OREANDA-NEWS. March 30, 2015. Fitch Ratings has assigned an 'AAA' rating to the following Aledo Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--\\$13.2 million ULT refunding bonds series 2015.

The 'AAA' long-term rating for the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

The bonds are scheduled for negotiated sale the week of March 30. Proceeds will be used to refund a portion of the district's outstanding ULT debt for interest savings.

Fitch also assigns an 'AA' underlying rating to the bonds and affirms the 'AA' underlying rating on the following outstanding bonds (pre-refunding):

--\\$49.8 million ULT refunding bonds, series 2006, 2007, 2012, 2013-A, 2013-B, and 2014;
--\\$60.3 million ULT school building bonds series 2008;
--\\$14.9 million variable rate ULT school building bonds series 2006-A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and also carry the Texas PSF bond guarantee (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 POSITION: The district's general fund balance position remains healthy, aided by recent restoration of state funding cuts and conservative budgeting practices.

TAX BASE IMPROVEMENT: The district's tax base has returned to growth after a period of contraction due to exposure to the Barnett Shale natural gas formation. Oil and gas industry concentration remains with the top 10 largest taxpayers, but mineral values now make up a smaller portion of total taxable assessed valuation (TAV).

WEALTHY SUBURB OF DALLAS-FORT WORTH: The primarily residential district benefits from its proximity to the broad Dallas-Fort Worth employment base and socioeconomic indicators are well in excess of state and national metrics.

WEAK DEBT PROFILE: The already high debt ratios may rise further as enrollment growth spurs near-term plans to seek voter approval for additional debt. Amortization is slow, in part due to the use of capital appreciation bonds (CABs).

RATING SENSITIVITIES

MATERIAL DECLINE IN FISCAL CUSHION: Fitch views the district's strong operating reserves as a key offset to the artificially low debt service tax rate. A decline in reserves below the board policy minimum could lead to negative rating action.

CREDIT PROFILE

Aledo Independent School District is located primarily in Parker County and includes the city of Aledo, a small, historically agricultural center. Aledo is located 19 miles west of Fort Worth (GOs rated 'AA+' by Fitch) near Interstate Highway 20.

AFFLUENT DISTRICT

Aledo continues to transition from having an agriculture-based economy to becoming an upscale suburb of Fort Worth. Numerous high-end residential developments have been completed in recent years. As a result, market value per capita is high at \\$160,000 in fiscal 2015. Residents are well-educated and affluent; the median household income in the district is twice that of the state and nation.

The district benefits from its proximity to the broad Dallas-Fort Worth metroplex employment base, and area employment and wealth levels are a credit positive. Employment growth in Parker County continues, expanding 2.5% for the 12-month period ending December 2014 and improving the unemployment rate to a low 3.7% from 5.1% over the same timeframe. The county's unemployment rate is lower than MSA, state, and national averages.

RESIDENTIAL TAX BASE GROWTH
The district's tax base is primarily residential, with moderate oil and gas exposure due to its location over parts of the Barnett Shale natural gas field. Recent declines in TAV were due to weakness in mineral values, which made up 19% of fiscal 2011 TAV but fell to less than 10% of fiscal 2015 certified values due to decreased drilling activity and lower prices. The tax base contraction was limited to fiscal years 2012 and 2013, with a cumulative decline a manageable 6.2%. Reappraisal gains and new construction have more than made up the losses with growth of 3.3% and 3.9% in fiscal years 2014 and 2015, respectively.

Over the near to medium term, TAV growth may accelerate as construction of a very large residential subdivision commences.
Several consecutive years of low gas prices have reduced the top taxpayers' share of the tax base, but industry concentration remains a concern. The top 10 taxpayers comprised 12.3% of fiscal 2015 TAV, and 7 of the top 10 are directly engaged in the oil and gas industry. Offsetting this concern is the large residential component of the tax base, stable home valuations, and prospects for continuing residential development.
Enrollment gains averaged just over 4% annually leading up to the recession and stagnated somewhat in the years after. Growth regained momentum in fiscal years 2014 and 2015, posting increases of 3% and 3.6%, respectively, mirroring tax base growth. Through fiscal 2017, management projects annual enrollment gains of 3% - 5% due to renewed home building activity. The district has ample land for development.

STRONG FISCAL CUSHION DESPITE DRAWDOWNS

Local property taxes account for 80% of general fund revenues reflecting the relatively high property tax wealth per student. Fiscal 2014 audited results were largely on budget, including an almost \\$3 million transfer (7% of spending) to the debt service fund; the transfer was necessitated by a tax rate swap approved by district voters in 2011. The unrestricted fund balance at year-end declined by \\$3.2 million to approximately \\$17 million, equal to a still robust 42% of spending.

The fiscal year 2015 budget keeps the tax rate unchanged and includes a \\$3.2 million deficit - equal to the amount of the debt service fund transfer. Management reports enrollment is in line with projections and the district will end the year as budgeted.

The tax rate swap shifted \\$0.13 of the total rate from debt service to operations, yielding enhanced state and local revenues for operations but also generating an annual debt service fund shortfall of about \\$3 million. The shortfalls were cured by use of debt service fund balance in fiscal years 2011-2013, and in fiscals 2014 and 2015 by a roughly \\$3 million transfer from the general fund to the debt service fund.
The tax rate structure is unconventional, but not unique among Texas school districts. Importantly, the rate swap could be reversed or the debt service tax rate could be raised without voter authorization. Going forward, the district plans to increase the debt service tax rate to service its annual payments in order to remain compliant with the newly adopted minimum general fund balance policy of 35% of spending.

ELEVATED DEBT BURDEN TO CLIMB

Overall debt levels are elevated at 5.8% of market value, including accreted interest, and will likely increase pending voter approval of an upcoming bond referendum. Annual debt service is level but the pace of amortization is slow, which also reflects the district's use of CABs. Approximately 10% of the district's debt is variable rate, with no associated swaps.
The district will seek approval for a \\$53 million two-part bond package this May to address current and expected enrollment growth. The district's \\$0.25 per \\$100 TAV debt service tax rate is well below the \\$0.50 statutory cap for new issuance approval, providing the district ample flexibility to address capital needs. Limiting this flexibility, however, will be the gradual increase in the debt service tax rate necessary to make payments on existing debt.

OTHER LONG-TERM LIABILITIES MANAGEABLE

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 TRS funded position is satisfactory at an estimated 73% using Fitch's more conservative 7% rate of return assumption compared with 81% funded as reported by 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. The district's cost for pension and other post-employment benefits (OPEB) represented 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 overall carrying costs manageable in the face of a growing debt burden. Combined carrying costs for the district (debt service, pension, and OPEB costs net of state support) consumed a moderate 18% 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 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.