OREANDA-NEWS. March 11, 2015. Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) guarantee and an 'A+' underlying rating to the following Needville Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--\\$8.6 million ULT refunding bonds, series 2015.

The bonds are expected to be sold through negotiated sale the week of March 16. Proceeds from the bonds will refund a portion of the district's outstanding debt for interest savings.

Fitch also affirms the 'A+' underlying rating on the district's \\$20.7 million in outstanding ULT bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy on all property within the district and are further secured by the Texas PSF bond guarantee program (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial performance is characterized by a series of positive annual results and substantial reserves despite the use of operating revenues for one-time expenses.

RESIDENTIAL COMMUNITY IN HOUSTON METRO AREA: Needville is located adjacent to the Houston metropolitan area, and as a result, Fitch views the long-term growth prospects of the local economy as a credit positive.

ABOVE AVERAGE DEBT BURDEN: Debt ratios are higher than average, although the district reports no borrowing plans for the foreseeable future. The debt service tax rate is very high.

RATING SENSITIVITIES

CASH-FUNDED CAPITAL NEEDS: The rating is sensitive to the district's ability to fund capital needs with cash given the district's debt service tax rate exceeds the new money issuance statutory cap of \\$0.50 per \\$100 of taxable assessed valuation (TAV). The Stable Outlook reflects Fitch's belief that the district will be able to address the scope of current needs with ongoing operating revenues.

CREDIT PROFILE

The district is located 45 miles southwest of Houston in Fort Bend County. The district is small, with an estimated population of 14,500 and a student population of roughly 2,900.

LIMITED LOCAL ECONOMY, PROXIMITY TO HOUSTON
Needville historically has been an agricultural community, but its character has gradually changed over the past decade due to expansion of the Houston metropolitan area. The city's population increase of roughly 3,000 since 2000 has included commuters to both the Sugar Land and Houston employment markets. Modest, steady growth is expected in the near term as developers expand into the primarily residential district.

TAV in the district experienced only a modest contraction post-recession from 2011-2012 and has grown somewhat unevenly since 2013. Certified values for fiscal 2015 show a modest 2.2% increase after a year of more robust 9.3% growth. District officials expect future growth trends between 3%-4% in the near term. These projections may be tempered by the district's exposure to a potential economic slowdown in the Houston metropolitan area given the slump in oil prices.

SIZABLE OPERATING RESERVES
The district has a history of strong financial operations marked by positive operating results and additions to reserves. Fiscal 2014 was the first year since 2007 that ended with a draw on reserves, although the \\$1.8 million decline in fund balance was attributable to one-time projects. The most significant project was an energy efficiency initiative that updated all district campuses, including the replacement of HVAC equipment, the installation of LED lighting, and other energy efficiency measures. Unrestricted operating reserves at year-end were still a healthy 32% of spending. The fiscal 2015 budget is balanced, and management reports year-to-date spending is in line with the budget and enrollment is exceeding expectations.

CASH-FUNDED CAPITAL NEEDS
Additional capital needs in the near- to mid-term are modest in nature, helping to ensure the district's ability to address capital expenditures with ongoing revenues. The district continues to levy a debt service tax rate in excess of the statutory new issuance cap of \\$0.50 per \\$100 of TAV, thus precluding the district from issuing any new money debt. As of fiscal 2015, the debt service rate had declined to \\$0.56 per \\$100 TAV from \\$0.61 one year prior. Management has elected not to transfer state operational (Tier 1) money to subsidize debt service since the district last sold new money bonds in 2010.

The series 2015 refunding bonds will deliver interest cost savings that are expected to further reduce the debt service rate by one cent, and there are additional plans to refund outstanding bonds as they become callable in the coming years. Fitch sees the high debt service tax rate as a credit risk and views favorably the efforts of the district to further lower the tax rate.

MIXED DEBT PROFILE
The district's overall debt burden is relatively high at nearly \\$5,040 per capita and 6.5% of market value. Payout is just below average at 43% and there is no use of capital appreciation bonds.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer plan. 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. The district's cost for pension and other post-employment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2014, as plan contribution amounts are principally paid by the state and district employees.

The state's payment of district pension costs is an important credit strength as it keeps carrying costs manageable. Combined carrying costs for the district (debt service, pension, and OPEB costs net of state support) consumed a manageable 12.5% of governmental fund spending in fiscal 2014. Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015.

TEXAS SCHOOL FUNDING 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.