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

--\$75 million 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 Permanent School Fund is available in Fitch's Sept. 4, 2014 press release, 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

In addition, Fitch assigns an 'AA-' underlying rating to the series 2015 ULT school building bonds.

The bonds are scheduled for competitive sale on June 30, 2015. Proceeds from the sale will be used to construct new facilities and renovate existing facilities of the district.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited ad valorem tax pledge levied against all taxable property in the district and have been approved for the Texas PSF guaranty.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: District finances are well-managed, with recent state budget cuts prudently offset by spending cuts to maintain ample reserves and liquidity.

FAVORABLE LOCATION NEAR DFW: The district benefits from its location along a major transportation corridor and proximity to the larger Dallas-Fort Worth (DFW) economy and employment base.

SOME TAX BASE CONCENTRATION: Top taxpayer concentration is above average, but recent healthcare and retail investments are helping diversify the tax base. The pace of taxable assessed valuation (TAV) growth increased in each of the last two years.

WEAK DEBT PROFILE: Overall debt levels are high and the pace of amortization is very slow, reflecting extensive use of capital appreciation bonds (CABs). Projected further enrollment growth will pressure facility capacity over the medium to longer term.

RATING SENSITIVITIES

PRESERVATION OF BUDGET BALANCE: The maintenance of budgetary balance and solid reserve levels is necessary to mitigate the credit concerns over high debt, very slow amortization, and any operating pressures associated with new facilities.

CREDIT PROFILE
Waxahachie ISD is located about 30 miles south of Dallas, in the center of Ellis County along Interstate 35E. Moderate enrollment growth is occurring and the current student count is approximately 8,000.

STABLE LOCAL ECONOMY ENHANCED BY PROXIMITY TO DFW LABOR MARKET
The district's proximity to the broad, diverse DFW economy and employment base as well as its location along a major transportation route has fostered a well-established local manufacturing and industrial base. In addition, the availability of affordable land has spurred residential development and accompanying enrollment growth. Although development slowed during the recent economic downturn, healthcare investments and an improving housing market have prompted new residential construction in the past two years.

The unemployment rate for Ellis County improved to 3.8% in March 2015 from 5.3% a year prior due to employment growth of 2.4% during this period, compared to just 1.8% nationally. The labor force also expanded over the same period. District wealth levels are average, with median household income and per capita income at 112% and 87% of national norms, respectively. Market value per capita of \$84,000 in fiscal 2015 is boosted by the district's industrial base.

TAX BASE RESUMES GROWTH
The district's tax base grew quite rapidly prior to the national recession but TAV contracted in fiscal years 2011 and 2012. The district recouped lost values in the last two years with modest gains and realized stronger TAV growth of 5.7% for fiscal 2015. Fiscal 2015 TAV totals \$2.99 billion.

Fitch expects moderate tax base growth to continue over the near term, based on current residential building activity and other positive economic indicators (including development spurred by the recent expansion of a medical complex). Taxpayer concentration remains above average with the top 10 payers at about 16% of fiscal 2015 TAV, led by a Walgreen's distribution center at 5.4%. Other top taxpayers include a fairly diverse mix of manufacturing concerns.

SOUND FINANCIAL OPERATIONS
District financial operations are solid, with positive operating margins producing a robust level of reserves and supporting pay-as-you-go capital spending. Audited fiscal 2014 results show a \$717,000 general fund surplus (2% of spending) after \$886,000 of spending for one-time projects. Unrestricted fund balance was equal to a stout \$24.7 million or 44% of spending. Liquid general fund assets totaling \$26.5 million at year-end were sufficient to cover over five months of operating expenditures.

The adopted fiscal 2015 budget projects a modest operating surplus of \$1.1 million (1.8% of budgeted spending). Bottom line results will be lower, however, due to planned one-time outlays. Management recently authorized a \$10.5 million capital outlay to purchase land for future school sites and to replace a gymnasium. These purchases will conclude the district's planned capital-related use of fund balance which started in fiscal 2013.

Year-end reserves after this outlay are projected to remain above the district's informal fund balance target of three months of operating expenditures (\$15 million), which Fitch considers adequate.

TAX RATE SWAP
Waxahachie ISD voters approved a tax rate restructuring in 2014 that maintained the total tax rate of \$1.43 per \$100 of TAV while shifting a portion of the debt service tax rate to the general fund. The expected net effect is approximately \$1.5 million in additional operating revenues beginning in fiscal 2015 because the state funding formula more heavily subsidizes local operating taxing effort. One-half of the additional revenue will be used to fund pay raises and other expenditures in fiscal 2015, while the other half will be placed into savings for future needs.

Approximately \$3.9 million of ULT debt service will be repaid via annual transfers from the general fund. Revenue generated from TAV growth beyond the district's near-term projections of 4% annually would be used to retire outstanding debt and reduce this transfer. Fitch considers the district's TAV projection to be reasonable based on residential construction underway.

Fitch recognizes the revenue advantage to the district from the tax rate swap, but this unconventional taxing structure could be subject to legislative or statutory changes. Credit concerns are mitigated by management's ability to reverse the tax rates if necessary and sound financial operations. However, such reversal would raise the debt service rate above the state's tax rate cap of \$0.50 per \$100 of TAV for new debt, limiting borrowing capacity.

ABOVE-AVERAGE DEBT BURDEN
Inclusive of the series 2015 bonds, overall debt on a current accretion basis is high at 7.6% of market value and \$6,360 per capita. Annual debt service charges are manageable at 15.3% of fiscal 2014 governmental fund expenditures, though the annual burden will increase to a projected 20% of fiscal 2014 spending in 2016 (maximum annual debt service). Amortization remains very slow at only 14% to be retired in 10 years, which Fitch views as a credit negative. The slow debt retirement is largely due to the prior use of CABs in the district's borrowing program.

District voters approved \$125 million in new bonds with a very high 75% approval in May 2015. This offering is the first from the authorization, whose proceeds will be used to finance the construction of a replacement high school and the renovation of an existing school, as well as a career and technology education facility. The district plans to issue the remaining \$50 million in late 2016 or early 2017, addressing the remainder of medium-term borrowing needs. This debt is projected to require a tax rate increase of roughly \$0.13 per \$100 of TAV, which matches the rate amount transferred from debt service to operations with the 2014 tax rate swap.

AFFORDABLE POST-RETIREMENT BENEFITS
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 for the state-run postemployment healthcare plan. Including debt service, pension, and OPEB contributions, carrying costs were an affordable 16.4% of fiscal 2014 governmental fund spending, benefitting from the state's strong subsidy for pensions. However, school districts are susceptible to future funding changes by the state as evidenced by a new, relatively modest employer pension contribution requirement of 1.5% of salary effective 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.