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TMCNet:  Fitch Rates Fort Bend ISD (TX) ULT Bonds 'AA+' Underlying / 'AAA' PSF

[May 12, 2014]

Fitch Rates Fort Bend ISD (TX) ULT Bonds 'AA+' Underlying / 'AAA' PSF

AUSTIN, Texas --(Business Wire)--

Fitch Ratings assigns ratings to Fort Bend Independent School District, Texas' (ISD; the district) unlimited tax (ULT) bonds as follows:

--$69.8 million ULT refunding bonds, series 2014 'AAA' enhanced / 'AA+' underlying.

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

The bonds are scheduled for negotiated sale during the week of May 12. Proceeds from the sale of the bonds will be used to refund a portion of the district's outstanding ULT debt for interest savings.

Fitch also affirms the 'AA+' underlying rating on the district's $886 million in outstanding ULT bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district and are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the PSF guaranty.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial profile is a positive credit factor, characterized by large reserve levels and a consistent record of conservative budgeting practices.

STABLE AND DIVERSE ECONOMY: The local economic climate is favorable and continues to demonstrate low unemployment, high wealth levels, and a healthy local housing market.

HEALTHY GROWTH PROSPECTS: Housing construction has accelerated, spurred by major transportation arteries that facilitate access to broad labor markets in the Houston metropolitan area. Residential development has also led to renewed enrollment growth which Fitch believes has been conservatively budgeted by the district.

ELEVATED DEBT BURDEN: The district's overall debt levels are high and will remain elevated due to the district's plan to seek a general obligation (GO) bond authorization in the near term. Fitch believes the debt load is manageable due to the district's moderate carrying costs and favorable prospects for further tax base expansion.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's healthy financial profile. Maintenance of solid reserves while addressing its ongoing capital needs is a key credit consideration.

CREDIT PROFILE

The district is the seventh largest school district in the state, with average daily attendance (ADA) at just under 68,000 in fiscal 2014. The district service area spans a large 170 square miles in northeastern Fort Bend County (GO bonds rated 'AA+' with a Stable Outlook by Fitch), in a rapidly growing residential and commercial sector of the Houston metropolitan statistical area (MSA).

The district encompasses the incorporated cities of Missouri City (GOs rated 'AA' with a Stable Outlook), Sugar Land (GOs rated 'AAA' with a Stable Outlook), Arcola, and Meadows Place. The district also serves portions of Richmond, Houston (GOs rated 'AA' with a Stable Outlook), and other smaller area communities.

ENROLLMENT AND TAX-BASE GROWTH RESTORED

The district's service area is about 70% developed. Enrollment and tax base growth moderated during the recession but both have ramped up recently with improvement in the economy.

ADA was essentially flat from 2010-2014. However, 2014 ADA grew by 2% and is projected to grow by a similar rate in fiscal 2015 and beyond, which Fitch considers realistic given recently surging homebuilding activity within the district. Major road infrastructure currently under construction in the district has spurred the ongoing residential development throughout the district which will lead to continuation of student enrollment growth.

The district's taxable assessed value (TAV) growth moderated during the recession and registered only one annual dip (-2.5% in fiscal 2011). TAV for fiscal 2014 of $26.1 billion grew by 7% over the previous year. Including property values under appeal, the preliminary TAV for fiscal 2015 is up a large 15%. Assuming conservatively that appeals exceed the typical rate of 5%, the district is using a 9% TAV gain for planning purposes, which Fitch considers prudent.

Fitch housing data indicate that the Fort Bend County housing market is performing well, with ongoing new starts and housing prices trending up. The county's average home sale price rose a large 12.8% to $269,500 in 2013, up from $238,900 in 2012. Fort Bend County's population, which is estimated at more than 652,000 in 2013, has grown by a compound average annual rate of 3.8% since the 2010 census. The county's average 2013 unemployment rate of 5.7% was well below the state (6.3%) and national averages (7.4%) for the same period. Wealth levels of the county's population are notably higher than those for the Houston MSA, state, and nation.

