[September 18, 2014]

Fitch Affirms Wylie ISD, Texas' ULTs at 'AA-'; Outlook Stable

Fitch Ratings affirms its 'AA-' rating on the following Wylie Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--Approximately $74 million (on a non-accreted basis) in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable and secured from an unlimited property tax levy against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA' Stable Outlook by Fitch).

KEY RATING DRIVERS

SOUND FINANCES: Underpinning the rating is the district's sound financial position. Consistently positive operating results since fiscal 2009 have yielded strong fund and cash balances despite the cost pressures from ongoing enrollment growth and recent state aid cuts. The district maintains a balanced operating profile.

STRONG REGIONAL ECONOMY; FAVORABLE DEMOGRAPHICS: The district benefits from access to the broad and diverse Dallas Fort-Worth metropolitan statistical area (DFW MSA), which fared relatively well during the recession. Income and educational attainment levels exceed those of the state and U.S. while poverty and county unemployment is low. Annual enrollment gains remain moderate.

TAV STRENGTHENS: Taxable assessed valuation (TAV) gains are up due largely to an improved housing market and active residential development underway. TAV grew modestly during much of the recession.

HIGH DEBT LEVELS AND LIMITED CAPACITY: The district's debt profile remains the key credit weakness. Fitch anticipates a continued high debt burden and above average debt service tax rate given a rising debt service schedule and future enrollment-driven capital and debt needs. Minimal headroom projected under the statutory tax rate limit for new money debt issuance places some limitations on the district's future borrowing capacity and debt structure.

AFFORDABLE RETIREE COSTS: The state continues to fund the bulk of pension and healthcare costs on behalf of districts, resulting in an affordable fixed cost burden to the district.

RATING SENSITIVITIES

DEBT ISSUANCE & CAPACITY: The district's prudent management of growth-related capital needs and debt plans in sync with tax base trends and the state's tax rate capacity parameters is a key credit consideration.

FINANCIAL FLEXIBILITY: Preservation of its strong fiscal cushion is an important mitigant to the district's high debt burden and will be a key determinant in rating stability.

CREDIT PROFILE

FAVORABLE LOCATION IN DALLAS-FORT WORTH MSA

The district is located in Collin County, 23 miles northeast of Dallas and within commuting distance of the cities of Plano (LTGOs rated 'AAA' by Fitch), Garland, and Richardson (News - Alert), as well as downtown Dallas. The fiscal 2014 student count was just under 14,000 and enrollment growth continues at about 3% annually.

PREVIOUSLY FAST (News - Alert) GROWTH DISTRICT

Rapid population and student enrollment increases occurred over the past decade given the northern expansion of the DFW MSA. Improvement of nearby transportation corridors as well as the growing saturation of larger neighboring communities such as Plano, Richardson, and Garland and proximity to their aggregate employment base enhances the district's attractiveness as a suburb. County unemployment is favorably low at 4.4% in April 2014 as compared to the MSA (4.7%) and U.S (5.9%) despite solid year-over-year labor force growth. Area income, wealth, and educational attainment metrics are solidly above those of the metro, state, and U.S.

STRONGER TAV GAINS

TAV grew rapidly at double-digit rates given the aforementioned development trends, nearly quadrupling to the $3 billion reached in fiscal 2009 from $865.4 million in fiscal 2001. Recessionary pressures on the housing market subsequently saw TAV stall briefly in fiscal 2011, but otherwise post modest annual gains through fiscal 2013. An improved housing market, active residential development, and some new commercial properties recently led to a nearly 7% TAV gain in fiscal 2014 that strengthened to 9% in fiscal 2015. The reported 2014 median new home price of $310,000 is up about 10% year-over-year.

Previous years' enrollment gains were also rapid. The district had roughly 12,000 students in fiscal 2010, which reflected a significant increase from its small student base of 4,600 in fiscal 2001. The pace of annual enrollment growth has generally moderated since then to a more sustainable 3%-4%. Management anticipates a fairly comparable, steady pace of 2%-3% in annual enrollment growth over the near term per the most recent demographic projections that have generally stayed on track with actual student trends. Build-out is estimated at a total of roughly 17,000 students (down from prior years' estimates of 25,000 students) due to the established shift in development trends towards larger, higher-end homes in the district.

SOUND FINANCES AND LIQUIDITY MAINTAINED

State aid continues to provide the larger portion of the district's operating revenues at about 57% in fiscal 2013. Property tax revenue received annually for operations since fiscal 2009 is derived from the maximum taxing effort allowed by the state's funding formula with voter approval ($1.17 per $100 TAV). Notably, the district achieved positive net operating surpluses in fiscal years 2012 and 2013 in spite of state funding reductions. Conservative budget assumptions for attendance-based state revenues and expenditures, as well as careful expenditure control throughout te year, underpin the district's solid fiscal track record.

