OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA+' underlying rating to the following Northside Independent School District, Texas unlimited tax bonds (the bonds or ULTs):

--$84 million unlimited tax refunding bonds series 2016A.

The bonds are expected to price via negotiation the week of September 19th. Proceeds will be used to refund debt for savings.

Additionally, Fitch has affirmed the district's $2.1 billion in outstanding ULTs and Long-Term Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy 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 and unlimited tax bond rating are based on the district's strong operating performance, supported by solid expenditure flexibility, very strong growth prospects, and a long-term liability burden on the low side of moderate.

Economic Resource Base

Northside ISD is located in the larger San Antonio metropolitan area and serves the rapidly growing northwest portion of Bexar County and surrounding areas, with a fiscal 2017 population of 665,559. Enrollment growth is steady but slower than that of the overall population. Median household income trends are above the regional and state-wide averages.

Revenue Framework: 'a' factor assessment

Northside ISD does not have the ability to independently raise revenues, but has realized strong revenue growth over the past 10 years at a rate in excess U. S. GDP. Consistent with regional trends, Fitch believes that growth prospects remain strong.

Expenditure Framework: 'aa' factor assessment

The district's spending is likely to grow in line with revenues. Expenditure flexibility is derived from discretion over workforce costs and moderate carrying costs. Fitch expects the district's carrying costs, driven primarily by debt service, to remain moderate based on issuance plans in relation to expected growth in the district's operating budget. The state assumes the majority of employer pension and other post-employment benefits (OPEB) contributions.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are on the low end of the moderate range at 11% of personal income. Fitch expects these to remain moderate because population and income growth are likely to be aligned with additional debt needs. The district's net pension liability is modest.

Operating Performance: 'aaa' factor assessment

Fitch expects the district to demonstrate strong financial flexibility through a moderate economic downturn based on its healthy financial cushion and solid expenditure flexibility. Strong financial management underpins the district's history of favorable operating performance and high reserve funding.

RATING SENSITIVITIES

Growth Management: The rating is sensitive to the district's ability to continue to successfully manage growth as demonstrated by its strong expenditure management and operating profile.

CREDIT PROFILE

Northside ISD serves a growing northwest San Antonio bedroom community. The district's taxable assessed valuation (TAV) has realized a long-term compound average growth rate (CAGR) in excess of 8% over the past 10 to 15 years during which time its enrollment CAGR has generally exceeded 3%. TAV growth remains high in fiscal 2016 and 2017, although enrollment growth is decelerating to a range of 1% to 1.5% per annum based on a lower number of children per new household. The district is about 2/3rds built-out.

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). In fiscal 2015, the district received about half its revenues from the property tax, with the bulk of the remainder from state sources.

The district's revenues realized a 5.7% CAGR for the 10 years ending 2014 on enrollment growth of 3.5% and TAV growth of 8.1% during the same period. The district's revenue growth exceeds that of enrollment growth because the district receives a one-year benefit from TAV gains before state funding is adjusted under the funding formula. The combination of expected tax base and enrollment growth bode well for the district's strong revenue growth prospects.

Northside ISD's maintenance and operations (M&O) tax rate of $1.04 per $100 of taxable assessed valuation (TAV) is at the statutory cap above which voter approval is required, leaving it with no independent revenue-raising flexibility. The district does not have plans to seek voter approval of an increase in its M&O tax rate.

Expenditure Framework

Instructional costs account for 68% of fiscal 2015 operating expenditures, which Fitch expects to grow in line with revenues, along with the district's other operations costs.

The district's expenditure flexibility is derived from discretion over its workforce costs and moderate carrying costs. The district's carrying costs, 13.2% of fiscal 2015 spending, are driven primarily by debt service at 11.3% of spending. Fitch expects carrying costs to remain moderate based on growth in the district's operational spending in relation to projected debt service and the assumed ongoing state funding for the vast majority of employer pension and OPEB contributions. The district's 10-year principal amortization is below average at 37%.

Long-Term Liability Burden

Northside ISD's long-term liability burden ($3.25 billion) is on the low side of moderate at 11% of personal income and is driven primarily by the district's debt ($3.1 billion total; $2.2 billion direct). The district expects to issue the remainder of its $373 million authorization over the next several years and plans to seek additional authorization as early as fiscal 2018 to address ongoing growth needs. The district's interest and sinking fund (I&S) tax rate of $0.3355 per $100 of TAV is below that communicated to voters at the 2014 referendum and well below the statutory new-issuance test ceiling of $0.50. Fitch expects the district's long-term liability burden to remain moderate because population and income growth are likely to be aligned with additional debt needs.

The district historically maintains a moderate amount of its debt portfolio in variable-rate unlimited tax bonds, estimated to remain below the district's policy ceiling of 30%. Terms of the variable-rate bonds include a three-to-five-year initial fixed-rate term, a soft put-back to bondholders in lieu of liquidity support, and the option to periodically reset the rate. Fitch considers the risks associated with a failed remarketing, which would result in an elevated interest rate of up to 8%, minimal. The district's rating indicates strong market access and the ability to refinance its variable rate debt, if necessary.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68 reporting, TRS's 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, Northside 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 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 one-half of 1% of personal income. Northside 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 $19 million in fiscal 2015).

Operating Performance

Fitch expects Northside ISD to demonstrate strong financial flexibility in a moderate economic downturn based on its strong expenditure flexibility and robust financial cushion.

Northside ISD completed fiscal 2015 with a sound $19.8 million operating surplus after transfers (2.5% of spending) and $232.2 million of unrestricted reserves (29.6% of spending). The district estimates a fiscal 2016 net operating surplus of $39 million (4.8% of spending) and $271 million of unrestricted reserves (33.7% of spending). The district anticipates maintaining at least $165 million in 'funds available for appropriation' over the next several years, defined by the district as the combination of unassigned funds and long-term investments.

Northside ISD typically outperforms its conservative budget. The district consistently builds reserves during economic upturns and maintains a high financial cushion to mitigate state funding uncertainty.