Fitch Rates Northside ISD, TX ULTs 'AAA' PSF/'AA+' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Northside Independent School District, Texas (the district) unlimited tax bonds (ULTs):

--$70 million unlimited tax school building bonds, series 2013.

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

The bonds are expected to price via negotiation the week of June 17, 2013, subject to market conditions. Proceeds will be used to fund district facility design and construction.

In addition, Fitch assigns an 'AA+' underlying rating to the series 2013 bonds and affirms the 'AA+' rating on the district's $1.9 billion unlimited tax debt outstanding.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from and secured by an unlimited ad valorem tax levied against all taxable property in the district. The bonds are secured further by the PSF guaranty.

KEY RATING DRIVERS

FINANCIAL FLEXIBILITY: The district's financial profile is characterized by consistently strong operating performance and healthy reserves. The district is positioned favorably to withstand the uncertainties of future state funding.

MANAGEABLE ENROLLMENT GROWTH: The district is the fourth largest in the state, typically adding two to three schools a year to keep pace with north San Antonio suburban population growth. More moderate enrollment gains are expected to ease pressure on the district's facilities over the near term.

HIGH DEBT LEVELS: Overall debt is high in relation to the district's population and market value, a pattern typical for rapidly growing suburban districts in the state. Fitch expects debt levels to remain high as the district is only about two thirds built-out. Notably, the district retains ample debt service tax rate capacity.

HEALTHY TAX BASE: The district's historically strong taxable assessed valuation (TAV) appreciation has slowed but continues to register modest gains. The commercial sector of this largely residential tax base continues to expand. The tax base has no material concentration. The district benefits from its location in the larger San Antonio metro area.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in the larger San Antonio metropolitan area and serves the rapidly growing northwest portion of Bexar County and surrounding areas, with a 2013 estimated population of about 560,000.

STRONG FINANCIAL PROFILE

The district has maintained strong financial performance despite the pressures associated with sustained enrollment growth and state funding cuts. With the addition of a high $59 million (9.5%) operating surplus, the district's fiscal 2012 unrestricted fund balance improved to $186 million (30.1% of spending and transfers out). The year's performance was driven by enrollment-based increases in state support and personnel cost savings due largely to attrition.

Management cut more than $60 million from its budget during fiscal 2011 and 2012, which more than offset the state funding cuts. Cost reduction measures included the elimination of close to 1,000 positions through attrition, a salary freeze, reduced starting pay for new teachers, and increased classroom sizes.

The district expects to realize a fiscal 2013 operating surplus through continued cost management. Officials project to maintain between $125 million and $150 million of unassigned general fund reserves over the next several years. Fitch views favorably management's proactive approach to tightened spending and preservation of adequate fund balance reserve levels in light of state funding uncertainties.

SOUND LOCAL ECONOMY

The district's fiscal 2013 TAV of $33 billion has increased 75% since fiscal 2006, mirroring growth throughout northwest San Antonio. After two years of sluggish growth, fiscal 2013 TAV posted a solid 3.1% gain, reflecting new residential and commercial development. Officials expect up to 5% annual TAV growth in fiscal 2014, which Fitch considers plausible based on strengthening of the housing market and continued commercial development. Given that the district is only about 65% built-out, and much of the major road infrastructure in the district is in place, the prospects for continued growth are favorable.

Sound job growth continues to support a low county unemployment rate of 5.7% in April 2013, below state (6.1%) and national (7.1%) averages for the same period. The district's income and wealth levels trend moderately above state and national averages.

HIGH DEBT/ONGOING CAPITAL NEEDS

Overall debt ratios are high at about $5,400 per capita and 7.8% of market value, reflecting the district's infrastructure requirements over the past decade. Fitch believes debt levels may remain high into the foreseeable future as a result of below-average principal amortization (31% of principal is retired in 10 years) and future facility needs.

The district maintains a portion of its total debt portfolio, currently about 25%, as variable-rate debt in order to minimize the impact to its debt service tax rate. Management reports the district is managing variable rate exposure within the policy range of 25% to 30% of total debt. While few Texas school districts issue variable rate debt, Fitch derives comfort from the district's experience with this instrument and its tenured financial management team.

The current issue is part of the district's $535 million bond program approved by voters in May 2010 and will fund new elementary and middle schools, as well as facility improvements. Subsequent to these issues, $160 million remains in the current authorization program. The district's debt service tax rate is currently $0.336 per $100 of TAV, well below the statutory new-issuance test ceiling of $0.50 and providing flexibility regarding future debt needs.

LIMITED PENSION/OPEB OBLIGATIONS

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. Including debt service, pension and OPEB contributions, carrying costs were a moderate 13.5% of fiscal 2012 governmental spending, net of capital expenditures.

TEXAS SCHOOL DISTRICT LITIGATION

In February 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 as a constitutional flaw in the current system.

Fitch will monitor the appeal process of the suit, which may go directly to the state supreme court. If the supreme court upholds the lower court ruling, the state 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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, 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=793706

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com