[February 12, 2013]

Fitch Rates Judson ISD Texas' ULTs 'AAA' TX PSF/'AA-' Underlying; Outlook Stable

Fitch Ratings has assigned an 'AAA' rating to the following Judson Independent School District, Texas' (the district) bonds:

--$18.8 million unlimited tax (ULT) refunding bonds, series 2013.

The 'AAA' long-term rating reflects the guaranty provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

In addition, Fitch assigns an 'AA-' underlying rating to the series 2013 bonds and affirms the 'AA-' rating on the district's $376 million (pre-refunding on a non-accreted basis) in outstanding ULTs.

The series 2013 bonds are scheduled to sell the week of February 11 via negotiation. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are payable and secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the PSF.

KEY RATING DRIVERS

STABLE FINANCIAL POSITION: The district's financial position remains sound, supported by conservative budgeting, largely balanced operations, and solid general fund reserves which remain in line with historic trends and exceed adopted policy levels.

FAVORABLE ECONOMIC, DEMOGRAPHIC PROFILE: The district is part of the stable and diverse San Antonio metropolitan economy. Area unemployment rates are relatively low compared to state and national averages. Income and wealth metrics are better than average.

MODEST TAV GAIN; SOME CONCENTRATION: The recently positive TAV trend reflects increased levels of area development and modestly reverses stagnation during the recession. The tax base has historically experienced healthy rates of growth. Fitch believes further moderate tax base expansion appears reasonable given development projects underway or planned. Taxpayer concentration is moderately high.

WEAK DEBT PROFILE; CAPITAL PRESSURES: Overall debt levels are high and amortization of direct debt is slow, reflective of the district's prior fast-growth years. Capital pressures have built up with a failed bond election in 2010; the most recent election to pass was in 2006. If successful, a smaller May 2013 bond election would allow the district to reduce some of those needs. Fitch believes evidence of successful management of the associated capital projects could further restore public confidence and subsequently, provide additional capital funding flexibility in the intermediate-term.

RATING SENSITIVITIES

Material deterioration of the district's financial and/or capital funding flexibility would be viewed negatively by Fitch.

Passage and successful implementation of the upcoming bond election and continued evidence of community support for needed capital projects would be a positive credit factor.

CREDIT PROFILE

SAN ANTONIO METRO DISTRICT

Located northeast of San Antonio amidst major transportation corridors, the district serves the suburban communities of Kirby and Converse and portions of Universal City, Live Oak, Selma, and San Antonio that include nearly 120,000 residents. Median household income levels exceed those of the MSA, state, and nation by about 10%. Enrollment trends have more recently moderated from prior fast-growth years as a result of recessionary economic pressures and a subdued housing market. The district has realized modest yet steady annually enrollment gains of 1%-2% over the past four fiscal years, which has increased average daily attendance to 21,300 students in fiscal 2013.

TAX BASE, UNEMPLOYMENT LEVELS REFLECT STRENGTHENING ECONOMY

Development within the district that led to sizeable population and solid enrollment gains before fiscal 2010 was spurred by the northern expansion of the diverse and stable San Antonio metropolitan employment base and housing market. Proximity to several military bases adds to the local economy.

Evidence of economic strengthening since the recession is apparent with a year-over-year decline in unemployment. At 5.6% in November 2012, unemployment levels were down from 6.9% in November 2011, remaining modestly below the state (5.8%) and well below the nation's rate of 7.4%. In addition, a modest 2% TAV increase was realized in fiscal 2013 after three years (fiscals 2010 - 2012) of stanant growth. The district's tax base is largely residential at 60%, although it also includes sizeable distribution, warehousing, and food manufacturing businesses, stimulated by access to Interstate 35 which runs from Mexico to Canada. Top ten taxpayer concentration is moderately high at 16% with the largest, HEB Grocery Company, LP at 7%. Fitch believes further moderate tax base expansion appears reasonable over the near-term given the residential as well as retail/commercial development projects underway or planned.

