OREANDA-NEWS. Fitch Ratings affirms the 'AA-' underlying rating for the following Burleson Independent School District, Texas' (the district) bonds:

--\$303 million outstanding unlimited tax (ULT) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The district demonstrates sound financial management through consistently positive financial performance, robust fund balance levels and conservative budgeting.

HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS: Debt levels are elevated, and amortization is slow. No new money debt issuance is planned, as the capital projects fund reserve remains sufficient to meet near-term capital needs.

SLOWER GROWTH ANTICIPATED: The district serves Burleson and surrounding areas south of Forth Worth, which experienced rapid growth until the recent sharp drop in natural gas prices. Growth is continuing but at a slower rate, easing facility pressures for the near term.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics, including the district's sound financial cushion and conservative financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE
Located approximately seven miles south of Fort Worth along Interstate Highway 35 West, the district serves approximately 11,000 students from the city of Burleson and surrounding areas.

CONSISTENTLY POSITIVE FINANCIAL PERFORMANCE

The district has a consistent track record of generating operating surpluses and was able to add to reserves even during the recession with effective cost control. Fiscal 2014 ended with a \$3.9 million surplus, boosting unrestricted general fund balance to a solid \$23.7 million, or 33% of expenditures plus transfers. The fiscal 2015 budget is balanced. However, another operating surplus is anticipated given the district's conservative budgeting practices and year-to-date revenue performance.

The district's current operating tax rate of \$1.04 per \$100 of taxable assessed valuation (TAV) is at the statutory maximum. The district has access to an additional \$0.13 with voter approval but has no plans to hold a tax ratification election. This reduced financial flexibility is partially mitigated by state funding, which provides about one-half of the district's operating revenues pursuant to the state funding formula, and is further helped by enrolment gains. The district's most recent demographic study projects annual 2% enrollment increases or a cumulative 11% gain (more than 1,200 students) in the next five years.

The district also receives Barnett Shale mineral royalties. Due to the unpredictability of the revenue stream (between several hundred thousand to over one million dollars annually in recent years), the district applies these funds to capital outlays in accordance with its conservative management policies.

GROWING BEDROOM COMMUNITY

Burleson's affordable land, convenient transportation routes, mineral exploration activity, and proximity to the larger Dallas-Fort Worth-Arlington employment base combined to fuel rapid population growth at an annualized rate of 3.5%, much faster than the state (1.9%) or the nation (0.9%) between 2000 and 2013. Management estimates only about half of the district is currently built out, and planned residential and commercial developments suggest growth will continue for the near to intermediate term.

Socio-economic indicators of Burleson are favorable, with a low unemployment rate at 3.6% in November 2014 (versus 4.6% in Texas and 5.5% nationally) and above average incomes. The district's median household income is at 132% and 129% of the state and national levels, respectively.

STABILIZING TAX BASE

Improving residential property prices contributed to a 6.5% gain in taxable assessed value (TAV) in fiscal 2015, the first since fiscal 2011. Prior years' TAV experienced fluctuations due to changes in mineral and housing valuations. The area benefitted from drilling activities over workable portions of the Barnett Shale within its boundaries, which slowed markedly after 2011 when natural gas price collapsed. Nevertheless, top taxpayers are still somewhat concentrated in the energy sector.

Fluctuations in taxable values have a neutral impact on total operating revenues as the state backfills on a per-pupil basis, but TAV changes affect the district's capacity to issue new debt due to debt service tax rate currently being at the maximum statutory rate.

HIGH DEBT, MANAGEABLE CAPITAL NEEDS

At nearly \$6,600 per capita and 8.3% of market value, overall debt levels are high and are expected to remain so, given the slow amortization of the district's direct debt (20% retired in 10 years).

The district has no remaining bond authorization and reports no plans to return to voters in the near term. The district is currently levying a debt service tax rate at the \$0.50 cap that the state attorney general imposes on school districts as a test before approval of new money debt issuance. In the absence of meaningful TAV growth, the district's ability to issue new debt is constrained.

However, capital requirements appear manageable without additional debt. Facility needs due to increasing enrollment will be addressed through the conversion of an old elementary school to a middle school, which will be funded from capital projects reserves. As of the end of fiscal 2014, the unrestricted capital projects fund balance was almost \$14 million, sufficient to cover estimated project costs.

HIGH DEBT SERVICE COSTS

Annual debt service costs are high, totaling 18% of fiscal 2014 governmental spending. Total carrying costs (including both debt and benefit contributions) for fiscal 2014 were at roughly the same level and considered in the moderate range. The district receives minimal state support of debt service payments, and the district's required contributions to pension and retiree healthcare programs historically have been nominal(totaling \$953,000, or around 1% of governmental spending for the year).

The district participates in the Teacher Retirement System of Texas (TRS), a cost sharing multiple-employer pension plan, and the TRS-run post-employment healthcare plan. The TRS funding position is satisfactory, at 73% using Fitch's more conservative 7% rate of return assumption compared with 81% funded as reported by TRS. The state imposed pension contributions on all Texas districts in fiscal 2015 of 1.5% on the statutory minimum portion of payroll, which will increase carrying costs. Further increases in district pension funding requirements beyond fiscal 2015, while not presently anticipated, could create additional budget pressure going forward.

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.