OREANDA-NEWS. Fitch Ratings has affirmed Grayson County Junior College District, Texas' (the district) outstanding limited tax general obligation (LTGO) bonds as follows:

--\$37.5 million in outstanding GO bonds at 'AA-'.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

Ad valorem tax levied on all taxable property within the district, limited to up to \$0.50 per \$100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE DRIVES POSITIVE OUTLOOK: The district has consistently achieved solid, positive operating margins over several years that have steadily improved reserves to a very sound level. Notably, the positive budget performance has occurred despite recent enrollment declines and prior years' state funding cuts. District finances are characterized by a relatively diverse revenue base. The district maintains ample revenue-raising and more modest expenditure flexibility.

BELOW AVERAGE SOCIOECONOMIC METRICS: Area population growth trends are modest, which provides a level of constraint to the locally concentrated enrollment base. County income/wealth and educational attainment levels fall below state and national averages.

LIMITED ECONOMIC BASE: A sizeable portion of Grayson County remains rural and agricultural in nature. The local economy is anchored by employers and taxpayers predominately in the healthcare, government, education, and manufacturing sectors.

MODEST TAV GROWTH: Modest TAV growth since the recession strengthened in fiscal 2015 in large part due to the completion of a new power plant coming on the tax rolls. The district maintains a low and stable tax rate, well below the voter-approved cap.

MODERATE DEBT AND OTHER LONG-TERM LIABILITIES: The overall debt burden is moderate. Capital needs remain manageable and are expected to be met with pay-go capital spending. Carrying

RATING SENSITIVITIES

MAINTENANCE OF FISCAL TREND: Fitch views the continuing trend of budgetary balance and strong fiscal flexibility as key mitigants to the district's slightly below average socio-economic profile, generally modest tax base expansion, and still weak enrollment trends. Continuation of this trend will be the key area of focus when evaluating the rating's ability to change.

CREDIT PROFILE

The district serves primarily Grayson County with an estimated population of 124,000. Population gains since 2000 have been relatively modest, averaging about 1% annually or roughly half of the state's rate of growth. The county is located north of the Dallas-Fort Worth metropolitan statistical area (MSA) along the Texas-Oklahoma border, bisected by U.S. Highway 75.

TAX BASE, ECONOMIC STABILITY

The area's top ten employers, which consist primarily of health care, education, government, and manufacturing concerns, provide a fairly stable employment base of roughly 17% of total county employment. Unemployment declined on a year-over-year basis to 3.9% in March 2015 from 5.2% the prior year, although a modest 1% loss of labor force over the 12 months largely contributed to the drop. Income and wealth levels are below state and national averages by about 10% as measured by median household income.

The district's taxing jurisdiction is coterminous with Grayson County. About 40% of the tax base is comprised of residential properties, a generally stable 3% comes from mineral (oil/gas) values, and 20% from acreage. Top taxpayer concentration is moderate at approximately 9%, led by an electric utility at 3.4% in fiscal 2015. After stagnating briefly during the recession, TAV gains have remained fairly modest. However, TAV grew by a stronger 6.3% to \$7.8 billion in fiscal 2015 primarily due to the recent completion of a new electric power plant. A return to modest TAV growth in fiscal 2016 is presently expected by management and appears reasonable to Fitch, as the net effect of reduced mineral values is balanced against the year's new and increased valuations, based on initial appraisal district estimates.

REVENUE DIVERSITY SUPPORTS OPERATIONS

The district benefits from a diverse revenue stream and revenue-raising capacity comparable to most community colleges in the state. Property taxes are the largest revenue source at 31% or \$13 million in fiscal 2014, followed by roughly equivalent levels of state funding and federal (largely Pell grant) revenue. Net tuition/fees have provided no more than 11% of total revenue since fiscal 2010 despite periodic increases. The district's overall tax rate has remained at a stable \$0.18 per \$100 TAV since fiscal 2009, well below the locally voted cap of \$0.70 (of which not more than \$0.50 can be for debt service). About \$0.13 of the levy is for operations.

