OREANDA-NEWS. Fitch Ratings affirms the 'AA+' underlying rating on the following Eanes Independent School District, TX bonds:

--$155.96 million outstanding unlimited tax (ULT) bonds.

Fitch also affirms the district's Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district, without limitation as to rate or amount.

KEY RATING DRIVERS

The 'AA+' IDR and ULT rating is based on the district's strong operating profile, supported by solid expenditure flexibility, and a low long-term liability burden.

Economic Resource Base

Eanes ISD, a 31 square miles wealthy district, is situated on the western boundary of Austin (IDR 'AAA'; Outlook Stable). The mature district has a stable enrollment base of about 8,000 students and serves the cities of West Lake Hills and Rollingwood, as well as a small portion of Austin.

Revenue Framework: 'a' factor assessment

Fitch anticipates solid revenue growth driven by the district's expanding economic base. As a property rich district under Chapter 41 of the Texas Education Code, the district's revenues are driven largely by property values. The district's independent ability to raise revenues through its ad valorem tax rate is limited by state law.

Expenditure Framework: 'aa' factor assessment

The district's resource base is sufficient to support anticipated expenditure growth. Solid expenditure flexibility is reflected in moderate carrying costs and management's ability to adjust labor costs, if needed.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities are a low burden on resources at 7% of personal income. Fitch expects these to remain consistent with a 'aaa' assessment based on income trends relative to debt needs.

Operating Performance: 'aaa' factor assessment

Fitch believes the district would use its expenditure flexibility to maintain a high level of financial resilience during a moderate economic downturn. The district has institutionalized mature planning practices and typically meets or outperforms its budget.

RATING SENSITIVITIES

Financial Flexibility: The IDR and general obligation ratings are sensitive to the district's maintenance of low liabilities and sound financial flexibility, as reflected in a solid reserve cushion, as well as Fitch's expectation for solid economic and revenue growth prospects.

CREDIT PROFILE

Eanes ISD lies immediately to the west of Austin and participates in the broad economic base of the region. The district's high fiscal 2016 market value per capita of $349,000 reflects a historically strong residential market and growing commercial base. Single family residential properties comprise 71% of the fiscal 2016 tax base, followed by commercial and industrial properties at 22%. The tax base realized 10-year compound annual average growth of 6% through fiscal 2015. An even greater 8.6% increase in fiscal 2016 is attributed to both new property additions and property appreciation.

The tax base is without concentration. Top 10 taxpayers are represented by real estate, shopping center, and technology concerns. While near-term tax base growth remains strong, an analysis of home price and economic trends over time leads Fitch to believe Texas home prices may be above long-term sustainable levels (for more information, see Fitch's 'U. S. RMBS Sustainable Home Price Report,' published May 2016). The rating assumes a moderate amount of growth going forward.

Revenue Framework

The district is considered property wealthy and relies almost entirely on local property taxes to support operations.

Fitch expects Eanes ISD revenue growth to approximate the pace of U. S. GDP growth based on the trajectory of tax base growth and development plans.

Eanes ISD's maintenance and operations (M&O) tax rate of $1.04 per $100 of taxable assessed valuation (TAV) is at the statutory cap above which voter approval is required, resulting in almost no ability to independently raise revenues. The district benefits from a robust local fund-raising program, not subject to limitation. While donations ($2 million committed for fiscal 2017) represent a modest 1.5% of total revenues, this funding source is material in relation to the district's net operating performance.

Expenditure Framework

Instructional costs account for 55% of spending. As a property rich district under Chapter 41 of the Texas Education Code, a sizable portion of Eanes ISD's M&O levy is recaptured by the state for distribution to less wealthy school districts. These payments totaled $62 million in fiscal 2015, representing 48% of spending.

Fitch expects the district's spending to grow in line with revenues. Growth of Chapter 41 payments mirrors the trend line of taxable assessed valuation (TAV) growth and, therefore, revenue trends.

The majority of the district's expenditures, workforce spending, offer some flexibility with respect to staffing and salary adjustments, if needed. Transfer students, comprising about 5.5% of the district's enrollment base, provide an additional source of flexibility. Transfer decisions are made annually and provide an opportunity for the district to optimize class sizes and offset a portion of recapture costs. As a mature district, Eanes ISD does not experience enrollment-growth-related spending pressure. The district's moderate carrying costs, 14.3 % of spending, reflect the state's payment of state-wide school district pension contributions. Fitch expects the district's carrying costs to remain moderate and to potentially decline as amortization of existing debt exceeds planned debt issuances.

Long-Term Liability Burden

The district's long-term liability burden, 7% of estimated personal income, is expected to remain consistent with Fitch's 'aaa' assessment because income growth is likely to be aligned with additional debt and the district's unfunded pension liability is negligible. Representing about half of the burden, the district's direct debt is characterized by rapid amortization (78% in 10 years). The potential for ongoing early debt retirement, funded through strong tax base growth, applies additional downward pressure on the district's long-term liability burden. Facility needs are adequate for the foreseeable future, and new debt plans are not expected to elevate the district's I&S tax rate, a low $0.1725 per $100 of TAV, well below the statutory cap of $0.50 for new debt issuance.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68 reporting, TRS' 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. The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts that state statute requires districts to assume. Like all Texas school districts, Eanes 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 that became effective fiscal 2015. The district's pension contributions are determined by state statute, rather than actuarially, and similarly to other Texas school districts, have historically fallen short of the actuarial level. Recent state reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.

The proportionate share of the system's net pension liability paid by the district is minimal, representing less than 0.5% of fiscal 2015 market value. Eanes ISD's contributions are currently limited to the 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $1 million in fiscal 2015.

Operating Performance

Fitch expects the district to reflect a high level of financial resilience during a normal economic downturn based on its solid expenditure flexibility and currently sound reserve levels.

The district completed fiscal 2015 with $30.4 million in unrestricted reserves, representing a solid 23.2% of spending and estimates reserves of $27.5 million (18.7% of spending) for fiscal 2016.. Officials anticipate modest reserve draws in fiscal 2017 and 2018 and resumption of structural balance in fiscal 2019 based on natural tax base growth and without necessitating expenditure reduction. Fitch expects the district to exercise its expenditure flexibility, if needed, to maintain reserves above its 30% of spending floor (without regard to recapture costs - - the contra revenue representing chapter 41 payments to the state), which translates to about 13% to 14% of unrestricted reserves in relation to total spending.

The district typically outperforms its budget and does not as a practice defer costs. Officials are taking advantage of the current economic expansion to naturally regain structural balance by fiscal 2019. This operating strategy remains consistent with prior years' planning models and allows the district to take advantage of ongoing tax base growth to balance the budget in lieu of exercising its expenditure flexibility to adjust headcount or salaries.