OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following unlimited tax (ULT) bonds of Calallen Independent School District, Texas (the district):

--\$8.75 million ULT refunding bonds, series 2015.

The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. The bonds are expected to price via negotiated sale the week of March 30. Proceeds will be used to refund outstanding ULT debt of the district for interest savings.

Fitch also assigns an 'AA-' underlying rating to the series 2015 bonds and affirms its 'AA-' rating on the district's outstanding \$41 million ULT school building bonds, series 2008 (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and also have been approved for the PSF bond guarantee. For more information on the Texas Permanent School Fund guarantee program see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The district has successfully weathered a series of financial challenges, including a bankruptcy filing by the district's largest taxpayer and state funding cuts. Reserves are healthy, the result primarily of prompt spending reductions in response to these challenges. Restoration of state funding cuts and renewed tax base growth have eased operating pressures.

CONCENTRATED LOCAL ECONOMY: Petrochemical tax base concentration exposes the district to economic cyclicality, which is somewhat mitigated by the stability of an area-wide employment base anchored by military, education, government and health services. Ongoing oil industry weakness may reverse some recent economic gains generated by activity associated with the Eagle Ford shale exploration activity in south Texas. Unemployment is low, with above-average measures of income and wealth.

DEBT AND BENEFIT LIABILITY MANAGEABLE: Overall debt levels are moderate. The district's low carrying costs reflect slow amortization of direct debt and state funding for all but a small portion of pension and other post-employment benefit (OPEB) obligations.

LIMITED CAPITAL NEEDS: Management has identified a need for additional elementary classroom capacity, but recent economic uncertainty likely will delay any decision on new campus construction.

RATING SENSITIVITIES

LOSS OF FINANCIAL FLEXIBILITY: A material decline in the district's operating reserves likely would pressure the current rating. The Stable Outlook indicates such erosion is not expected over the coming review cycle.

CREDIT PROFILE

Calallen ISD is a small, 30 square mile district (enrollment roughly 4,000) located within the northwestern portion of Corpus Christi, the eighth largest city in Texas whose general obligation bonds are rated 'AA' by Fitch, with a Stable Outlook.

PETROCHEMICAL CONCENTRATION/OIL INDUSTRY VOLATILITY
The district includes a small portion of Corpus Christi, an industrial and commercial center in south-central Texas dominated by the petrochemical industry and boasting the sixth largest deep water port in the nation as measured by tonnage. Calallen ISD's top 10 taxpayers accounted for 26% of fiscal 2015 taxable assessed valuation (TAV), with the top taxpayer, Equistar Chemicals LP, representing a large 12%. TAV resumed growth in fiscal 2013 after a series of declines attributable to recessionary influences and a bankruptcy filing and negotiated appraisal reduction for Equistar. TAV grew more than 27% over the past two years to \$1.42 billion in fiscal 2015, reflecting primarily robust industrial activity in the district.

The regional economy has benefited the past several years from the explosive growth in oil exploration in the Eagle Ford Shale in south Texas. Much of the processing and shipment of Eagle Ford oil occurs in Corpus Christi, and area industries, including refining operations, have expanded in recent months. Equistar currently is expanding operations, and the additions are expected to add several hundred million dollars to the district's tax base when completed in fiscal 2017. The recent sharp drop decline in oil prices will negatively impact the pace of drilling in south Texas and likely will slow economic growth in the Corpus area. District management reports it will monitor the impact of any economic slowdown on enrollment and future classroom capacity needs.

Top area employers include the Corpus Christi Army Depot, Corpus Christi ISD, CHRISTUS Spohn Health Systems, H.E.B. Grocery, the City of Corpus Christi and Corpus Christi Naval Air Station. This diversity lends stability to an unemployment rate which typically trends below state and national averages, 3.8% as of December 2014. The district's income measures typically exceed state and U.S. averages.

SOUND FINANCIAL PROFILE
The district added to general fund reserves each of the past five fiscal years despite TAV declines, net state funding reductions of nearly \$2 million (approximately 10% of annual state operational funding), and low enrollment growth. Fiscal 2014 saw a boost in state funding and a nearly 4% increase in TAV, which facilitated a restoration of spending cuts implemented during the previous biennium (salary reductions and freeze, reduced work days, eliminated positions). Operations resulted in a boost to general fund reserves of slightly more than \$1 million, increasing the unrestricted fund balance to \$8.05 million or more than 25% of spending and transfers out.

Management's estimate for fiscal 2015 results indicates a further addition to operating reserves of roughly \$500,000, unless that and some portion of fund balance are used for capital outlays. State funding increased by \$250,000 for the year to help meet the new legislative requirement that local districts contribute 1.5% of salaries to the teacher retirement program. In subsequent years, the district must finance the entire contribution. Fall enrollment for fiscal 2015 was up only modestly (26 students or less than 1%) from the previous year, continuing a trend of minimal enrollment growth over the past decade.

The district's maintenance & operation (M&O) tax rate increased to the maximum rate of \$1.17 per \$100 of TAV in fiscal 2011 following a voter-approved transfer of \$0.125 from the debt service fund. The tax rate swap provides the district with approximately \$700,000 in additional state aid for operations, which flows to general fund balance each fiscal year for subsequent transfer to the debt service fund. Fitch views the tax rate structure as unconventional, but notes a number of Texas school districts have instituted similar swaps and also recognizes the debt service tax rate could be raised without voter authorization to repay outstanding debt or reversed if needed.

MANAGEABLE DEBT
Overall debt levels are moderate at \$3,532 per capital and 4.4% of market value. Amortization is slow at slightly more than 30% retired in 10 years. Management indicates a likely need for additional elementary classroom capacity in the next two to three years, but the current weakness in the oil and gas industry may delay a decision until any enrollment impact can be discerned. The district's fiscal 2015 debt service tax rate is unchanged from the previous two years and relatively low at \$.189 per \$100 of TAV; the low rate provides ample capacity for additional debt if necessary as it is well below the statutory cap of \$.50 for new debt issuance.

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 postemployment benefit healthcare plan. The district's cost for pension and 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. 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. The district's carrying costs (combined debt, pension and OPEB payments) were low at 8.2% of governmental fund spending for fiscal 2014, although that amount will be climbing with the additional district pension contributions.

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.