OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following Northwest Independent School District (ISD), TX unlimited tax (ULT) refunding bonds:

--$61.5 million unlimited tax refunding bonds, series 2016A.

The bonds are scheduled for negotiated sale the week of July 25. Proceeds will be used for debt service savings.

The 'AAA' 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.

In addition, Fitch has assigned an underlying rating of 'AA' to the bonds and affirmed $752.6 million in outstanding unlimited tax obligations (pre-refunding) and the district's Long-Term Issuer Default Rating (IDR) at 'AA.'

SECURITY

The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA' IDR and ULT rating reflects the district's strong operating performance while successfully managing rapid enrollment growth. Long-term liabilities are moderate and will likely increase in the near term to expand facility capacity, although Fitch believes they will remain only a moderate burden on resources. Strong area residential growth is likely to continue in the mid-term, driving revenue growth through enrollment gains.

Economic Resource Base

The district is located in the northwest part of the Dallas-Fort Worth (DFW) metropolitan area and encompasses a large 232 square miles that include 16 rural communities in Denton, Tarrant, and Wise counties. Population and enrollment growth have been rapid since 2000 spurred by the availability of affordable land and location within the broad DFW metro. Median household income is well in excess of regional, state, and national averages.

Revenue Framework: 'a' factor assessment

Revenue growth has been robust, averaging at a level well in excess of the national GDP in the last 10 years. Future growth will likely mirror this trend through enrollment growth, although may be tempered by the rolling off of some state aid. The district's independent legal ability to raise revenues is limited by state law.

Expenditure Framework: 'aa' factor assessment

District spending has kept up with revenue growth, reflecting operating costs for new schools and additional teachers and staff. State support for pension and OPEB costs helps keep the fixed-cost burden in moderate territory and expenditure flexibility is solid.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is moderate. Additional debt plans to address capital needs may elevate the burden on resources somewhat, but levels are expected to remain in Fitch's moderate range due to expected continued growth in the resource base.

Operating Performance: 'aaa' factor assessment

The district has navigated the strong growth environment through management's commitment to conservative budgeting practices. In the future management will be challenged to maintain operational balance with the expiration of certain state program monies and growth related spending pressures. However, Fitch believes the district is well positioned to meet these challenges. Reserves are robust and provide ample cushion in the case of an economic downturn.

RATING SENSITIVITIES

Operating Performance: The rating is sensitive to the district's ability to align growth related spending to available resources, either through revenue enhancements or expenditure controls.

Long-Term Liability Burden: The rating is sensitive to capital needs that could become an elevated burden on the district's resource base.

CREDIT PROFILE

Residential and commercial development has returned taxable assessed valuation (TAV) to peak levels after modest losses in previous years from low natural gas prices. The district's growth prospects are positive given the availability and affordability of land.

Top 10 taxpayer concentration is down slightly but remains elevated at 17.7% in fiscal 2016, led by Devon Energy Corp. at 6% (Issuer Default Rating 'BBB+'/Outlook Negative). Devon Energy has held the place of top taxpayer since 2002, and the Barnett Shale accounts for approximately a third of the firm's overall production from a geographic perspective. While TAV losses pose minimal operational risk given the current school funding formula, TAV declines could limit the district's ability to address capital needs.

Revenue Framework

Property taxes are the largest revenue stream, comprising over three-quarters of general fund monies; state support accounts for about 20%. 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 and the district's revenue raising ability is limited. The district typically adds between 1,000-1,500 new students per year, bringing estimated total enrollment to 22,000 for fiscal 2017. Annual enrollment gains have been in line with demographic studies that project steady increases, and the district anticipates 5% growth annually through fiscal 2021.

The compound annual growth rate (CAGR) of district revenues was robust at 8.2%, well in excess of the U. S. GDP over the 10 years through 2014. Fitch anticipates robust enrollment growth will continue to drive revenue growth in excess of national averages. The loss of Additional State Aid for Tax Reduction (ASATR) in fiscal 2018 from the program's expiration may temper future revenue growth, albeit modestly given program revenues represented only 3.6% of general fund revenues in fiscal 2016.

The district's M&O tax rate of $1.04 per $100 TAV is $0.13 below the legal limit of $1.17. The district would need voter authorization to raise the rate. The district levies a separate, unlimited debt service tax rate that stands at $0.4125 per $100 TAV as of fiscal 2017, leaving margin under the Attorney General's new money limit of $0.50.

Expenditure Framework

The district's main expenditure item is salaries, common for local governments. Adopted budgets typically include salary increases and additional staff to address growth, as well as some use of operating revenues for capital projects.

District spending has generally kept pace with revenue growth to accommodate student body growth. This trend is likely to continue barring any changes in district policy.

The district's fixed-cost burden is moderate, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling a moderate 15.5% of 2015 governmental expenditures. Fitch expects the fixed-cost burden to rise slightly as the district issues debt to address capital needs, but to remain moderate given the likelihood of similar growth in the district's budget and strong state support for retiree benefits. Areas of flexibility are primarily in the area of instruction, including class sizes, staffing patterns, and teacher salaries.

Long-Term Liability Burden

The district's total debt and net pension liability represent 18.2% of personal income. The district has $100 million in unissued but authorized debt from the 2008 and 2012 referenda and management reports it is undergoing a comprehensive internal review of capital needs and respective funding sources. Fitch will continue to monitor the district's ability to address capital pressures in relation to its tax base and budgetary flexibility as it implements its growth-related capital plan, and expects the debt burden will rise but remain a moderate burden on recourses. Amortization is sluggish at 41% retired in 10 years, although it has improved slightly with the current refunding.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. Like all Texas school districts, Northwest 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 in fiscal 2015. The proportionate share of the system's net pension liability paid by the district is minimal, representing 0.6% of personal income.

Operating Performance

The district has grown their financial cushion to robust levels despite enrollment pressures and state funding cuts. Moreover, the district retains solid expenditure flexibility to manage well through economic downturns. General fund balances have increased to a high $73.4 million as of fiscal 2015, equaling 46% of spending. Management reports a drawdown of fund balances of up to $6 million for the year that ended June 30, 2016. Fiscal 2017 is anticipated to be another deficit year as management uses robust reserves to address growth-related operating spending but reports future budgets will include staffing adjustments in order to maintain sustainability.

The district's current financial forecast projects annual operating gaps that grow to a substantial $21 million (11% of projected revenue) in fiscal 2020 without any policy action, partly due to the loss of state ASATR monies. While the forecasted imbalance is material, the district has also built up very high reserves in anticipation of this funding uncertainty. Given management's history of conservative budgeting practices and prudent financial management, Fitch believes the district will make necessary expenditure adjustments or revenue enhancements (by way of a tax ratification election) in order to preserve its strong financial position in the long-term.