TREND OF STABLE FINANCIAL PERFORMANCE

The district's financial position remains stable and comparable to prior years, characterized by solid general fund reserves. The district has generated operating surpluses in four of the last five fiscal years, assisted by conservative budgeting practices. Implementation of various cost-saving measures in light of state funding cuts as well as the use of $3.6 million in one-time, federal EduJobs funding to offset some general fund expenditures allowed the district to moderately increase its unrestricted reserves to nearly $39 million or 26% of spending at fiscal 2012 year-end. Fitch notes these results incorporated higher than usual pay-go capital spending from the general fund for the purchase of future school sites while comfortably exceeding the adopted fund balance policy requiring a minimum of two months or roughly 17% of general fund spending.

For fiscal 2013, additional spending cuts were made to right-size from the loss of EduJobs funding. The year's $155.6 million adopted budget includes a $3.5 million draw on reserves for one-time retention incentives in order to maintain salary competitiveness given the lack of salary adjustments in recent fiscal years. However, year-to-date projections anticipate modestly exceeding budget by about $1 million and an ending position of about $36 million or 23% of spending.

Preliminary budget plans for fiscal 2014 anticipate relatively flat state aid and fewer opportunities for additional cost savings while developing a balanced operating budget. There is reportedly some consideration by management of further increases to salaries (totaling about $3.7 million) and possible pay-go capital spending of up to $6 million. Although the financial impact remains uncertain, Fitch expects a measured approach from district leadership given the district's previous financial performance and takes some comfort from the cushion provided by its solid reserves.

DEBT BURDEN HIGH; BUILD-UP OF CAPITAL NEEDS

Debt ratios are high, reflective of the area's previous fast-paced expansion. Overall debt levels approximate $4,800 on a per capita basis and 8.2% of market value on a currently accreted basis. District principal amortization is slow at about 35% of principal maturing within 10 years. The district's debt profile is primarily comprised of fixed-rate debt with some use of capital appreciation bonds. The current offering will refund a portion of the district's outstanding debt for interest savings; debt structure is not materially changed as a result of the refunding. District debt levels benefit from state assistance for debt service (roughly 20%) provided to less property-wealthy districts. The fixed debt service cost to the budget is moderately high at 16% of fiscal 2012 general and debt service spending.

Capital needs have expanded in line with steady enrollment gains since the district's last successful bond election in 2006 despite some pay-go capital spending. A $198.8 million bond election called in 2010 to address capacity issues failed by a 56% to 44% margin. The district has no remaining authorization; a bond election sized at a reduced $83 million for a portion of the district's capital needs will be presented to voters in May 2013. The proposed bond authorization would fund two new schools with minimal change projected to the current debt service tax rate ($0.385 per $100 TAV) over the next 15 years. Assumptions that support a relatively flat debt service tax rate include fairly conservative tax base growth, state support for a portion of the new money issuance, use of debt service fund balance,, and another refunding opportunity in 2014.

Fitch will monitor the district's debt and operating position for additional stress, noting that management's ability to generate additional classroom capacity with limited resources outside a successful bond election will be a key credit consideration. A successful election would help to allay Fitch's concern about voter confidence related to the failed 2010 election and publicized cost overruns and improper procurement practices in prior bond projects.

With this issuance, debt service is structured as relatively level at roughly $26 million annually throughout the majority of the amortization schedule, which Fitch views positively. Inclusive of the planned new money issuance (if approved by voters), current projections anticipate annual debt service would rise to exceed $30 million within the next twenty years.

OTHER LONG-TERM LIABILITIES MODERATE; CARRYING COSTS MANAGEABLE

The district'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 district provides the bulk of the employer's annual pension contribution. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a manageable 15% of governmental fund spending in fiscal 2012, reflective largely of the district's annual debt load.

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 report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, LoanPerformance, Inc, and IHS (News - Alert) Global Insight.

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

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