Jal Public School District 19, NM

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1 CREDIT OPINION Jal Public School District 19, NM New Issue - Moody's Revises Jal PSD, NM's Outlook to Negative; Assigns A3 to Ser GOULT Bonds New Issue Summary Rating Rationale Contacts Heather Correia Associate Analyst heather.correia@moodys.com John Nichols AVP - Analyst john.nichols@moodys.com Moody's Investors Service has assigned an A3 underlying rating to Jal Public School District 19, NM s $18 million General Obligation School Building Bonds, Series Concurrently, Moody s affirms the A3 on $9.5 million in outstanding parity debt. Moody's has also assigned an Aa2 enhanced rating to the Series 2016 GO bonds based on the New Mexico School District Enhancement Program (NMSDEP) - Post March 30, The outlook has been revised to negative. The A3 rating reflects the district s large tax base, which is concentrated in oil and gas. Risks associated with exposure to market volatility are somewhat offset by the district s stable enrollment and stable financial position, with a majority of operating revenues derived from state and federal sources. The rating further incorporates the district s below average socioeconomic profile; manageable debt burden, which will likely increase in the near-term given further issuances coupled with tax base contractions; and, elevated pension liability. The Aa2 enhanced rating on the Series 2016 General Obligation School Building Bonds is based on our assessment of the NMSDEP - Post March 30, 2007 and a review of the district's proposed financing. For additional information on the program, please see Moody's report dated May 4, Credit Strengths Significant tax base growth in recent years Stable enrollment that is independent of the oil and gas industry Improved financial position Credit Challenges Highly concentrated in oil and gas; sizable tax base contraction expected in fiscal 2017 Trend of deficits in prior years, reducing General Fund balance Rating Outlook The negative outlook primarily reflects the potential economic challenges associated with significant tax base concentration in oil and gas producing properties and imminent assessed value declines due to low commodity prices.

