OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating on $350 million Tyler Independent School District, Texas (ISD; the district) unlimited tax bonds.

In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA+'.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further backed by the PSF bond guaranty 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+' IDR reflects the district's diverse economic resource base and healthy overall financial profile. The district's strong operating profile is supported by a sound level of expenditure flexibility, expectations for solid revenue growth, and exceptionally strong gap-closing capacity. Stable enrollment performance is expected to require manageable levels of capital spending in the near term. As a result, Fitch expects the district's modest long-term liability burden to remain low in future years.

Economic Resource Base

The district is located in Smith County in east Texas, serving a 2014 population of approximately 123,000 residents. Enrollment of approximately 18,000 students has remained stable in recent years. Taxable assessed value (TAV) has exhibited consistent moderate growth over the last decade due to the centrality of the area as a regional economic hub with notable health care and higher education sectors.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. The natural pace of revenue growth is expected to remain solid, given historical performance and ongoing enrollment stability. The district's legal ability to raise revenues is limited, as the current operating tax rate resides at the legal limit.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given limited enrollment-driven capital needs. The district retains solid spending flexibility with manageable carrying costs, reflecting state support for retiree benefits.

Long-Term Liability Burden: 'aaa' factor assessment

The combined burden of long-term debt and pension liabilities represents a moderate share of resident personal income. Fitch expects debt levels to remain low, given the district's minimal immediate debt plans. Retiree benefit obligations do not represent a significant burden on resident income.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's ample reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a solid level of spending flexibility in the event of revenue declines.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility and ample reserve levels, which Fitch expects it to maintain throughout the economic cycle.

Manageable Long-Term Liabilities: A material increase in long-term liabilities above the level currently expected could result in a downward rating pressure.

CREDIT PROFILE

Tyler ISD is located in Smith County in east Texas, along Interstate 20 between the cities of Dallas, TX and Shreveport, Louisiana. District enrollment has fluctuated modestly, but remains relatively stable across its numerous campuses, including 17 elementary schools, six middle schools, two high schools, and three special purpose campuses.

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 targeted revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).

Approximately 38% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. Enrollment, which is a key component of state funding, has grown over the last decade, though declining somewhat in recent years. The state demographer projects enrollment gains in the intermediate term, driving expectations for future state aid increases. Fitch's expectations for revenue growth absent policy action are based on anticipated additional enrollment gains, given the district's minimal revenue-raising ability.

District revenues have grown at a compounded annual growth rate of 2.7% over the last decade, performing ahead of national CPI but below GDP growth. Fitch expects the natural pace of district revenue growth in future years to remain in line with historical performance, given expectations for continued enrollment stability in future years and the overall maturity of the district's base.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is $1.04 per $100 TAV and would need voter authorization to be raised up to the statutory limit of $1.17. There are currently no plans to do so. The district levies a separate, unlimited debt service tax rate of $0.34 per $100 TAV, 67% of the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

The district spends the majority of its operating budget on instruction, and also funds some annual capital outlay from general fund revenues for maintenance and repairs on facilities.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given that the district is relatively mature and retains solid expenditure flexibility given a lack of enrollment pressure.

The district's solid expenditure flexibility reflects substantial control over workforce costs and modest carrying costs for debt service, pension and other post-employment benefits (OPEB), at 10.7% of fiscal 2015 governmental spending. Carrying costs benefit from state support for the vast majority of school district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is low at 9% of resident personal income, and is made up almost entirely by the district's slow-amortizing outstanding debt load. The district's manageable capital needs indicate that debt levels will likely remain modest in future years.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to 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 which state statute requires districts to assume. Like all Texas school districts, the district 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 in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has maintained a financial cushion at robust levels despite recessionary pressures and state funding cuts, garnering an 'aaa' assessment. Fiscal 2015 available reserves were $34 million, or a high 24.6% of spending. Fitch believes the district would use its considerable expenditure flexibility to maintain a satisfactory level of financial flexibility in a moderate economic decline scenario.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in using excess revenues to limit debt issuance and boost reserves. Fund balances have increased significantly in years of recovery despite state funding volatility. The district projects a modest deficit for fiscal 2016 to fund capital projects, maintaining reserves at high levels. The district commits to a reserve cushion equal to two months' operations, or a healthy 16.7% of spending.