OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to Austin Independent School District, Texas' unlimited tax (ULT) bonds as follows:

--$84.9 million ULT refunding bonds, series 2016A;

--$152.6 million ULT refunding bonds, series 2016B.

The 'AAA' long-term rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable,' dated Aug. 5, 2015).

Fitch also has assigned an 'AA+' rating to the district's $31.2 million ULT refunding bonds, series 2016C, and the same 'AA+' underlying rating to the series 2016A and series 2016B ULT refunding bonds.

The bonds are scheduled to sell the week of Aug. 1 via negotiation. Proceeds will be used to refund outstanding commercial paper issued for capital projects, refund certain outstanding maturities for debt service savings, and to pay related costs of issuance.

In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA+' and the 'AA+' rating on approximately $819 million (pre-refunding) in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax pledge levied against all taxable property within the district. The series 2016A and 2016B bonds also carry the Texas PSF guaranty.

KEY RATING DRIVERS

The 'AA+' rating reflects the district's high level of operating flexibility and anticipated financial resilience through the economic cycle that is largely the result of its solid budgetary control, modest use of its strong reserve cushion, and manageable carrying costs. The likely continuation of income and population gains should keep the long-term liability burden low going forward.

Economic Resource Base

Most of the district's revenues, in the form of enrollment and property taxes, stem from the city of Austin's growing and diverse economy. Further gains in population, jobs, and income levels should drive additional economic expansion within district boundaries, although at a slightly less rapid pace than that of the larger Austin-Round Rock metropolitan statistical area (MSA).

Revenue Framework: 'a' factor assessment

District revenues are limited by state law according to the school funding system. The district has little to no ability to independently raise revenues. Nonetheless, Fitch believes growth prospects for revenues are solid given locally robust economic trends as well as the ability of district property taxes to capture that growth.

Expenditure Framework: 'aa' factor assessment

Revenue gains should lead the pace of future spending to remain aligned with, to slightly above revenues, absent offsetting policy action. Sound expenditure flexibility is a result of moderate carrying costs that benefit from state support for retiree costs and the district's ability to adjust its labor costs, if needed.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low, comprised largely of overlapping debt. Fitch expects it will remain consistent with a 'aaa' assessment, as future growth in long-term liabilities should be balanced against additional economic expansion.

Operating Performance: 'aaa' factor assessment

Underpinning the district's high level of demonstrated operating flexibility is solid budgetary control, planned, modest use of reserves, and limited historical revenue volatility. Fitch believes the district's operating cushion would remain in line with a 'aaa' financial resilience assessment in a moderate economic decline.

RATING SENSITIVITIES

Financial Flexibility: The rating is sensitive to the district's ability to maintain its high level of operating flexibility and structural balance in light of a controlled revenue environment (pursuant to the state's funding formula) that remains vulnerable to state funding cuts during economic downturns.

CREDIT PROFILE

The district is the sixth largest school district in the state with an enrollment base of about 84,000 students that primarily serves the city of Austin (GO bonds rated 'AAA'/Stable Outlook). Fitch expects some additional, modest enrollment decline will be realized over the near term, although this should be tempered by further population expansion in the district's broad service area, formalized student recruitment efforts, and growth from some of the district's charter-like educational offerings.

The city of Austin is the state capital and home to the University of Texas at Austin (State of Texas and University of Texas System; rated 'AAA'). Primary employment sectors include government, higher education, healthcare, and high technology. The city's highly educated workforce and availability of major research facilities continues to attract and support expansion of technology firms. Tourism has also become a growing economic driver.

The property tax base is diverse and predominately residential. Taxable assessed value (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 further residential, retail and commercial development underway or planned. 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," dated May 2016).

Revenue Framework

Most of Austin ISD's operating revenue is generated from its tax base; the district is considered property-wealthy in the state's funding formula.

Looking ahead, Fitch expects revenue gains to be solid - above the rate of inflation, but below U. S. GDP - slightly outpacing historical performance. Further population and economic expansion anticipated should drive this trend.

The district has almost no ability to independently raise its operating revenues. Per state statute, the district cannot increase its operating property tax levy further unless it receives voter approval. The district levies a separate, unlimited debt service tax rate of $0.12 per $100 TAV in fiscal 2016.