The district closed fiscal 2013 with a very healthy operating surplus of $3 million, which was in line with prior years' financial performance and the fifth operating surplus over the last six audited fiscal years. The unrestricted general fund balance increased slightly to $24.2 million or about 26.5% of spending, up from $21.2 million or 25% in fiscal 2012. Reserves remain well above the district's 12% (1.5 months) minimum fund balance policy. The district's liquidity position also remained sound. General fund cash and investments totaled $24.1 million or just over three months of general operational spending.

General fund operations in fiscal years 2014 and 2015 are supported by a partial restoration of state funding levels. Management expects fiscal 2014 year-end results to again outperform the year's balanced budget with a $7 million addition to reserves despite some technology and facility pay-go capital spending during the year. The $107 million fiscal 2015 general operating budget is balanced. District officials provided a 3% pay increase to staff, which is estimated to have a recurring cost of about $2 million, and added additional teaching positions in order to maintain service levels for the growing enrollment base. Fitch does not foresee substantial changes to the district's strong financial performance and position.

HIGH DEBT BURDEN PERSISTS

The district's debt profile is its key credit weakness. Overall debt levels are high and approximate $7,500 per capita or 11.4% of fiscal 2014 full market value. Fitch's debt ratio calculation includes the currently accreted value of capital appreciation bonds (CABs) and does not consider annual state support for the district's debt service (22% in fiscal 2014) as it is subject to legislative appropriation. The district's direct debt burden is expected to remain high for the foreseeable future given some future capital needs and its borrowing legacy that included a sizeable amount of capital appreciation bonds, which minimize near-term tax rate impacts and shift the repayment of interest costs to future taxpayers. Fitch takes some comfort that future capital pressures should moderate given the lower number of total students now projected at build-out. Amortization remains average at 53% of principal repaid in 10 years.

Debt service consumed a manageable 13% of governmental fund expenditures in fiscal 2013, but the fixed cost burden increases to 19% with a gradual but steady rise to maximum annual debt service (MADS) in 2026 (based on current spending and before considering any offsetting state debt service aid, as the latter is subject to changes based on tax base and enrollment trends).

PRESSURE TO MANAGE TAX RATE & RETAIN DEBT CAPACITY IS EVIDENT

The district's debt service tax rate is a high $0.47 per $100 TAV and slightly below the $0.50 state cap for new debt issuance. The district expects to approach voters with a $94.2 million GO ULT bond authorization in November 2014. The bulk of the authorization is projected to fund an additional campus and renovations/expansion of existing school facilities to accommodate the enrollment growth.

The upcoming authorization is promoted not to increase taxes and conservatively assumes moderate annual TAV growth that does not exceed 5.5% for tax rate planning purposes. Fitch believes the TAV growth assumptions are plausible given the development underway and approximately 4% average annual growth rate in the last six years; however, lower TAV growth than presently forecast from a future housing market downturn could push tax rates to the state's $0.50 tax rate ceiling for new money debt issuance, potentially requiring debt restructuring to carve out additional capacity. 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.

Fitch also notes that in order to accommodate this promise to voters, the proposed amortization schedule for issuance of the new bonds (if approved) is to be extended by 10 years and the pace of principal pay-off slowed. Fitch will continue to monitor the district's debt and tax rate position for additional stress, noting that management's ability to provide sufficient classroom capacity with shrinking debt flexibility will be a key credit consideration.

AFFORDABLE RETIREE COSTS

Fitch's concern about the district's overall long-term liabilities is lessened however by its low retiree cost burden. Pension and healthcare benefits are provided through the Teacher 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. District employees contribute to TRS for pensions at 6.4% of annual payroll in fiscal 2013, and the state pays the local district's contributions (also 6.4% of payroll), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. The district consistently fully funds these costs. Other post-employment benefit (OPEB) contributions paid by the district are nominal as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2013 totaled less than 1% of governmental fund expenditures.

TRS is funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at roughly 74% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs for the district affordable, despite the high and growing debt burden. Starting in fiscal 2015, pension contributions for all districts in the state will rise to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs further, although pass-through state aid is projected to largely offset the year's increase. Further increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. Fitch's expectation is that the state will appeal the latest ruling to the state supreme court. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, the Texas Municipal Advisory Council, and LoanPerformance, Inc.

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=876314

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