SOLID FINANCIAL RESERVES MAINTAINED

Positive operating margins have resulted in the accumulation of solid general fund reserves despite the challenges posed by substantial state unding cuts. In fiscal years 2010 and 2011, the district proactively declared financial exigency, a Texas Education Agency prerequisite for terminating contracted employees, to eliminate 483 positions in order to close a $22 million budget gap. These cuts along with other tight budget constraints enabled the district to generate large surpluses over the past four years.


At the close of fiscal 2013, the district's unrestricted general fund balance stood at $169 million, or a high 36% of spending, inclusive of a $16 million net surplus for the year (equal to 3.5% of spending). The fiscal 2014 budget was adopted as balanced but interim results point to another large estimated $20 million to $25 million surplus, equal to 4%-5% of budgeted appropriations. Management reports the surplus is due largely to continued austerity despite restored state aid cuts, as well as greater than budgeted ADA. Management indicates that it plans to transfer any net surplus to the capital projects fund for instructional technology improvements.

In fiscal 2014, the district also transferred $10 million (2% of spending) of committed fund balance to eliminate the deficit position in the health insurance fund. Under a new CFO, the district has issued a request for proposal (RFP) for health insurance providers and interim changes have reportedly stabilized the fund. The preliminary proposed budget for fiscal 2015 is balanced, funds 4%-8% pay hikes for teachers and 4% pay hikes for all others, and adds 400 new positions to accommodate the projected 2% gain in ADA. Despite the restoration of state funding in fiscal years 2014 and 2015, the district remains vigilant to maintain its solid financial cushion. The district has adopted formal fiscal policies including: maintain the unassigned general fund balance at 30% of net budgeted operating expenditures for the following year, adopt balanced budgets, and limit the use of fund balance reserves for nonrecurring expenditures. Fitch believes adherence to these policies provides stability to the high credit rating.

ELEVATED DEBT BURDEN

The district's overall net debt burden is high at 9.2% of fiscal 2014 market value and $7,015 per capita. The high overall debt load includes a large number of special districts in the area. The payout rate is moderately below average with 46% of principal maturing in 10 years.

The district still has $63 million in authorized but unissued bonds for two new elementary schools. These bonds were a part of a $428 million bond authorization approved by voters in 2007. The district plans to start construction on these schools in the short term and reimburse itself with bond proceeds upon the issuance of this remaining authorization in early 2015.

A facilities master plan (FMP) was recently completed which identified the need for 11 new schools and facility improvements, estimated to cost roughly $818 million. The district plans to seek voter approval for the first phase of these projects in November 2014. The size of the authorization has not yet been determined but management's goal is to limit the tax rate impact from the additional borrowings. The district's phased approach is viewed positively by Fitch given that the estimated cost of the FMP nearly equals the par amount of the district's outstanding debt.

The district has maintained a manageable debt service tax rate (currently $0.30 per $100 of TAV), well below the attorney general's tax rate cap for new debt issuance of $0.50 per $100. The debt burden is expected to remain elevated given the large number of special districts within the area, but carrying costs should be manageable, assisted in part by a level debt service schedule, anticipated tax base growth, and phased approach for funding the FMP.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). 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 (OPEB). Including debt service, pension and OPEB contributions, carrying costs were a moderate 12% of fiscal 2013 governmental spending, benefitting from the state's strong pension funding system currently in place. However, districts in Texas are susceptible to future funding changes by the state - as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013 a district judge ruled that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...'. The judge also cited inadequate funding and districts' inability to exercise 'meaningful discretion' in setting tax rates as constitutional flaws in the current system.

The judge re-opened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began in January 2014. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.

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, IHS (News - Alert) Global Insight, and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--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, IHS Global Insight, and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

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

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

Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 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=829712

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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