News Column

Fitch Affirms Leander ISD, TX's ULT Bonds at 'AA-'; Outlook Stable

May 9, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed Leander Independent School District, Texas' (the district) approximately $678.7 million in unlimited tax (ULT) debt at 'AA-' as follows:

--ULT school building bonds, series 2001, 2009, and 2010;

--ULT school building and refunding bonds, series 2003, 2005, 2006, 2007, and 2008;

--ULT refunding bonds, series 2010, 2010A, and 2011.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.

KEY RATING DRIVERS

VERY HIGH DEBT LEVELS: Debt levels are very high and amortization of principal is slow. The current debt structure and debt service tax rate limit flexibility for issuance of new money debt for additional facilities.

CAPITAL NEEDS CONTINUE: The district's enrollment trend moderated somewhat but remains very strong resulting in the need for additional facilities over the near to medium term.

STRONG FINANCIAL PERFORMANCE: Consistently strong financial performance is a stabilizing credit factor. The district has posted positive financial results in each of the last five fiscal years despite recent state funding cutbacks and pressures associated with enrollment growth. The district's unrestricted general fund balance and liquidity remain solid.

TAX BASE REMAINS SOLID: The district's solid tax base resumed growth after a single year of a modest decline. The prospects for continued growth are favorable given the availability of land and recent completion and ongoing construction of road infrastructure that opens more land for development. Moreover, the tax base, while still predominantly residential, is diversifying, with increased commercial construction over the past few years.

STABLE ECONOMY: The district benefits from its location within the broad economic and employment base within the Austin-Round Rock metropolitan area, which has above-average wealth levels and relatively low unemployment rates.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial profile and high reserves, factors that offset concerns over its weak debt profile.

PRESSURE TO FUND CAPITAL NEEDS: Pressure to maintain a tax rate below the statutory $0.50 per $100 TAV test for new debt issuance may hinder the district's ability to issue additional new money debt for its capital needs.

CREDIT PROFILE

The district is located northwest of Austin within the broader Austin-Round Rock metropolitan area. Its vast 200 square mile service area includes the cities of Leander, Cedar Park, Jonestown, and portions of Georgetown, Round Rock, and Austin. Prospects for continued growth are positive given recent and planned development of major highway corridors and availability of affordable land.

HIGH DEBT BURDEN AND CONTINUED CAPITAL PRESSURES

Fitch considers the district's debt levels very high. Overall debt levels approximate 9% of market value and over $9,000 per capita. In addition, amortization is slow, reflecting in part the extensive use of capital appreciation bonds (CABs) to minimize tax rate impacts and shift the debt burden to future taxpayers. Approximately 38% of the district's direct debt is retired in 10 years on a non-accreted basis. Annual debt service increases at a steady rate over the next few years and this will continue to pressure the debt service tax rate if tax base growth stalls.

Capital needs remain significant, resulting in pressure on management to stay below the state attorney general's $0.50 per $100 TAV debt issuance test. A decline in the growth rate over the last few years provided some facilities relief enabling the district to push back its capital plan and debt issuance authorization for roughly three years beyond initial projections.

Earlier this year, the district issued approximately $205 million of its remaining $229 million bond authorization from 2007. However, with ongoing residential development in the district, it is likely that the district will need to return to voters for additional bond authorizations in the near term, which could necessitate additional debt restructuring to create borrowing capacity.

CONSISTENT POSITIVE OPERATING RESULTS

The district's financial position is a positive credit factor. Revenue variances are typically favorable due to rapid enrollment growth and conservative estimates. The district currently levies at $1.04 per $100 of TAV, with the option to levy an additional $0.13 per $100 TAV with voter approval. However, the additional levy would be subject to recapture due to the district's high property value. Approximately 57% of the district's revenue is generated through property taxes and 39% through state funding.

The district has historically recorded operating surpluses that have resulted in strong reserve levels, which enhance its financial flexibility. Despite deep state funding cuts, for fiscal years 2012 and 2013, audited results exceeded original projections primarily due to spending cuts and very conservative enrollment projections. The district eliminated budget gaps of $13 million and $22 million in fiscal years 2012 and 2013, respectively. Instead, over those two years the district added an aggregate $16.4 million to general fund reserves, or 6.8% of spending at the fiscal year 2013 level. The unrestricted general fund balance totaled $95 million or a solid 39% of operating expenditures and transfers out at fiscal 2013 year-end.

The district adopted the fiscal year 2014 budget with a projected $10 million use of fund balance. Moreover, the district conservatively forecasted that it would need to utilize another $6 million and $3 million of general fund reserves in fiscal years 2015 and 2016, respectively. However, management is typically conservative and these forecasted budget gaps are expected to be substantially reduced or even eliminated.

For fiscal 2014 management reports that positive variances in both revenues and expenditures are now projected to bring ending results to an estimated $3 million operating surplus after transfers. The fiscal 2015 preliminary budget includes about $2.5 million in spending cuts that are projected to decrease the previously projected use of fund balance essentially to maintain general fund reserves at the fiscal year 2013 level.

STABLE AND DIVERSE LOCAL ECONOMY

The district is largely residential in nature but benefits from its location in the broad economic and employment base of the Austin-Round Rock metropolitan area. At 4.4% in March 2014, the unemployment rate in the metro area had declined on a year-to-year basis while remaining below state and national levels. The regional labor force and employment registered solid gains of roughly 3.9% in the 12 months ending December 2013. District wealth levels exceed those of the metro area, state, and the U.S.

While the district had historically experienced double-digit%age tax base growth due to the availability of affordable land TAV growth slowed in fiscal year 2010 and decreased a modest 1% in fiscal 2011 reflecting a less robust housing market. TAV quickly rebounded in fiscal year 2012 with 2% growth. Fiscal years 2013 and 2014 reflect a modest acceleration with growth of 4.1% and 6.7%, respectively.

As a result of area residential development enrollment over most of the last decade grew very rapidly, increasing at an average annual pace of about 10% between fiscal years 2003 and 2008. With the economic slowdown, annual enrollment growth trends have slowed but remain significant with about 1,000 new students annually over the past three years. District enrollment currently approximates 35,150 students. At present, demographic studies project anywhere from 10,000 to 15,000 new students over the next 10 years, maintaining pressure on the district to construct new campuses.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013 a district judge ruled that the state's school finance system was 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 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. The testimony, which began Jan. 21, 2014, is expected to last roughly three weeks. 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 and IHS 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829457

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 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.



Fitch Ratings, Inc.

Primary Analyst

Gabriela Gutierrez, +1-512-215-3731

Director

Fitch Ratings, Inc.

111 Congress Avenue, Suite 2010

Austin, TX 78701

or

Secondary Analyst

Steve Murray, +1-512-215-3729

Senior Director

or

Committee Chairperson

Michael Rinaldi, +1-212-908-0833

Senior Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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