Federal revenues totaled \$10.3 million or about 24% of total revenue in fiscal 2014, which was down from a peak of \$13 million or 30% of total revenue received in fiscal 2012. Most of this revenue comes from Pell grants received for low-income students and it has trended comparably with the district's recent enrollment declines that are largely attributable to counter-cyclicality against a stronger economy.

RECENT ENROLLMENT DECLINES

Most students are local and the district realized strong enrollment gains during the recession, although the enrollment base remains small. Enrollment losses began in fiscal 2012 as the economy began to strengthen. This has generally remained the trend to date; enrollment has declined by a cumulative 13% through fiscal 2014 to 4,322 as measured by fall full-time student equivalents (FTSEs).

The district did however see a modest reversal in its state-funded contact (instructional) hours in fiscal 2014 with growth in some of its technical (non-credit) programs. Year-to-date enrollment in fiscal 2015 is running in line with the 5% enrollment decline budgeted according to management. Fitch believes the district's ongoing trend of solid annual financial performance and management's ability to right-size a portion of its spending to enrollment trends should enable the district to successfully navigate any associated financial pressure over the near term.

POSITIVE FINANCIAL PERFORMANCE; STRONG RESERVES MAINTAINED

District operations have consistently generated solid surpluses over the last seven fiscal years. The ability to raise revenues under a healthy taxing margin and tuition/fee flexibility has allowed management to successfully offset much of the fiscal pressure associated with prior years' state funding cuts and recent enrollment declines. Also, management's conservative fiscal practices have typically enabled outperformance of its structurally balanced annual operating budget.

For fiscal 2014, the operating margin was once again strongly positive at 9.9%, largely assisted by an increase of \$500,000 to the year's state appropriation and a modest 1.4% reduction in total spending. Liquidity levels, as measured by available funds, remained stable at a healthy 69% of total operating/non-operating expense in fiscal 2014. The district's fiscal cushion remained strong at nearly \$18 million in unrestricted reserves, equivalent to approximately 67% of fiscal 2015 total unrestricted revenue, well above management's formal policy to maintain between 20% - 25% of the ensuing year's budgeted unrestricted revenues in reserve.

For fiscal 2015, the \$26.4 million unrestricted fund operating budget remained flat and was adopted as balanced with a 5% enrollment decline assumed. Additional property taxes from the year's stronger TAV gain bolstered revenues. Expenditures also incorporated \$250,000 as an initial funding source to address future capital needs, which is expected to be maintained in future budget cycles.

Year-to-date, management expects fiscal results at or slightly better than budget with the addition of roughly \$500,000 in surplus to unrestricted reserves at year-end. Preliminary planning for the fiscal 2016 budget has begun, which anticipates the adoption of a structurally balanced operating budget given tuition/fee increases planned and despite a slightly lower state appropriation (\$230,000/year less in the new fiscal 2016-2017 biennium) due to lower student count in prior years.

MODERATE DEBT, OTHER LONG-TERM LIABILITIES

Overall debt levels are moderate at approximately \$2,780 per capita or 3.3% of market value. Principal amortization of the district's direct, tax-supported debt is slightly above average with about 67% repaid in 10 years. The district is an infrequent issuer of debt and has no near-term debt plans.

Capital needs remain manageable given recent enrollment patterns and some use of its solid reserves is planned to fund pay-as-you-go capital spending. Management expects to purchase a \$1.3 million campus-wide computer system over fiscals 2015 -2016 with a total of \$1.8 million in plant fund reserves currently set-aside for that purpose.

The college's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state historically provided the bulk of the employer's annual pension contribution. TRS is funded at 80.8% as of Aug. 31, 2013, though Fitch estimates the funded position to be lower at 72.8% when a more conservative 7% return assumption is used.

The college's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan. The employer's contribution is currently shared at a slightly higher 50% with the state. Increases in pension funding requirements beyond fiscal 2015, while not presently anticipated, could create additional budget pressure, which Fitch will monitor. Carrying costs (debt service, pension, OPEB costs, net of state and self-support) were modest at approximately 11% of total expenses in fiscal 2014 and are expected to remain manageable given level annual debt service of the district's outstanding, tax-supported debt through maturity.