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

--\$5.1 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 competitive sale the week of May 11. Proceeds will be used to refund a portion of the district's outstanding ULT debt for interest savings.

Fitch has also assigned an 'AA+' underlying rating to the bonds and affirmed the 'AA+' underlying rating on the following outstanding bonds (pre-refunding):

--\$21.4 million ULT school building bonds series 2006 and 2008;
--\$52.5 million ULT refunding bonds series 2005, 2007, 2010, 2012A, 2013, and 2014;
--\$52.5 million ULT tax school building and refunding bonds series 2011 and 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy of the district, 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 PROFILE: The district has consistently generated surplus results despite spending pressures from enrollment growth, expanding general fund reserves to very high levels. Moreover, these results were achieved while prudently maintaining a modest margin of taxing flexibility for operations.

TAX-BASE EXPANSION: Residential and commercial development has resulted in significant tax base growth in the last two fiscal years after a period of more modest growth post-recession. Growth prospects remain positive given the district's location, which straddles IH 35 between Austin and San Antonio, and ample undeveloped land.

MODERATELY HIGH DEBT BURDEN: The district's elevated debt burden reflects the accelerated enrollment growth prior to the economic downturn and associated facility construction, but it is mitigated by prospects for continued tax base growth with affordable debt plans.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial performance and healthy economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Located 30 miles north of San Antonio, the district encompasses 75 square miles and serves primarily the city of New Braunfels (the city) (rated 'AA', Stable Outlook by Fitch). The district's current population is estimated at 48,517 and has shown an average annual increase of nearly 3% since 2000.

STRONG FINANCIAL FLEXIBILITY

District finances are characterized by a strong trend of annual operating surpluses that have led to growing reserve levels, reaching an unrestricted fund balance of almost \$40 million or 75% of spending in fiscal 2014. Liquidity is also favorable, with cash and investments representing nearly 90% of general fund spending. The fiscal year 2014 results were better than the budgeted \$459,000 drawdown; the very high \$3.8 million surplus is due to conservative projections of student population growth and state and local revenues, combined with spending levels below budget.

Management reports no year-to-date significant variances with the 2015 budget, and year-end results will likely be positive despite the budgeted \$1.3 million drawdown. Preliminarily plans for fiscal year 2016 assume 3% enrollment growth, 4% tax base growth, and flat tax rates.

The budget maintains the current M&O tax rate at \$1.0133 per \$100 taxable assessed value (TAV), which is below the statutory rate cap of \$1.04 (or \$1.14 with voter approval). The debt service rate of \$0.326 per \$100 TAV has ample margin under the statutory \$0.50 new money rate cap. Fitch sees margin in both tax rates as favorable, as it provides the district flexibility to address any operational or capital pressures it might face in the current growth environment.

ECONOMY SUPPORTED BY PROXIMITY TO SAN ANTONIO

The local economy centers on tourism, manufacturing, distribution, healthcare, and retail trade. The city's location and access to the extensive economic bases of both San Antonio and Austin offers residents additional employment opportunities, as reflected in the area's historically low unemployment rate. The city's unemployment rate of 3.0% in February 2015 improved more than a percentage point from 12 months prior and remains below the rates of the San Antonio metropolitan statistical area (MSA; 3.8%), the state (4.3%), and the nation (5.8%). Median household income levels are above average.

ENROLLMENT AND TAX-BASE GROWTH CONTINUES

Enrollment continues to record steady gains, averaging about 2.3% growth annually from 2008-2015 with current enrollment at 8,400 students. TAV, however, increased by an average of more than 6.7% annually during the same period. The tax base quickly resumed growth post-recession with 2011 marking the only year of modest contraction. Growth resumed in fiscal 2012 and has picked up pace recently, with 11.6% growth in fiscal 2014 and certified values for fiscal 2015 marking a second year of significant growth at almost 10%.

Management expects additional moderate growth in student counts and TAV in the near-term as the ongoing northern expansion of San Antonio, as well as the availability of affordable land within the district, continue to spur additional development. Fitch considers this expectation reasonable.

ABOVE-AVERAGE DEBT BURDEN

District debt ratios are elevated but have come down recently as a result of ongoing population and tax-base expansion. Debt ratios stand at \$4,522 per capita and 5.1% of market value. Debt amortization is swift with 62% retired in 10 years.

The district has no remaining authorization to issue new money bonds. Given the current enrollment growth trends, the next facility need will be at the elementary school level and management reports potential for a bond election in the near-term At current tax base levels the district has ample margin in the tax rate to address capital needs.

LIMITED PENSION/OPEB OBLIGATIONS

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The TRS funded position is an estimated 75% using Fitch's more conservative 7% rate of return assumption compared with 83% 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.

Carrying costs, including debt service, pension and OPEB contributions, were a moderate 17% of fiscal 2014 governmental spending, benefitting from the state making all but a small percentage of the district's annual pension contribution. However, Texas school districts are susceptible to future funding changes by the state--as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

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 would likely follow with changes intended to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.