OREANDA-NEWS. Fitch Ratings affirms Eanes Independent School District (ISD), Texas (Eanes or the district) unlimited tax (ULT) bonds as follows:

--\$121.8 million outstanding ULT bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district, without limitation as to rate or amount. Series 2006 ULT refunding bonds and series 2011 school building bonds are additionally secured by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable,' dated Sept. 4, 2014).

KEY RATING DRIVERS

SOLID FINANCES: The district maintains a sound financial profile and adequate reserves. Financial performance is typically favorable to the conservative budget.

AFFLUENT AUSTIN AREA DISTRICT: The largely residential area is characterized by very high wealth. The district lies immediately to the west of Austin and participates in the broad economic base of the region.

MATURE DISTRICT; ADEQUATE CAPACITY: The mature district is largely built out with adequate capacity for the foreseeable future. Capital needs are manageable.

HEALTHY TAX BASE: Fitch anticipates the district to realize ongoing tax base appreciation based on a relatively limited supply of high demand residential properties and a notable presence of commercial and retail enterprise.

AFFORDABLE DEBT AND PENSIONS: Fitch expects debt to remain low in relation to market value based on limited planned issuances and rapid amortization. Carrying costs (debt service, pension and other post-employment benefit [OPEB] contributions) place a low impact on the budget, benefiting from strong state-wide funding of school district pension and OPEB contributions.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial management practices. The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability. The rating assumes the district will work towards maintaining structural budget balance going forward.

CREDIT PROFILE

The district encompasses 31-square miles and serves the cities of West Lake Hills and Rollingwood as well as a small portion of Austin.

DISTRICT FINANCES ARE SOUND
The district has maintained a solid financial position through careful cost management. As a property rich district under Chapter 41 of the Texas Education code, Eanes makes substantial wealth equalization payments to the state, consuming a high 44% of its fiscal 2014 expenditure budget. Fiscal 2014 unrestricted reserves of \$33.3 million represent a sound 26.9% of spending, despite several years of modest operating deficits signaling expenditure pressures. Officials project a modest fiscal 2015 deficit and report plans for structurally balanced operations in fiscal 2016.

The district's maintenance and operations (M&O) tax rate is at the current statutory cap of \$1.04 per \$100 of taxable assessed value (TAV). While district officials do not plan to seek voter approval to increase the M&O tax rate, additional flexibility exists to levy up to \$1.17 with voter approval, although two recently failed general obligation (GO) bond elections signal voter disapproval of rate hikes.

STRONG LOCAL ECONOMY WITH APPRECIATING RESIDENTIAL VALUES
A high fiscal 2015 market value per capita of \$313,000 reflects an historically strong residential market and growing commercial base. Single family residential properties comprise 72% of the fiscal 2015 tax base, followed by commercial and industrial properties at 18%. The tax base realized five-year compound annual average growth of 2.6%, with a strong uptick of 6.3% in fiscal 2015 due primarily to home price appreciation. The tax base is without concentration. Top 10 taxpayers are represented by real estate, shopping center, and technology concerns.

The district's median household income is a high 238.6% of the U.S. average; per capita income, 259.5% of the U.S. Area unemployment is a low 3.5% as of November 2014 compared to 6.2% for the nation. Top area employers include government, education, manufacturing, and health care.

AFFORDABLE DEBT
The district's overall debt is relatively low at 2% of market value, reflecting very high wealth levels; debt per capita is elevated at about \$6,400. The debt service burden on the budget is moderate at 10.1% of general government expenditures.

Fitch expects the district's debt burden to remain relatively low given a rapid 10-year debt amortization rate of 82% and anticipated capital needs over the next several years. The district expects to hold a GO bond election in May 2015 for between \$50 million and \$70 million of GO bond issuance. Officials anticipate maintaining the current interest and sinking fund tax rate of \$0.1725 per \$100 of TAV for the foreseeable future based on the modest new issuance plans and current rapid amortization rate.

LIMITED PENSION AND OPEB OBLIGATIONS
The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan. Including debt service, pension and OPEB contributions, carrying costs were a low 10.8% of fiscal 2014 governmental spending, benefitting from strong state-wide funding of local school district pension contributions. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015 from 0% the year prior.

TEXAS SCHOOL DISTRICT LITIGATION
For the second time in the past two years a Texas district judge ruled in August 2014 that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.