Third-party funding support stems from the long-standing commitment of the state to fund K-12 education. The district remains exposed to the loss of operational state aid from recessionary pressures on state revenues despite state aid providing a relatively slim portion of the district's total revenues.

Expenditure Framework

Instruction accounts for about 50% of operational spending. As a property-rich district under Chapter 41 of the Texas Education Code, a sizeable portion of the district's operating tax levy is recaptured by the state for distribution to less wealthy school districts. These payments totaled $181 million or about 20% of fiscal 2015 spending.

Fitch expects revenue gains should lead the pace of future spending and remain aligned with, to slightly above revenues. Growth in Chapter 41 payments mirror changes in TAV growth and, therefore, revenue trends.

The district has demonstrated its ability to adjust staffing and class sizes in order to control key expenditure items in times of fiscal stress without affecting its educational goals. This is tempered by the district's need to maintain a competitive salary structure in the Austin-Round Rock MSA employment base to recruit and retain highly educated professionals. Nonetheless, management's legal control of labor costs and headcount remains strong. The three-year contracts that underpin employment for about 40% of the workforce do not enable collective bargaining or contain wage or benefit provisions, and otherwise provide a measure of stability for the district in a labor environment of high, ongoing attrition.

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 relatively modest 9.6% of fiscal 2015 governmental spending. Fitch expects these fixed costs will slowly rise going forward as a result of current and future debt plans, but remain moderate and in line with the 'aa' assessment given low retiree costs that reflect primary state funding of this expense.

Financial exigency, a Texas Education Agency prerequisite for terminating contracted employees, was proactively declared by the district in fiscal 2011 in order to address recessionary state funding cuts. This special status allowed the district to eliminate nearly 1,300 positions by attrition or layoffs in order to close a gap created by a total $97 million cut in state funding over the fiscals 2012-2013 biennium.

Long-Term Liability Burden

Including this issuance, the long-term liability burden is low at 5.7% of 2014 MSA personal income, derived largely from the city's overlapping debt. In total, the district's direct debt of roughly $819 million (pre-refunding) currently comprises about one-third of the overall long-term liability burden. Fitch expects the burden to remain consistent with a 'aaa' assessment, as growth in the long-term liability burden should be offset by continued economic expansion that drives additional income and population gains, similar to historical performance.

The district will refund all of its currently outstanding commercial paper with this issuance; the district is one of few Texas school districts to utilize such a program. District officials anticipate paced issuance of the remaining $365 million ULT bond authorization over the near term and a review is underway of the key capital needs to be included in the next bond authorization, anticipated in 2017. Solid TAV gains have generally mitigated the debt service tax rate impact of the district's borrowings, enabling the district to implement its capital plan with limited tax rate impact. The district expects to again reduce its debt service tax rate by $0.01 per $100 TAV in fiscal 2017 despite its planned debt issuances. The bond program was largely directed toward various renovation/expansion needs at existing facilities, which Fitch believes may result in 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 the bulk of the employer's (the district) annual pension contribution. Recent reforms have lowered benefits and increased statutory contributions in order to improve plan sustainability over time.

Under GASB 67and 68, the district reports its share of the TRS net pension liability (NPL) at $102.3 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 a 7% interest rate assumption remains small at less than 1% of personal income. The district also provides OPEB through the state-run, post-employment benefit healthcare plan.

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 NPL 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. Like all Texas school districts, Austin 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

The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves and a high level of financial flexibility throughout the economic cycle.

The district typically builds its reserve position in periods of economic recovery when surpluses are achieved or one-time revenues are received. District policy directs a minimal unassigned reserve balance of 20% of spending (excluding the Chapter 41 payment) to be maintained. Unassigned reserves exceeded this threshold at $190.3 million or 26% of spending at fiscal 2015 year-end, although this cushion totaled a thinner 21% of spending when the year's large Chapter 41 payment was included.

Fiscal 2016 operations are projected to improve upon budget due to an even mix of under-spending and one-time revenue, resulting in a surplus ($17 million or roughly 2% of spending) that will boost reserves. Operations in fiscal 2017 are budgeted as structurally balanced with a slim surplus anticipated.