OREANDA-NEWS. Fitch Ratings has assigned a 'AA+' rating to Austin Community College District, Texas' (the district) limited tax debt as follows:

--$86.3 million limited tax and refunding bonds, series 2016.

The bonds are scheduled to sell July 20 via negotiation. Proceeds will be used to construct, equip, and renovate school facilities, refund certain outstanding maturities for debt service savings, and to pay related costs of issuance.

In addition, Fitch affirms the district's Issuer Default Rating (IDR) at 'AA+' and the 'AA+' rating on approximately $245.5 million in outstanding limited tax bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are a direct obligation of the district, secured by an annual property tax levy limited to $0.50 per $100 of taxable assessed valuation (TAV) on all taxable property within the district.

KEY RATING DRIVERS

The 'AA+' rating reflects Fitch's expectations of a continued, strong pace of growth in the property tax base, as well as use of the district's sound expenditure flexibility and ample tuition-raising ability, which should allow the district to preserve a sound reserve cushion throughout the economic cycles. Fitch expects the long-term liability burden to remain low as population growth pressures should be offset by continued economic and income gains.

Economic Resource Base

Most of the district's resources are locally derived from the robust and relatively diverse Austin-Round Rock metropolitan statistical area (MSA) economy, which is underpinned by a highly educated workforce. Fitch anticipates further strong gains in population, jobs, and income levels should drive additional economic expansion.

Revenue Framework: 'aaa' factor assessment

Fitch believes the district's natural revenue growth prospects (a portion of which is attributable to typically counter-cyclic enrollment) are strong and will continue to exceed U. S. GDP. The continuation of strong local economic trends appears likely and the district is able to capture that growth in property tax revenue. The superior ability of the district to raise tuition/fee revenue in the event of normal, cyclical revenue decline also supports the 'aaa' assessment.

Expenditure Framework: 'aa' factor assessment

The pace of spending growth should remain more or less aligned to revenues over time, led by passive operating revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases. Underlying the district's solid expenditure flexibility is its strong workforce control. Moderate carrying costs are projected to rise in conjunction with the district's future debt issuance plans, but remain consistent with a 'aa' assessment, aided by employer retiree costs shared equally with the state.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden as a percentage of personal income is low, comprised largely of overlapping debt. Fitch believes overlapping debt levels will increase with further population gains but, in line with historical trends, growth in the long-term liability burden should be offset by continued economic expansion.

Operating Performance: 'aaa' factor assessment

The district's high level of operating flexibility is underpinned by minimal revenue volatility, a strong local economy that drives steady property tax revenue gains, ample tuition-raising ability, and sound budgetary control. Use of this flexibility has preserved a strong and stable reserve cushion through the economic cycle. Fitch believes the district's operating cushion would remain consistent with a 'aaa' financial resilience assessment in a moderate economic decline.

RATING SENSITIVITIES

Financial Flexibility: Deterioration of the district's operating flexibility would likely lead to negative rating action.

Prolonged TAV Decline: The rating is sensitive to a trend of material TAV decline. While this is not deemed likely to occur in the near to intermediate term, Fitch recognizes the district's revenue base is reliant on property taxes and its operating levy is at the local cap.

CREDIT PROFILE

ACC operates 10 comprehensive campuses in its taxing jurisdiction, which is largely comprised of some of the region's most rapidly growing counties (Travis, Williamson, and Hays) and offers instructional programs at its educational centers throughout its larger, eight-county service area. The district's resources are primarily influenced by local trends, including enrollment and the tax base. Enrollment typically runs counter-cyclical to local economic conditions. A pattern of moderate enrollment declines over fiscals 2012-2014 was largely reflective of the area's strengthening economy, post-recession. Enrollment has since stabilized and remained flat in fiscal 2016 at about 20,000 in full-time equivalent students.

The MSA continues to grow strongly given ongoing population gains and the resulting economic expansion. IHS Economics anticipates regional job growth, personal income, and real gross metro product to significantly outpace the U. S. over the medium term with the greatest growth in the construction and professional and business services sectors. Growth resulting from the MSA evolving into one of the country's high-tech hubs lends some economic vulnerability to potential technology downturns, but the stable and sizeable presence of higher education (particularly the University of Texas) and state government counter-balances some of that risk.

The district's tax base is diverse, although some technology sector concentration is present. TAV trends generally reflect consistently solid annual gains. Fitch expects this trend will be sustained given a robust housing market, typically healthy increases in reappraisals, and significant residential, retail and commercial development underway or planned.

