delays have occurred with financial consultants hired in the fall of 2013. They are tasked with reconstructing financial data after the FBI's confiscation of documents and correcting internal control and financial management issues present in day-to-day operations. The district only recently hired an interim internal auditor in accordance with recommendations made in prior TEA and the Legislative Budget Board reviews and a new finance director is yet to be hired.
TAX BASE CONCENTRATED IN PETROCHEMICAL INDUSTRY
The district's tax base remains heavily concentration in the petrochemical industry, although this concern is mitigated to a degree by industry diversification in both production and end users as well as the key role oil refineries play in the national economy. TAV has grown at a steady pace of 2%-5% annually since fiscal 2012; TAV totaled $10 billion in fiscal 2014. Expansion by the district's largest taxpayer (an ExxonMobil refinery) has been the primary contributor to increased tax base concentration. Top 10 taxpayers provided 28% of TAV in fiscal 2012 which has risen to a high 37% in fiscal 2014, led by the refinery at 25%.
OVERALL DEBT BURDEN HIGH
Overall debt levels are high at approximately 6.5% of TAV. Principal amortization of the district's direct debt is slow with roughly 30% retired in 10 years. The district has exhausted its general obligation bond authority with the recent completion of its $388 million bond program, approved by 57% of voters in November 2007. Future debt and capital plans are presently uncertain given the district's evolving management structure.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Municipal Advisory Council of Texas, IHS Global Insight, National Association of Realtors.