OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following Lewisville Independent School District, Texas' (LISD or the district) unlimited tax (ULT) bonds:

--\$61.3 million ULT refunding bonds, series 2015.

The bonds are scheduled to sell April 21 via negotiated sale. Proceeds will be used to refund certain outstanding maturities for savings and to pay related costs of issuance.

The Rating Outlook is Stable.

SECURITY

The series 2015 bonds are payable from an unlimited property tax levied against all taxable property within the district.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION MAINTAINED: General fund reserves and liquidity remain solid, enhancing the district's financial flexibility. Conservative and prudent fiscal management typically facilitates outperformance of the sizeable operating deficits budgeted annually.

FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in the broad Dallas-Fort Worth metro area and employment base along major transportation corridors. Population trends exceed those of the state. Income and wealth levels also are above average.

TAV STRENGTHENS: Positive taxable assessed value (TAV) trends have continued to strengthen and prospects for further tax base expansion appear favorable.

HIGH DEBT LEVELS: Steady enrollment growth trends will continue to drive the district's capital plans and already elevated debt ratios. Strong voter support for bond programs mitigates some concern over debt levels.

AFFORDABLE RETIREE COSTS: The state continues to fund the bulk of pension and healthcare costs on behalf of districts, resulting in an affordable fixed cost burden to the district.

RATING SENSITIVITIES

The rating is sensitive to material changes in the solid reserve levels that provide a level of financial flexibility consistent with the district's high-grade rating and/or any deterioration in its debt profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE
LISD encompasses 127 square miles and is located about 20 miles northwest of Dallas in Denton County. The district serves all or portions of 13 residential communities, including the cities of Lewisville, Flower Mound, Carrollton, and The Colony. Unemployment rates in Denton County are consistently below regional, state, and national averages and local wealth measures exceed state and national levels by 10%-60%, depending on the community within the district's boundaries.

STRONG FINANCES
Property taxes continue to provide the largest portion of the district's operating revenues at about 65% in fiscal 2014. The district generated solid net operating surpluses in four of the past six fiscal years despite realizing reduced state aid over fiscals 2012-2013, enabled by management's multi-year efforts in reducing staffing costs. General fund operations in fiscal years 2014 and 2015 were supported by a partial restoration of state funding levels. Management historically outperforms the year's adopted operating budget that usually includes a moderately-sized deficit as a percentage of spending under conservative revenue and expenditure assumptions. Receipt of additional federal and state revenue from higher actual enrollment as well as salary savings from budgeting full staffing costs in total contribute to the predictably improved financial performance by year-end.

Fiscal 2014 was no exception as the year's gap (\$23 million or 6% of budgeted spending) was closed and a \$3.2 million net surplus (1% of spending) boosted reserves. Unrestricted fund balance improved modestly to \$144.4 million or 36.5% of spending at fiscal 2014 year-end. This amount includes \$45 million (equivalent to slightly under 12% of fiscal 2013 general operational spending) held as a minimum reserve according to the district's formal fund balance policy. The district's liquidity position also remained robust. General fund cash and investments totaled \$174.4 million, or slightly more than five months of operational spending.

The \$427.3 million fiscal 2015 adopted operating budget increased by about 8% year-over-year (actual-to-budget) and included a similarly-sized \$18.7 million (4.4% of budgeted spending) drawdown on reserves. District officials provided a 3% pay increase to staff, which is estimated to have a recurring cost of about \$9.1 million, and plans to use about \$5.4 million for one-time capital spending on student technology. The budget gap has widened by \$5 million year-to-date due to some board-approved, carryover department and encumbrance spending. Nonetheless, management currently expects to narrow the year's gap, comparable to historical trends and in line with Fitch's expectations. A modest drawdown \$6.5 million (1.5% of budgeted spending) is anticipated at fiscal 2015 year-end given expenditure savings and stronger actual revenue performance.

Fitch does not foresee substantial changes to the district's strong financial performance and position. Fitch recognizes management's history of maintaining reserves well above its stated minimum. Unreserved/unrestricted reserves have totaled no less than 20% of spending since fiscal 2008 and management anticipates reserves to be at least 25% or a still solid three months of spending going forward. Material widening of the structural imbalance or failure to meet the stated reserve target would be of concern to Fitch.

STRONG TAV GAIN IN FISCAL 2015
The district's tax base is stable and primarily residential in character. Roughly 75% of the district is built-out. TAV gains prior to the recession were strong, averaging a compound annual growth rate of 6.5% from fiscal years 2003 to 2009. Enrollment trends followed at a fast-paced 5% average annual growth rate during the decade from fiscal 1997 to 2007. TAV and enrollment trends subsequently moderated given the recession and the district's maturing nature. Enrollment has grown at about 1% on average annually over the last five fiscal years (fiscals 2010-2015) to a total of about 53,000 students in fiscal 2015.

A balanced mix of residential and retail/commercial gains saw TAV growth strengthen to 5% in fiscal 2014 and double to 10% in fiscal 2015. Management projects TAV growth in the 4%-8% range for fiscal 2016. However, stronger TAV gains have yet to be reflected in the district's enrollment trends, although Fitch believes this is a possibility over the near term. Further TAV increases also appear reasonable to Fitch. Development underway includes a large retail store and distribution center (projected to contribute roughly \$1 billion in value at completion) that is yet to be fully added to the tax rolls. Some additional residential and retail/commercial development also appears likely to be spurred by Toyota's nearby North American headquarters, presently under construction.

HIGH DEBT/MANAGEABLE CARRYING COSTS
Debt ratios are high, reflecting the district's prior fast-growth years. Overall debt levels approximate \$4,925 per capita and 6.3% of fiscal 2015 market value on an accreted basis. Principal amortization is above average with roughly 63.5% of principal repaid within 10 years. This refunding is projected to provide fairly level annual debt service (ADS) savings of about \$900,000/year over much of the amortization schedule without restructuring or extending maturities. Carrying costs for the district's debt totaled a moderate 16% of governmental fund spending in fiscal 2014; the fixed cost burden increases to 18% at maximum annual debt service (MADS) based on current spending, but remains manageable.

Management indicates future GO bond election plans and use of \$30 million in remaining bond authorization are under consideration, although an election is not considered likely before November 2016. The district maintains some capacity in its existing school facilities. Fitch believes capital needs should remain manageable in this fairly mature district. This should reduce the district's reliance on continual tax base growth to fund capital needs with debt.

AFFORDABLE RETIREE COSTS
Fitch's concern about the district's overall long-term liabilities is lessened by its low retiree cost burden. Pension and other post-employment benefit (OPEB) liabilities (largely healthcare benefits) are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan in which the state provides the bulk of the employer's annual pension contribution. Total pension and OPEB contributions made by the district in fiscal 2014 totaled less than 1% of governmental fund expenditures.

The TRS funded position was 80.8% as of Aug. 31, 2013, although Fitch estimates it to be lower at 72.8% when a more conservative 7% return assumption is used. 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 consistently funds its annual required contributions. Increases in pension funding requirements beyond the 1.5% increase for all districts in fiscal 2015, while not presently anticipated, could create additional budget pressure. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable despite an elevated debt burden.

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. 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.