Revenue Framework

Property taxes, levied for both operations and debt service, presently provide about 40% of total revenues. ACC's operations have become significantly more dependent on the local tax base in the past decade. Additional tax revenue as a result of TAV growth has largely offset moderate declines in enrollment-related revenues, such as federal (largely Pell grant) revenue, state appropriations, and tuition, as well as some recessionary cuts to state funding.

The district's total tax rate is limited to $1.00 per $100 TAV according to state statute, of which no more than $0.50 per $100 TAV can be for debt service. However, the district's operating property tax revenue is capped at a much lower $0.09 per $100 TAV tax levy (the current rate) by locally voted limitations. The district maintains ample margin in its debt service tax rate at $0.01 per $100 TAV.

Nonetheless, Fitch expects the area's strong demographic and economic trends should drive much of the future revenue growth trends for the district, exceeding U. S.GDP and aligning with historical revenue performance.

Tuition/fee revenue accounts for about 20% of ACC's total revenue, and Fitch judges the district's independent ability to raise its tuition and fee charges as ample.

Third-party funding support stems from the long-standing commitment of the state (rated 'AAA'/Outlook Stable) and U. S. to fund higher education. Nonetheless, these revenue streams remain susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures

Expenditure Framework

Further revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases should lead the pace of spending growth to be more or less aligned with revenues over time.

The district maintains sound flexibility to adjust instruction (its largest operating expense) to evolving enrollment trends. The district retains strong control over its workforce costs and can adjust employee headcount and compensation accordingly, enabled by the absence of multi-year, contractual agreements or collective bargaining with labor. This expenditure flexibility is tempered by the district's need to recruit and retain a sufficient number of highly educated professionals for instructional purposes.

The district demonstrated its ability to rapidly respond to revenue declines and maintain structural balance following the last downturn with the implementation of various salary and staffing cost efficiencies as enrollment gains reversed in conjunction with a developing economic recovery.

Fixed carrying costs (the combination of total annual debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits [OPEB], net of state support) consumed a moderate 11.5% of total operating/non-operating expenses in fiscal 2015. Fitch expects carrying costs will increase somewhat given rising annual debt service projected and future tax-supported debt issuances planned but remain moderate given manageable retiree costs shared with the state.

Long-Term Liability Burden

Including this issuance, the long-term liability burden is low at 8.6% of 2014 MSA personal income, derived largely from overlapping debt in a growing MSA. Fitch expects the burden to remain consistent with a 'aaa' assessment despite pressure from ongoing population gains as growth in the long-term liability burden should be offset by continued economic expansion that drives additional income and population gains, in line with historical trends.

About half of the district's debt is supported by ample taxing margin under a separate levy of up to $0.50 per $100 TAV given much of the recent $386 million GO bond authorization (including this new money portion) has been issued. The remainder is supported by either the district's general operating revenues in the form of annually appropriated lease payments or a specifically pledged portion of tuition/fees. In total, the district's direct debt is a small fraction of the overall long-term liability burden.

District officials anticipate near-term issuance of the remaining bond authorization, which is expected to require a maximum two - cent tax rate increase under what Fitch believes to be reasonable TAV assumptions. The GO bond program was largely directed toward various renovation/expansion needs at existing facilities, and management anticipates there may be some positive effect on enrollment from the near-term completion of these projects.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides roughly half of the community college's (employer) annual pension contribution. Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $40.1 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL adjusted for 7% IRR remains small at less than 1% of personal income.

Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects there will be modest growth in the net pension liability even if investment returns meet assumed rates, although not outside of expectations for the 'aaa' assessment given how small the pension liability is relative to overall debt. In addition, the district remains vulnerable to future policy and funding changes by the state, similar to all Texas community colleges. The district also provides OPEB through the state-run, post-employment benefit healthcare plan, and its individual obligation associated with the decision to fully fund retiree dental care in this same plan remains small at less than 1% of personal income.

Operating Performance

The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves through the economic cycle. This assessment is informed by the district's recent fiscal history of unrestricted cash/investments as a proxy for unrestricted general fund balance.

The district has steadily increased funding for annual capital pay-go as key revenues and enrollment trends strengthen. Fiscal 2016 performance is projected to generate a healthy operating surplus (roughly $9 million or 3% of operational spending), positive to budget. Management expects these results, in addition to the year's budgeted set aside of $3 million, will maintain the district's internal reserve of unrestricted cash/investments at no less than 17% of spending at year-end (in line with policy).