OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating for Lewisville Independent School District, TX's (the district) outstanding $1.2 billion unlimited tax (ULT) general obligation (GO) bonds.

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

The Rating Outlook is Stable

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district, and are further backed by the Texas Permanent School Fund (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+' rating reflects the district's growing economic resource base and the district's strong operating profile. Operations are supported by considerable expenditure flexibility, expectations for solid revenue growth, and a high level of gap-closing capacity. Given anticipated borrowing plans, the district's moderate long-term liability burden is expected to remain manageable in future years.

Economic Resource Base

The district encompasses 127 square miles and is located in Denton County about 20 miles northwest of Dallas (GOs rated 'AA+'/ Stable Outlook). It serves 13 residential communities, including the cities of Lewisville (GOs rated 'AAA'/ Stable Outlook), Flower Mound (GOs and certificates of obligation rated 'AAA'/ Stable Outlook), Carrollton (ULTGOs rated 'AAA'/ Stable Outlook), and The Colony.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. Fitch expects solid revenue growth in future years, given historical performance and nominal enrollment growth. The district's legal ability to raise revenues is limited, as the current tax rate is $1.04 and an increase would require voter approval.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line with to marginally above revenue growth, given manageable capital needs and modest projected enrollment growth. The district's moderate carrying costs reflect state support for debt service and retiree benefits, bolstering spending flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The combined burden of long-term debt and pension liabilities represents a modest share of resident personal income. Fitch expects debt levels to remain manageable, given the district's nominal enrollment growth, related capital needs and future borrowing plans.

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 considerable 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 currently high level of expenditure flexibility and ample reserve levels, which Fitch expects it to maintain through a typical economic cycle.

CREDIT PROFILE

The district services a population of approximately 304,400, and is comprised of five high schools, three 9th-grade campuses, two 9th-10th grade campuses, two career centers, one learning center, 15 intermediate schools, 40 elementary schools and one early childhood center. Fiscal 2015 enrollment of 52,698 students reflects modest cumulative growth of about 17% over the last decade. Minimal growth is projected in future years.

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 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 30% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. Enrollment is a key component of state funding and Fitch's expectations for revenue growth absent policy action are based on anticipated slight enrollment gains (given the district's minimal revenue-raising ability).

District revenues have grown at a compounded annual growth rate of 3.1% over the last decade, performing 0.8% ahead of national CPI and 0.4% under GDP growth. Fitch expects a comparable pace of district revenue growth in future years, given anticipated enrollment growth trends and expectation of continued taxable assessed value (TAV) growth in the intermediate term.

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 increased to the statutory limit of $1.17. Management reports no current plans to do so. The district levies a separate, unlimited debt service tax rate of $0.437 per $100 TAV, slightly below the statutory cap of $0.50 per $100 TAV for new debt issuance.

Expenditure Framework

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

Given slight enrollment growth, limited capital needs and modest borrowing plans, Fitch expects the natural pace of spending growth to remain in line with to moderately above revenue growth absent policy action.

The district's adequate expenditure flexibility reflects control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB) of about 18% of fiscal 2015 governmental spending. Carrying costs also benefit from state-wide support for school district pension and OPEB.

Long-Term Liability Burden

The district's long-term liability burden is moderate at approximately 15% of personal income, and is predominately made up of the district's quickly-amortizing debt load. The district's limited capital needs indicate that debt levels will likely remain manageable in future years, barring any major new borrowing by overlapping entities.

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 TRS 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 fiscal year 2015 for certain districts. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has bolstered its financial cushion to ample levels despite recessionary pressures and state funding cuts, garnering an 'aaa' assessment. Healthy operating margins provide considerable cushion to absorb sudden revenue declines. Fitch believes the district would use its solid expenditure flexibility to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.

The district has demonstrated a strong commitment to maintaining financial flexibility. Budgeting is conservative, and management has been proactive in maintaining operational balance throughout economic cycles. Unrestricted reserves have increased to a high $155 million at fiscal 2015 year-end, bringing the district's financial cushion to approximately 37% of spending.

Fiscal 2015 general fund revenues came in at about $426 million with expenditures coming in at approximately $417 million, leading to a net operating surplus of around $9 million. The fiscal 2016-2017 budget includes an operating deficit of $8.9 million, driven primarily by an increase in salaries and investments in new technology equipment. Although the district has budgeted a deficit for the year, consistently conservative budgeting practices are expected to produce an addition to fund balance by year-end.