OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA' underlying rating to the following San Antonio Independent School District (ISD), Texas (the district) unlimited tax (ULT) bonds:

--\$307.4 million unlimited tax school building and refunding bonds, series 2015.

The bonds are scheduled for negotiated sale the week of May 4. Bond proceeds will be used to refund outstanding series 2005 bonds, to restore capacity for the district's commercial paper program and for district improvements.

In addition, Fitch affirms the following ratings:

--Approximately \$547.1 million (pre-refunding) in outstanding ULT bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district, without limitation as to rate or amount and are further secured by the PSF bond guarantee program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sept. 4, 2014).

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: The district typically outperforms the budget and achieves surplus operations, resulting in a sound financial cushion.

STATE FUNDING RELIANCE: The district relies on state funding for the majority of its operations. Sound reserves and available cost containment measures help to mitigate the district's exposure to state funding uncertainties.

MIXED DEBT PROFILE: Overall debt is high, but its impact on the budget is manageable, reflecting state support for debt service. Well-funded pensions also reflect strong state support.

SAN ANTONIO METRO ECONOMY: A low unemployment rate results from the city's broad and growing economy. The district's inner city service territory is characterized by low wealth and high poverty levels.

RATING SENSITIVITIES

DEBT BURDEN: Ongoing sizable growth in the district's already high debt burden could pressure the current rating.

SOUND FINANCES DRIVE STABLE OUTLOOK: Fitch expects the district to maintain its sound financial profile to counterbalance concerns over high debt levels and below average wealth levels, credit factors that Fitch believes limit the rating to its current level in at least the near term.

CREDIT PROFILE

The district encompasses 79 square miles in the downtown portion of San Antonio (the city, Fitch GO rated 'AAA'), which is located in Bexar County. The district serves over 53,700 students.

BROAD ECONOMY WITH MILITARY PRESENCE

The district benefits from its location within the broad and diverse city of San Antonio. The city's economy includes a sizable military presence and strong representation by trade, tourism, healthcare, finance, and telecommunication sectors. Employment gains reflect the strength of tourism and construction activity, as well as the impact of nearby Eagle Ford Shale drilling. The city's unemployment rate of 3.7% as of Feb. 2015 compares favorably to a U.S. rate of 5.8% for the same period.

The district's median household income represents just 58.3% of the US median and the rate of poverty is about double the U.S. rate, reflective of the urban demographics. Fiscal 2015 taxable assessed valuation (TAV) per capita is a low \$48,000. After posting gains through fiscal 2010, the district's tax base flattened over the subsequent three years. TAV increased by a solid 3.4% in fiscal 2014 with an additional 4.7% gain in fiscal 2015.

SOUND FINANCES DESPITE ENROLLMENT DECLINES AND STATE FUNDING CUTS

The district addressed financial pressure stemming from declining enrollment and fiscal 2012 - 2013 biennium state funding cuts with school closures and leaner staffing levels. These expenditure cuts achieved significant savings and have allowed the district to consistently maintain structural balance.

The district completed fiscal 2014 with a \$2.0 million net surplus (.5% of spending). Fiscal 2014 reserves of \$65.8 million represent an adequate 15.9% of spending and include a strategic initiatives component. The district established the strategic initiatives fund for periodic compensation increases to address the competitive labor market, deferred facility maintenance, and technology.

Officials estimate fiscal 2015 unrestricted reserves at a similar level. The preliminary fiscal 2016 budget is structurally balanced and assumes flat enrollment, in noted contrast to the five year declining trend, and reflecting the district's expected enrollment gains associated with newly renovated facilities and new program offerings.

HIGH DEBT; ONGOING CAPITAL NEEDS

Overall debt, including a sizable overlapping component, is high at 9.3% of fiscal 2015 market value. However, the district's debt service burden consumes a moderate 6.4% of fiscal 2014 governmental expenditures and a lower 4.7% of spending considering state support for debt service.

Fitch anticipates overall debt to remain elevated due to the district's ongoing capital needs and expected growth in the overlapping component. Given the already high level of debt, additional growth at a rate greater than tax base growth could pressure the current rating.

The district expects to largely wrap up its current capital program -- renovation of 21 schools -- by November 2015, with completion by the end of fiscal 2016. Officials expect to issue about \$100 million in commercial paper (CP) to complete the program. The district does not anticipate seeking additional GO authorization prior to 2017.

The current rating assumes that the district's variable rate debt will remain within the district's current target of 30%. In addition to the CP program, the district's debt structure includes \$97.7 million in variable rate ULTs, issued in 2014. Terms of the district's series 2014 VRULTs include three and four year initial fixed rate terms, a soft put back to bondholders in lieu of liquidity support and optionality to periodically reset the rate to a long-term fixed basis. Fitch believes this structure presents a manageable risk in terms of interest rate exposure. These offerings plus the CP program capacity comprise about 30% of the district's debt total.

Variable rate debt at the maximum target level would expose the district to a high level of interest rate risk, especially for a school district. Fitch therefore views this somewhat liberal policy with concern.

In the case of a failed remarketing for the series 2014 bonds, the district would face a risk of paying an elevated interest rate, capped at a fixed-rate of 7% as applicable to the district's outstanding VRDOs. The district maintains healthy reserves in its debt service fund (cash and investments totaling \$84 million at fiscal 2014 year-end), and Fitch believes that this cushion serves as a mitigant to interest rate exposure.

MANAGEABLE CARRYING COSTS

The district participates in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension plan. Other post-employment benefits (OPEB) contributions paid by the district are modest. Total carrying costs for debt service, pension, social security, and OPEB, are low at 7.6% of fiscal 2014 governmental spending, and even lower considering state support for debt service at 5.5% of spending.

TEXAS SCHOOL DISTRICT 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.