2 Factors that Could Lead to an Upgrade Economic diversification Trend of surplus operations Factors that Could Lead to a Downgrade Loss of enrollment without corresponding expenditure management Deterioration of fund balance and cash reserves Significant tax base contraction Material increase in debt burden due to assess value declines; inability to complete projects if district reaches debt burden limitation Key Indicators Exhibit 1 Source: District audits; Moody's Investors Service Detailed Rating Considerations - Enhanced Moody's has assigned an enhanced rating of Aa2 to the Series 2016 General Obligation School Building Bonds, one-notch below the NMSDEP-Post March 30, 2007 programmatic rating. Ratings on individual intercept financings depend on programmatic rating as well as the evaluation of additional rating factors. These factors include the sufficiency of interceptable revenues as determined by specific coverage tests, the timing of the state's fiscal year as it relates to scheduled debt service payment dates, and the transaction structure. Based on the district's state equalization guarantee (SEG) funds for fiscal year 2015, interceptable state-aid provides a limited minimum of 1.33 times coverage of maximum periodic debt service. Further, state revenues provide a narrow minimum of 1.22 times maximum periodic debt service coverage when coverage is stressed by deducting the state's final monthly state aid payment within a fiscal year. State-aid funding levels for New Mexico school districts have been stable in recent years, but have experienced mid-year cuts to address fiscal stress at the state level within the last decade. Principal payments are scheduled for October, nearly halfway through the State's fiscal year, leaving the district exposed to risk of late budgets. The program requires the appointment of a thirdparty fiscal agent, who is required to notify the state if an intercept of SEG is required. The Bank of Albuquerque is the fiscal agent for the current sale. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Detailed Rating Considerations - Underlying Economy and Tax Base: Significant Concentration in Oil and Gas; Tax Base Contraction Expected for Fiscal 2017 The district is located in Jal in the southeastern corner of New Mexico, 80 miles from Midland, TX (Aa2 negative outlook). Situated in the Permian Basin, the district has historically benefitted from increases in oil and gas prices, which spurred production. Since fiscal 2012, the district's assessed value (AV) has expanded by 169.3% in total. Fiscal 2016 continues this trend, increasing by 44.2% to $1.1 billion, derived from a full value (FV) of $3.4 billion. The district's assessed value is highly concentrated in minerals, which comprised 81% of the tax base in fiscal Given the large decline in oil and gas prices, for fiscal 2017, management anticipates mineral values to fall by 50%, resulting in an AV of $672.7 million (FV of $2.2 billion). Although the district's base will remain sizeable, even after the projected decline, the heavy exposure to the oil and gas industry leaves the district vulnerable to future volatility that could impact assessed values, tax rates and debt burden. The district's concentration is a credit negative given the current economic climate; however, management reports that production has not slowed. In fact, within Lea County, as of January 2016, oil production was up 9.1% year-over-year. Additionally, the City of Jal's gross receipts tax (a portion of which is derived from oil and gas related activities), has experienced consistent annual growth since fiscal 2013; fiscal 2016 is projected to be another positive year, with annualized collections of $3.3 million compared to fiscal 2015's $2.2 million. Industry is in process of completing a 16 pipeline to transport oil from Jal to Midland and Odessa. Inherent volatility in the district's base is slightly offset by modest residential development and construction of a $1 billion potash mine that, when completed by 2019, will employ hundreds of permanent employees. Enrollment has increased from 377 in fiscal 2012 to 474 students in fiscal Management believes enrollment is fairly stable as a majority of students are children of permanent Jal residents as opposed to temporary workers. Management estimates that at most 5% of enrollment is tied to the oil and gas industry. Officials expect modest enrollment growth moving forward. The district's socioeconomic profile is below average, with median family income reported at 91.1% of the US as per the 2014 American Community Survey. Lea County's unemployment levels are elevated at 7.6% compared to the state's 6.3% as of February Financial Operations and Reserves: Stable, Albeit Limited, Financial Position We expect the district's financial position to remain stable over the near-term given conservative budgeting and flat enrollment projections. In fiscal 2014, the district hired a new superintendent and business manager. They focused on balancing operations through conservative budgeting without staffing cuts. Fiscal 2014 ended positively, and fiscal 2015 followed suit, reporting a surplus of $211,000, increasing General Fund balance to $677,000, or 15.2% of revenues. Typical of New Mexico school districts, Jal receives 87.6% of its revenues from state aid. The district does receive approximately 10% of its revenues from property taxes. Since fiscal 2010, as the district's base has expanded due to an uptick in oil and gas values, property tax collections has increased from $109,000 to $491,000. Officials report that if taxable values were to decline, resulting in loss of property tax revenues, assuming no corresponding loss of enrollment, state aid would increase to make the district whole. For fiscal 2016, management expects to end the year with $530,000 for budgeting purposes, which does not directly translate to General Fund balance. When compared to fiscal 2015's budgeting dollars of $591,000, it appears the district is anticipating a draw of $61,000; the district paid out $65,000 in cost of living adjustments to its employees. Fiscal 2017 is expected to be balanced with use of reserves, a typical practice in New Mexico. In reality, the district plans to realize savings from two positions held vacant, and does not anticipate requiring fund balance to rightsize operations. Enrollment is projected to remain flat, unaffected by fluctuations in the local economy. Future reviews will focus on the district's ability to maintain, if not increase, fund balance. LIQUIDITY General Fund cash balances improved in fiscal 2015 to $551,000, or 12.4% of revenues. While this is in-line with A3 national medians as a percentage, as a dollar-amount, it is somewhat limited. Positively, the district reports they have $1.4 million in unrestricted monies housed in the SB-9 Capital Levy fund. Originally managed by the State's treasurers' office, in fiscal 2015, the district retained the funds, investing them in certificates of deposits for a higher return. The $1.4 million is intended for capital; however, it remains legally unrestricted and available as needed. 3

