OREANDA-NEWS. June 24, 2015. Fitch Ratings has assigned an 'AAA' rating to the following Crystal City Independent School District, Texas (the district) bonds:

--\\$35 million unlimited tax (ULT) school building bonds, series 2015.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas PSF is available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

The bonds are scheduled to sell June 24 via negotiation. Proceeds will be used to construct new district facilities.

Fitch also assigns an underlying 'A' rating to the series 2015 bonds and affirms the district's outstanding \\$18.4 million in ULT bonds at 'A'.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited ad valorem tax pledge of the district. The bonds also have been approved for the PSF guarantee.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: Strong property tax revenue growth and conservative budgeting practices produced positive financial operations in each of the last five fiscal years. General fund reserves are large as a percentage of annual spending.

CONCENTRATED ECONOMY, LOW WEALTH LEVELS: The district's tax base has risen sharply over the past three years due to an increase in oil and gas values and expanded drilling activity. The energy sector expansion has boosted regional economic activity but also exposes the district to increased economic cyclicality and potential fluctuations in taxable values. Wealth and employment indicators are well below average.

ELEVATED DEBT PROFILE: Debt levels are moderately high and the pace of debt repayment is slow. Overall carrying costs are low due to state support for post-retirement benefits, but the annual debt service burden will increase with this issuance, which is not expected to qualify for state debt service aid.

MODEST ENROLLMENT GROWTH: Enrollment growth is expected to be flat to modest over the near term. Facility capacity is sufficient and this offering addresses the bulk of capital needs.

RATING SENSITIVITIES

ABILITY TO ABSORB TAX BASE DECLINES: The combination of state support, taxing capacity, and solid reserves should enable the district to withstand operational pressures from energy-related taxable assessed valuation (TAV) swings. However, severe TAV declines will result in a higher debt service tax rate, possibly limiting future borrowing capacity. TAV declines that result in erosion of the district's financial reserves would also pressure the rating.

CREDIT PROFILE
Crystal City ISD serves a large and sparsely populated area in Zavala County (estimated population of 12,156), which is 100 miles southwest of San Antonio and includes the commercial center and county seat of Crystal City.

The district is small, with approximately 1,800 students. Fitch views the district's near term projection of flat to modest enrollment growth as reasonable, given that to date increased drilling activity has not generated notable population growth. District facilities include two elementary schools, one junior high school, and one senior high school.

RECENT ECONOMIC AND TAX BASE EXPANSION
The area economy historically was limited, with the tax base primarily composed of farming and ranching land. However, discovery of oil and gas reserves in the Eagle Ford formation has led to active exploration and related activities in this part of south Texas. To date, the primary benefit to the district has been in TAV growth. Zavala County's unemployment rate was a still-high 10.8% in March 2015, although down from 13% the prior year.

District wealth levels are low; both per capita money income and median household income are roughly 47% of the Texas and U.S. averages. The individual poverty level is very high at 37%, driven primarily by the large presence of migrant workers.

TAV registered remarkable growth of 81% and 69% for fiscals 2014 and 2015, respectively, driven largely by increased oil and gas mineral values and the expanded exploration activity. Tax base concentration is very high, with the top 10 taxpayers representing 54% of fiscal 2015 TAV. The top payers are led by oil production company EXCO Operating (38% of total TAV), and include mostly oil and gas companies.

The rating reflects the inherent volatility of oil and gas prices and Fitch's uncertainty regarding the viability of oil reserve levels over time; a material decline in the tax base would likely pressure both the district's tax rate and reserve levels. Given recent declines in oil prices and slowed drilling activity in the district, TAV likely will decline over the near term unless oil prices reverse course.

STABLE FINANCIAL POSITION A MITIGATING FACTOR
The district's financial condition is sound, as reflected in its solid operating reserve levels. The general fund added to fund balance in each of the last five fiscal years, including a \\$429,000 gain (2% of spending) in fiscal 2014. Increased property tax revenue in fiscal 2014 allowed the district to fund \\$1.2 million in athletic facility improvements, and still record an unrestricted general fund balance of \\$8.8 million at year-end (41% of spending and transfers out). Liquidity is also sound, with fiscal 2014 year-end cash and investments representing more than four months of operating expenditures. Management reports that the district is on track to achieve balanced operations for fiscal 2015.

State aid is the district's most prominent revenue source, comprising 66% of general fund revenues in fiscal 2014; property taxes comprised 26%. The district also benefits from additional state support for its annual debt service (ADS); this support covered approximately 54% of ADS in fiscal 2014. The district anticipates that recent tax base expansion will result in the discontinuance of state debt service aid in fiscal 2016. The state aid has declined recently in response to TAV gains and its loss is not expected to have an impact on the district's debt service tax rate because TAV growth covers the increase in funding to replace the subsidy.

In 2006, voters approved an increase to the maximum operating tax rate of \\$1.17 per \\$100 of TAV. Subsequent TAV growth prompted the district to lower this rate to \\$1.08, but the district retains the ability to increase the rate to the maximum \\$1.17, providing a notable measure of revenue flexibility.

Management's willingness to budget conservatively and make necessary spending adjustments in light of potential TAV declines will be integral to long-term credit quality. Fitch also takes some comfort in the state's current funding formula, which would increase aid to meet target revenue per student in the event of decreased local taxes.

MANAGEABLE DEBT PROFILE
The district's overall debt per capita increases to a high \\$6,994 with this offering, while debt to fiscal 2015 market value is moderate at 3.9%. Principal amortization slows to 29% retiring in 10 years. The series 2015 bonds received strong approval from district voters in May 2015 to fund replacement of the high school and expansion of cafeteria facilities. This debt will finance the bulk of the district's identified capital needs, given existing facility capacity and flat enrollment projections.

The bonds are projected to require a debt service tax rate of \\$0.39 per \\$100 of TAV, based on an assumption of flat TAV. A possible drop in the tax base due to slumping oil prices will result in a sizable increase in the tax rate, nearing the \\$0.50 statutory cap for new bond issuance by school districts. Although the tax rate for debt service on outstanding bonds is unlimited, any further upward pressure from a TAV decline would further limit borrowing opportunities.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teacher Retirement System of Texas (TRS). The district's annual contribution to TRS is determined by state law, as is the contribution to the state-run post-employment healthcare plan.

Including debt service (net of state support), pension and other post-employment benefit (OPEB) contributions, carrying costs were a low 3% of governmental fund spending in fiscal 2014. Although debt service will increase with this offering, Fitch expects that overall carrying costs will remain moderate to low due to the district's modest capital plans. The district benefits from the state's strong pension funding system, but Texas school districts are susceptible to future funding changes, as evidenced by a relatively modest 1.5% of salary contribution requirement effective in fiscal 2015.

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 and was the second such ruling in the past two years, 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.

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. Any changes that include additional funding for schools and more local discretion over tax rates would be positive credit factors.