OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following Alvin Independent School District, TX bonds:

--$90.5 million unlimited tax (ULT) schoolhouse and refunding bonds, series 2016A.

The bonds are scheduled for negotiated sale the week of Aug. 1. Proceeds from the sale will be used to construct school facilities, purchase land, and refund a portion of the district's outstanding ULT bonds for debt service savings.

In addition, Fitch has affirmed the following ratings at 'AA':

--$504.7 million in outstanding ULT bonds;

--the district's Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.

KEY RATING DRIVERS

The 'AA' IDR and underlying ULT ratings reflect the district's solid financial resilience, aided by expenditure flexibility and sound operating reserves that help offset very limited revenue raising ability. The district's somewhat elevated debt burden is driven by rapid enrollment growth, and is expected to remain in the moderate range.

Economic Resource Base

Alvin ISD is located 25 miles southeast of Houston in the northern portion of Brazoria County, which allows residents access to the broad metropolitan statistical area (MSA) employment market. The district's population has grown at a rapid pace over the past decade, accompanied by robust tax base expansion at an annual average rate of 10%. Although the MSA economy is dominated by the chemical and energy sector, residential development makes up an increasingly large portion of the district's tax base.

Revenue Framework: 'a' factor assessment

Revenue growth prospects are strong, consistent with historical trends and incorporate projected enrollment growth. The district's independent ability to raise revenues is limited by state law.

Expenditure Framework: 'aa' factor assessment

A solid degree of expenditure flexibility incorporates moderately low carrying costs and management's control over workforce spending; the district has demonstrated its ability to curtail spending during times of weakened revenue. The natural pace of spending is expected to exceed revenue gains over the intermediate term given the district's current mode of fast growth.

Long-Term Liability Burden: 'a' factor assessment

The long-term liability burden is elevated, but still within the moderate range. Fitch expects the burden to remain in this range given the district's significant capital needs over the medium to longer term.

Operating Performance: 'aaa' factor assessment

Fitch expects the district's financial position to remain sound through the economic cycle based on healthy reserves and satisfactory expenditure flexibility. Multi-year forecasting and conservative budget practices support structurally balanced operations.

RATING SENSITIVITIES

Growth-related Pressures: The maintenance of operational balance and financial flexibility through conservative budgeting is a key mitigant to credit concerns over the district's large debt load and ongoing growth-related spending pressure.

CREDIT PROFILE

The local housing market has been strong over the past decade, aided by enhanced transportation corridors accessing the Houston MSA. Recent declines in mineral values have been more than offset by significant growth in the residential sector and modest commercial development, softening Fitch's concerns about energy industry concentration.

Revenue Framework

Operating revenues are a mix of state funding and local property taxes at 63% and 36% in fiscal 2015, respectively. Revenue growth is primarily a function of enrollment, as the state seeks to ensure a certain level of per-pupil spending for all state school districts. Enrollment has grown at around 6% annually in recent years, and is expected to continue at a rapid pace given the significant housing development in the district.

Alvin ISD's general fund revenues grew at a compound annual rate of 9.5% over the 10 years through fiscal 2014, much faster than U. S GDP. Prospects for continued revenue growth are strong.

The operating tax rate of $1.04 per $100 of TAV is below the legal limit of $1.17, but any increase would require voter approval. The district levies a separate, unlimited debt service tax rate of $0.38 for fiscal 2016. Management anticipates increasing this rate to $0.42 by fiscal 2018, leaving some margin below the statutory rate cap of $0.50 for new debt issuance. Fitch considers the district's TAV assumptions for this tax rate projection to be somewhat aggressive at 8% annually, although it is consistent with recent performance.

Expenditure Framework

Alvin ISD's spending profile is led by instruction at over 60% of general fund expenditures. The district regularly funds a number of facility improvements from the general fund, often through transfers to capital projects.

Fitch expects that the district's pace of operating expenditures will likely exceed revenue gains over the near to medium term as the district brings on new facilities and personnel to meet projected student growth.

The district retains a solid degree of expenditure flexibility in labor costs given a lack of collective bargaining and its use of individual employment contracts for teachers. Fixed costs for debt service, pensions, and other postemployment benefits are affordable at 10% of fiscal 2015 governmental spending (reduced to 7% after factoring in state support for debt service), incorporating slow amortization. Fitch expects that carrying costs will remain in the low to moderate range as the district continues its practice of funding capital items from both debt and general fund reserves.

Long-Term Liability Burden

This offering is the second from the district's 2015 bond program, which will finance six new campuses, a high school expansion, and a new stadium. The district's overall debt and net pension liability equal an elevated yet still moderate 24% of personal income, and Fitch expects that the liability burden will remain in this range as the district issues additional debt to meet growing capital needs over the medium to longer term. The district plans to issue its remaining $52 million of authorized bonds in spring of 2017, and anticipates seeking additional voter authorization as early as 2018.

The district participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68, TRS's assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption. Contributions are determined by state statute rather than actuarially and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions in order to improve plan sustainability over time.

The state assumes the majority of TRS employer contributions and net pension liability on behalf of school district, except for small amounts that state statute requires districts to assume. Like all Texas school districts, Alvin ISD is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts, as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

Operating Performance

Fitch believes Alvin ISD would utilize a combination of its expenditure flexibility and currently sound reserves to adjust to a moderate economic downturn. The district has historically preserved operational balance while making frequent draws on fund balance for capital projects. In order to preserve future bond capacity, the district funded a large portion of its high school expansion from the general fund in fiscal 2016 with a projected drawdown of about $27 million. Management indicates an ability to cut departmental spending or defer capital outlay during a revenue downturn in order to maintain compliance with the district's reserve policy of 17%-25% of spending.

Management's generally conservative budget assumptions have allowed the district to address growth needs while building financial flexibility during periods of economic recovery. Alvin ISD outperformed its fiscal 2015 budget with a smaller than projected general fund drawdown of $2.5 million for new facilities, ending the year with an unrestricted fund balance of $73.6 million (40% of spending). The district's five-year forecast reflects operational balance (before capital outlays) and compliance with fund balance policy under reasonable assumptions for expenditure growth.

In the event that enrollment growth exceeds current projections or tax base expansion occurs more slowly than forecast by management, the district's ability to issue bonds for new facilities could be limited by the state's tax rate cap of $0.50 per $100 TAV for new issuance.