4 Debt and Pensions: Manageable Debt Burden; Plans to Exhaust Remaining Authorization in the Near-term The district's debt burden will increase in the near-term given planned issuances coupled with anticipated tax base contractions. Jal's current debt burden is manageable at 0.8% of fiscal 2016 full value (FV). Assuming mineral values decline by 50% (to a full value of $2.2 billion), the district's debt burden would increase to 1.2% of FV, which is below the statutory limit of 2.0%. However, management plans to issue the remaining $18.5 million in authorized unissued debt by mid While the fiscal 2016 FV of $3.4 billion could support $46 million outstanding (equating to a 1.3% burden), if the base were to contract to $2.2 billion, the debt burden would increase to 2.1%, which is above the statutory limit. Moody's notes this scenario analysis does not take into account debt service payments made during fiscal Regardless, depending on the severity of tax base declines, the district may be unable to issue its remaining authorized unissued debt. In that case, management reports they would borrow what they legally could, and fund the remaining projects with HB-33 monies, which would require voter approval. In an effort to manage their debt burden, in fiscal 2016, the district collected approximately $1.7 million more in debt service than necessary in hopes of cash-defeasing bonds in the future. Subsequent rating reviews will focus on the district's ability to manage their debt burden in conjunction with tax base fluctuations. DEBT STRUCTURE The district's debt consists of $27.5 million fixed rate general obligation bonds, inclusive of the new issuance. Principal payout is below average with 46.5% retired in ten years. Atypical of New Mexico issuers, the debt service is back-loaded, with maximum annual debt service of $2.2 million occurring two years (2030) before retirement (2032). In the case of sustained AV declines, the district may be challenged to make large debt service payments in the future without substantial increases to the tax levy. DEBT-RELATED DERIVATIVES The district is not party to any interest rate swaps or other derivative agreements. PENSIONS AND OPEB The district has an above-average employee pension burden, based on unfunded liabilities for its share of the Educational Retirement Board (ERB), a cost sharing plan administered by the state. Moody's fiscal 2015 adjusted net pension liability (ANPL) for the district, under our methodology for adjusting reported pension data, is $13.1 million, or an elevated 2.94 times operating revenues. The threeyear average of the district's ANPL to operating revenues is 2.97 times, while the three-year average of ANPL to equalized value is below average at 0.55%. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the district s reported liability information, but to improve comparability with other rated entities. The New Mexico pension plan funding structure experienced several changes with the signing of SB 115, including the reduction of a cost-of-living adjustment (COLA) and increases in employee contributions. The legislation will maintain the funding changes until the plan has reached 100% funding, which is estimated to be achieved in We believe the funding changes adopted in SB 115 will limit budgetary pressure on the district related to future pension costs. For more information on Moody's insights on employee pensions and the related credit impact on companies, government, and other entities across the globe, please visit Moody's on Pensions at Management and Governance New Mexico school districts have an institutional framework score of A, or moderate. Districts have a low ability to raise revenues because state aid provides over 95% of funding, and property taxes are subject to a small 0.5 mill cap. State aid is moderately predictable given a recent trend of increased funding and a history of funding cuts over the past decade. Expenditures, which are primarily comprised of personnel and facility costs, are moderately predicable given flat student enrollment levels. Districts have a moderate ability to reduce expenditures given above average fixed costs. Of note, the district is focused on increasing their cash balance to $700,000, which is approximately two months of operating expenditures in reserve. 4

5 Legal Security The bonds are secured by ad valorem taxes that are levied against all taxable property within the district without limitation as to the rate or amount. Use of Proceeds Proceeds from the Series 2016 bonds will be used for construction of a new elementary school and renovation of both the junior high and high school. Obligor Profile The district is located in Jal in the southeast corner of New Mexico, 65 miles west of Odesssa and Midland, and serves approximately 500 students. Methodology The principal methodology used in the underlying rating was US Local Government General Obligation Debt published in January The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July Please see the Ratings Methodologies page on for a copy of these methodologies. Ratings Exhibit 2 Jal Public School District 19, NM Issue Rating General Obligation School Building Bonds, Series 2016 Rating Type Sale Amount Expected Sale Date Rating Description General Obligation School Building Bonds, Series 2016 Rating Type Sale Amount Expected Sale Date Rating Description A3 Underlying LT $18,000,000 06/20/2016 General Obligation Aa2 Enhanced LT $18,000,000 06/20/2016 General Obligation Source: Moody's Investors Service 5

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7 Contacts Heather Correia Associate Analyst 7 CLIENT SERVICES John Nichols AVP - Analyst john.nichols@moodys.com Americas Asia Pacific Japan EMEA