OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Eagle Mountain-Saginaw Independent School District, Texas unlimited tax (ULT) bonds based on the Texas Permanent School Fund (PSF) and an underlying rating of 'AA-':

--$48.29 million ULT refunding bonds, series 2016-A;

--$4.5 million ULT school building bonds, series 2016-B.

The bonds are expected to sell via negotiation the week of Aug. 22, subject to market conditions. Series 2016-A proceeds will be used to refund certain outstanding obligations for savings. Series 2016-B proceeds will be used for the acquisition, construction, renovation, and equipment of school facilities.

In addition, Fitch has affirmed the 'AA-' underlying rating on the district's approximately $565 million in outstanding ULT bonds and the 'AA-' Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further secured by the PSF bond guarantee program, rated 'AAA' by Fitch. (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-' Issuer Default Rating (IDR) and unlimited tax bond rating are based on the district's strong operating profile, supported by solid expenditure flexibility. The rating also incorporates the district's moderate long-term liability burden.

Economic Resource Base

Eagle Mountain-Saginaw Independent School District (ISD) is located approximately seven miles from the center of Fort Worth. The district includes the northernmost portion of Fort Worth as well as the cities of Saginaw and Blue Mound. The district's enrollment grew by a rapid compound annual growth rate (CAGR) of about 8% for the 10 years (through fiscal 2014), but has realized a more moderate 3% CAGR over the past five years.

Revenue Framework: 'a' factor assessment

Fitch expects the district to realize strong revenue growth based on continuing enrollment gains, consistent with recent trends. The district does not have the independent legal ability to raise revenues as its ad valorem tax rate is at the statutory maximum.

Expenditure Framework: 'aa' factor assessment

Eagle Mountain-Saginaw ISD manages its largest expenditure, labor costs, through annual budgeting and control functions. The district's carrying costs are driven primarily by debt service and consume 19.4% of the operating budget. Fitch expects carrying costs to remain moderate based on the pace of overall spending growth relative to debt service. The state funds the majority of Texas school district pension and other post-employment benefit (OPEB) costs.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is also moderate at 13.6% of personal income. Fitch expects the burden to remain moderate based on growth in the district's population and income relative to debt needs. The district's net pension liability is modest.

Operating Performance: 'aaa' factor assessment

Fitch expects the district to demonstrate strong financial resilience throughout economic cycles based on its currently healthy level of reserves and its solid expenditure flexibility. The district typically outperforms its conservative budget.

RATING SENSITIVITIES

Growth Affordability: The current rating is premised on the district's ongoing ability to manage growth as demonstrated by affordable carrying costs.

CREDIT PROFILE

The district participates in the expanding Dallas Fort-Worth metroplex as reflected in its 7.6% taxable assessed valuation (TAV) CAGR between fiscal 2006 and 2016. Ongoing TAV growth is driven by commercial development and growth associated with the continued expansion of the Fort Worth Alliance Airport, a city-owned industrial airport designed for cargo and corporate aviation. The district's top 10 taxpayers are represented by oil and gas, utility, financial and commercial concerns, with moderate top 10 taxpayer concentration at 11% of fiscal 2016 TAV. The district does not face near term, material exposure to low oil and gas prices; mineral values comprise a modest 3% of the district's fiscal 2016 market value. The local economy is characterized by above average median household incomes and low unemployment rates.

Revenue Framework

Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).

The district's revenues realized an 11.5% CAGR for the 10 years ending 2014 driven primarily by rapid enrollment growth. However, growth has moderated over the past five years. Fitch's expectation for future revenue growth at the pace of U. S. GDP assumes the continuation of more recent moderate trends.

The district's maintenance & operation (M&O) tax rate is at the statutory cap, resulting in no ability to raise revenues through its tax rates. Through tax ratification election (TRE) voters approved a $0.13 increase in the district's M&O tax rate to $1.17 per $100 of TAV effective fiscal 2014. The total fiscal 2014 tax rate did not increase, as the debt service rate declined by the same amount. This tax rate restructuring provided a reported additional $650,000 in state funding, subsequent to a transfer of surplus funds for debt service. The district has the option to continue transferring all or a portion of these TRE revenues to the debt service fund or to retain them in the general fund in which case the district could increase its interest and sinking (I&S) fund rate.

Expenditure Framework

Instructional costs represent the most significant of Eagle Mountain-Saginaw ISD's operating costs at 61% of fiscal 2015 expenditures, as is typical for Texas school districts.

Fitch expects that the district's natural pace of spending growth will be in line with to marginally above its revenue growth.

Eagle Mountain-Saginaw ISD's greatest expenditure flexibility resides in its discretion over work force costs through the annual budgeting process. Carrying costs for debt service, pension OPEBs consumed 19.3% of the district's fiscal 2015 spending and are driven primarily by debt service, representing 17.6% of spending. The potential for increased carrying costs depends on growth of the district's operational spending in relation to its escalating debt service schedule. The state funds the vast majority of school district pension and OPEB contributions. Additional flexibility is derived from the district's ability to retain in its general fund all or a portion of $0.13 from its fiscal 2014 TRE.

Long-Term Liability Burden

Eagle Mountain-Saginaw ISD's long-term liability burden is moderate at 13.6% of personal income. Representing 79% of the burden, the district's direct debt of $576 million is characterized by a slow, 10-year principal amortization rate of 27%. Potential for the district's long-term liability burden to increase depends largely on growth and timing of additional direct debt in relation to the district's population and income growth. Eagle Mountain-Saginaw ISD has $158 million of authorized but unissued bond authorization subsequent to this issue and continues to monitor enrollment trends to inform the timing of its next issuance. The district's unfunded pension liability is negligible.

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, Eagle Mountain-Saginaw 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 about 1/2 of 1% of personal income. Eagle Mountain-Saginaw 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 $3 million in fiscal 2015.

Operating Performance

Fitch expects the district to maintain financial flexibility through a moderate revenue stress based on its solid expenditure flexibility and current sound financial cushion relative to its limited revenue volatility in the 15 years of history (fiscal 1999-2004) examined by Fitch. The district exercised its expenditure flexibility through a series of cost management efforts during state funding cuts of the 2012-2103 biennium to maintain a satisfactory financial cushion.

The district completed fiscal 2015 with an unrestricted general fund balance of $30.2 million representing a sound 19.9% of spending. A net deficit of $1.25 million (0.8% of fiscal 2015 spending) resulted from the funding of $2.7 million in nonrecurring capital projects from fiscal 2015 operating revenues. Officials estimate a dip in fiscal 2016 reserves to about $27.5 million (18% of spending) due to $6 million in property tax revenues the district estimates it did not realize in fiscal 2016 due to appraisal district software problems. Operational problems with Tarrant County's recently implemented appraisal software resulted in a backlog of appraisal updates and reduced property tax revenues.

The district's conservative budget management and control function underpin its generally positive operating margin. The district's fiscal 2017 surplus budget and subsequent year budget forecasts project achievement of the district's 90-day reserve target over the next several years. Fitch considers this projection reasonable based on the strength of regional growth, updates to and viability of the appraisal district software, and the district's track record of strong fiscal management.