OREANDA-NEWS. Fitch Ratings has assigned its 'AAA' rating to the following obligations of Eagle Pass Independent School District, Texas (the district) reflecting the guarantee provided by the Texas Permanent School Fund (PSF):

--\$10.7 million unlimited tax (ULT) refunding bonds, series 2015.

Additional information on the Texas Permanent School Fund is available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

In addition, Fitch assigns an 'A+' underlying rating to the series 2015 ULT refunding bonds.

The bonds are scheduled to sell via negotiation April 22. Proceeds from the bonds will be used to refund a portion of the district's outstanding debt for interest cost savings.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited tax levied against all taxable property in the district, and have been approved for the Texas PSF guarantee.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL RESERVES: Sound reserves have grown as a result of several years of generally positive financial performance. Budget balance has been largely preserved despite state funding reductions in some years.

MODERATELY CONCENTRATED RESOURCE BASE: The local economy centers on trade with Mexico and oil and gas production, and top taxpayer concentration is moderately high. The rating recognizes the potential tax base volatility driven by economic activity surrounding the Eagle Ford Shale formation. While taxable assessed valuation (TAV) growth has been strong in recent years, ongoing oil price declines are likely to affect future growth. Ongoing commercial development and state funding mechanisms should offset the potential impact on operating revenue.

BELOW-AVERAGE DEMOGRAPHIC PROFILE: Growth in per capita income has outpaced the state and U.S. but overall wealth indices and educational attainment remain very weak.

AFFORDABLE DEBT BURDEN: Outstanding debt levels are moderately low and the carrying costs for debt service and retiree benefits are modest due to state subsidies. The rate of amortization is average and the district's capital needs are limited. The district's debt service tax rate is well below the state's threshold for new debt issuance.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in the fundamental credit characteristics of the district, including its conservative budget practices and ongoing economic diversification. The Stable Outlook reflects Fitch's expectation that the district will continue to maintain its sufficient level of operating reserves.

CREDIT PROFILE

This 15,000-student district is located along the U.S.-Mexico border, approximately 150 miles southwest of San Antonio. The county seat, Eagle Pass (GO bonds rated 'A+' by Fitch with Stable Outlook), serves as the port of entry into Mexico at Piedras Negras, Coahuila.

LOCAL ECONOMY LINKED TO MEXICO & OIL/GAS ACTIVITY

The population of the Eagle Pass and Piedras Negras metropolitan area approximates 200,000, providing a solid base for trade and tourism that is complemented by agriculture and oil/gas production in the surrounding Maverick County. Increased oil and gas activity in recent years is tied to drilling in the Eagle Ford Shale, a large natural gas play spanning southern Texas and underlying portions of the district's tax base.

The drilling activity has spurred residential and commercial development which, together with positive reappraisals, produced a 10.7% gain in fiscal 2015 TAV to \$2.2 billion. Average annual TAV growth since fiscal 2008 has been strong at 7%, but future TAV changes related to the Eagle Ford Shale will likely be affected over at least the near term by price declines in oil. Fitch's rating assumes some tax base variability due to the district's participation in this volatile economic sector. However, ongoing retail, hospitality, and gaming development helps diversify the district's tax base to offset potential declines in mineral values.

The top 10 taxpayers comprise a slightly elevated 14% of fiscal 2015 TAV, with ConocoPhillips alone representing 4.6% (long-term Issuer Default Rating of 'A' with Stable Outlook). There is some energy-industry concentration among the top payers (four out of 10), which exposes the district to economic cyclicality in that sector. The remaining top payers span healthcare, retail, real estate, and utilities. The large amount of farm and ranch land in Maverick County makes up the largest share of the tax roll and contributes to an average per-capita market value of \$61,000.

Enrollment, on which state aid is largely based, has flattened in recent years, with fiscal 2014 enrollment up 0.5% from the prior year. Officials project flat enrollment to continue in the near term.

PERSISTENTLY HIGH UNEMPLOYMENT, LOW WEALTH

Top employers include the school district, retail, healthcare, and a casino; though the area's large migrant-worker labor force has contributed to historically elevated unemployment rates. County unemployment in January 2015 dropped to 11.7% from 13.7% year-over-year due to employment and labor force growth, though this figure is well above the state (4.6%) and U.S. (6.1%) rates. Resident wealth levels are below average, with per capita income at 53% of the state average and individual poverty at twice the national rate.

PRUDENT BUDGET PRACTICES ADD TO RESERVES

Conservative budgeting practices yielded operating surpluses in five of the last six years, with only a modest deficit in fiscal 2012 due to state budget cuts. Increased local and state revenues produced positive results in fiscals 2013 and 2014, as the district outperformed budget expectations in each year. The general fund produced a modest surplus of \$478,000 (0.4% of spending) in fiscal 2014, despite a \$3.6 million transfer to the capital projects fund. Fiscal 2014 unrestricted fund balance totaled \$16.3 million or a solid 12% of spending. Liquid general fund assets remained satisfactory.

The district's 2015 budget includes a general fund deficit of \$1.1 million (0.8% of spending), reflecting flat enrollment projections. However, officials expect to achieve a modest year-end surplus due to revised state revenue estimates. The district typically budgets conservatively for state funding and maintains a degree of expenditure flexibility in its ability to increase class sizes, which are currently below the state's maximum. Fitch expects that reserves and liquidity will remain sound.

LOW DEBT SERVICE BURDEN DUE TO STATE SUBSIDIES

Overall debt ratios, including direct and overlapping debt, are low to moderate at \$1,913 per capita and 3.1% of market value. Debt service is heavily subsidized by state funds totaling 63% of annual debt service. Net of state subsidies, debt service is only 1.6% of governmental fund spending. The rate of amortization is average, with 45% of principal retired in 10 years.

The district maintains a five-year facility plan that includes annual cash funding of improvements as needed. Due to the district's flat enrollment trend, officials indicate no near term borrowing plans. The current tax rate for debt service is \$0.11 per \$100 of TAV, which is very competitive with other school districts and affords significant capacity if debt needs were to arise.

AFFORDABLE PENSION OBLIGATIONS

Pension benefits are provided through the state's Teacher Retirement System (TRS), a cost-sharing multiple employer plan. The state pays the bulk of the required contributions on behalf of the district and currently funds TRS at 74.5% using an adjusted 7% investment return rate. The district's annual required contribution to TRS was \$597,000 in fiscal 2014, or a marginal 0.4% of governmental fund spending. Combined carrying costs for debt service and pensions totaled 2% of spending.

TEXAS SCHOOL FUNDING LITIGATION

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. Fitch expects the state will appeal the 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.