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TMCNet:  Fitch Rates Frenship ISD, TX, ULT Bonds 'AAA' TX PSF/'AA-' Underlying; Outlook Stable

[July 21, 2014]

Fitch Rates Frenship ISD, TX, ULT Bonds 'AAA' TX PSF/'AA-' Underlying; Outlook Stable

AUSTIN, Texas --(Business Wire)--

Fitch Ratings assigns an 'AAA' rating to Frenship Independent School District, Texas' (the district) unlimited tax (ULT) bonds as follows:

--$45.2 million ULT school building bonds, series 2014.

The 'AAA' 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. Fitch also assigns an underlying rating of 'AA-' to the series 2014 bonds.

In addition, Fitch affirms the following ratings:

--$117.2 million ULT bonds, series 2006, 2007, 2008, 2009, and 2010 at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, series 2006, 2007, 2009, 2010, and 2014 bonds are secured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

POSITIVE FINANCIAL PERFORMANCE: The district has consistently posted positive operating results and maintained solid reserve levels despite reductions in state aid and cost pressures from enrollment growth.

ELEVATED DEBT LEVELS TO INCREASE: High debt ratios are expected to increase further given the slow repayment of outstanding principal and near-term borrowing plans. The elongated repayment structure of proposed debt raises questions about its affordability.

STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014 and 2015 will reestablish growth in a significant source of operating revenue for the district after several years of reductions to state support, despite increasing property wealth.

STRONG TAX BASE & AREA ECONOMY: The district tax base is growing at an increased rate after a moderate slowdown post-recession, while the area unemployment rate continues to trend below state and national averages.

RATING SENSITIVITIES

HIGH DEBT CAPS RATING: A high and growing debt burden likely precludes positive rating action over the near term. However, Fitch's expectations for continued tax base growth combined with the district's history of sound financial management, positive operating performance, and strong reserve levels are important credit strengths that moderate this risk.

CREDIT PROFILE

The 128-square mile district is located immediately to the west and southwest of Lubbock (rated 'AA+' by Fitch, Stable Outlook), a regional economic hub in west Texas. A portion of the district lies within the city limits, population 289,324. The district itself has a population of 43,383.

HIGH DEBT BURDEN

Incorporating this issue, overall debt ratios are high at $8,776 per capita and 12.5% of full value, and amortization is slow with 27% retired within 10 years. The district currently levies a high $0.46 per $100 of taxable assessed value (TAV) of the $0.50 statutorily permitted debt service tax rate for new money issuance.

In May 2014 voters approved $85 million of bond authorization to build a 9th grade center and an elementary school. In addition to addressing school capacity pressures, the district will use the funds for renovations at the high school, general school facility maintenance, athletic facilities, and technological infrastructure. The current issuance is the first from this authorization, and the district plans to issue the remaining $40 million in early 2016.

The district will increase its tax rate to $0.49 to service the bonds, drawing on strong reserves in the debt service fund as needed to maintain the rate below the statutory cap for new issuance. Inclusive of the projects associated with the recent bond referendum, management estimates sufficient school capacity through 2020 based on current enrollment trends. The elongated principal structure and slow amortization planned for the 2014 bond authorization places some limitations on the district's future borrowing capacity.

Affordability of current and planned debt is dependent upon district tax base performance, which has recently improved. TAV increased 6.0% and 6.2% in fiscals 2013 and 2014 following several years of more moderate growth after the recession. Fitch believes assumptins for continued yet moderate growth going forward are reasonable.


CONSISTENT POSITIVE OPERATING RESULTS

Audited results for fiscal 2013 depict a modest $61,449 general fund operating surplus (after transfers). The general fund has recorded positive year-end results each year dating back to at least fiscal 2002. The fiscal 2013 unrestricted fund balance of $16.5 million equates to a strong 30.9% of spending. Balance sheet liquidity is likewise strong, with year-end cash and investments totaling $20.9 million or 141 days of general fund spending.

State aid declined slightly in fiscals 2012 and 2013 as a result of an adjustment in previous years' lower than projected average daily attendance (ADA) and a legislative reduction in school support at the state level. State aid is projected to increase 8.1% in fiscal 2014 and 4.9% in fiscal 2015 due to increased school funding at the state level and enrollment gains within the district. Enrollment growth has recently trended at approximately 300 students per year, and the district projects similar growth in the medium term based on a recent demographic study.

CONSERVATIVE FISCAL 2014 BUDGET

In fiscal 2014, the district has budgeted a one-time capital expenditure of $1.4 million for technology, as well as increases in salaries and additions to staff to reduce class sizes to pre-recession levels. The district historically budgets conservatively, and the budget for 2014 includes an operating surplus but a slight general fund deficit of $413,400.

STABLE AREA ECONOMY

The district benefits from its location near Lubbock, where health care, education, and government make up the area's largest non-agricultural employment sectors. Largest area employers include Texas Tech University (TTU), Covenant Health System, and TTU Health Sciences Center. The MSA unemployment rate has remained consistently lower than the state and national rates and improved to a favorable 3.5% in April 2014 from 4.6% in 2013. Wealth and income levels for the district are above state averages and slightly below national averages.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple-employer plan. 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's cost for pension and other post-employment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2013, as plan contribution amounts are principally paid by the state and district employees.

The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of a high and growing debt burden. Carrying costs for the district (debt service, pension, and OPEB costs net of state support) remain very manageable, consuming 14.7% of governmental fund spending in fiscal 2013. Total carrying costs rise to a high 26.31%, inclusive of maximum annual debt service after issuance of the series 2014 and planned 2016 bonds. Fitch will continue to monitor the level of state support for school district pension payments, noting pension contributions for all districts in the state will increase modestly to 1.5% on the statutory minimum portion of payroll from 0% beginning in fiscal 2015.

TEXAS SCHOOL FINANCE 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 agreed to reopen testimony in January 2014 after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, the Municipal Advisory Council of Texas, and the National Association of Realtors.

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=840723

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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