OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the following Austin Independent School District, Texas' (Austin ISD or the district) unlimited tax bonds (ULTs):

--$75 million ULT refunding bonds, series 2015A.

The 'AAA' long-term rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014.)

Fitch also assigns an underlying 'AA+' rating to the series 2015A bonds and to the $116.2 million in ULT refunding bonds, series 2015B. In addition, Fitch affirms the 'AA+' rating on the district's approximately $806 million (pre-refunding) in outstanding ULT bonds.

The Rating Outlook is Stable.

The bonds are scheduled for a negotiated sale on July 22nd. Proceeds from the sale will be used to refund outstanding commercial paper issued for capital projects, refund certain outstanding obligations for savings, and to pay issuance costs.

SECURITY

The bonds are payable and secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. The series 2015A bonds also carry the Texas PSF guaranty.

KEY RATING DRIVERS

SOLID RESERVES MAINTAINED: Management's conservative fiscal practices are projected to again narrow the year's moderately-sized budgetary imbalance and preserve a sound financial cushion that remains in line with established policy.

VIBRANT, DYNAMIC ECONOMY: The city of Austin's economy is diverse and growing steadily, with government, higher education, healthcare and high technology the primary employment sectors. The city continues its strong post-recession performance, as reflected in healthy job and population gains. Wealth levels are good, the labor force is highly educated, and unemployment is low.

TAX BASE EXPANSION: The tax base is diverse. Taxable assessed valuation (TAV) has continued to record strong gains since the recession, bolstered by population and development trends. Management projects further TAV growth over the near term, which appears reasonable to Fitch.

MODERATE LONG-TERM LIABILITIES: Overall debt levels and other long-term liabilities of the district are moderate. Amortization of principal is slightly above average. Carrying costs are low and expected to remain manageable over at least the near term.

RATING SENSITIVITIES

MATERIAL DETERIORATION OF RESERVES: Sound reserve levels that provide significant financial flexibility underpin the high 'AA+' rating, particularly in light of the district's limited revenue-raising ability. Material deterioration of the district's financial position from a growing and unmitigated structural imbalance could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Austin ISD is the fifth largest school district in the state with nearly 130 campuses and a relatively stable enrollment base of about 85,000, serving the city (general obligation [GO] bonds rated 'AAA' by Fitch).

HEALTHY AND EXPANDING ECONOMY

The Austin area is among the top performing U.S. metro area economies. The city is the state capital and home to the University of Texas at Austin (State of Texas and University of Texas System; rated 'AAA' by Fitch), as well as six other colleges and universities. The large state government and higher education employment base has provided a stabilizing presence and economic buffer for the city during downturns.

Technology manufacturing is another key area employment sector, led by Dell, IBM, Samsung and others. The city's highly educated workforce and availability of major research facilities continues to attract and support expansion of technology firms. Tourism has also become a growing economic player. The city hosts several festivals and conferences for music and technology throughout the year, which continue to increase in visitor count. More recently, the city has added high-profile sporting events to its roster of events, including Formula One auto racing and the ESPN Summer X Games.

Correspondingly, year-over-year unemployment trends reflect further improvement. City unemployment declined to a low 2.9% in March 2015 from 3.8% the year prior, and was below the state (4.2%) and U.S. (5.6%) rates for the same time period. The city's population, estimated at roughly 888,000 for 2015, has increased more than 25% since 2000.

TAV GAINS STRENGTHEN

The district's tax base remained resilient over the recession, registering only one year of a modest TAV decline and has since reflected steady increases. TAV grew by a strong 12% in fiscal 2015 to $71.5 billion; initial estimates from the appraisal district project another solid 9% gain in fiscal 2016. Fitch believes this estimate is reasonable given various residential and retail/commercial projects underway as well as the appreciation of existing property values driven by a robust economy. Concentration among the top 10 taxpayers is minimal at 3%.

BUILD-UP OF RESERVE CUSHION IN PRIOR FISCAL YEARS

The district is considered property wealthy and relies almost entirely on local property taxes, but its funding is subject to the state's formula and a portion of the district's operating tax levy is effectively recaptured by the state for distribution to less wealthy school districts. For fiscal 2014, this payment approximated $124 million or 15% of total general fund spending.

Operations generated sizeable net surpluses over fiscals 2010-2012 despite state funding reductions. This favourable performance was due largely to the receipt of some one-time federal stimulus funds and significant staffing cuts enabled by the district's declaration of financial exigency (allowable by state law) that lasted for roughly one year.

Reserve levels peaked at fiscal 2012 year-end with an unrestricted general fund balance of $244 million or nearly 31% of spending. The district has since then planned for a moderate use of reserves annually as the primary means to offset growth in spending, resulting in a structural operating imbalance despite some improvement in state funding.

RELIANCE ON RESERVES MANAGEABLE TO DATE

Management's careful budgeting and spending practices once again enabled the district to realize a more modest use of reserves in fiscal 2014 ($19.3 million or 2.3% of spending) as compared to the larger, initial $32 million budgeted. Unrestricted general fund reserves equalled roughly $211 million or about 25% of spending at fiscal 2014 year-end, which remained comfortably above the district's stated 20% unassigned reserve policy. General fund cash/investments totaled $262 million or nearly four months of general operational spending.

A smaller drawdown of $3.4 million or less than 1% of spending at fiscal 2015 year-end is currently projected by management, largely due to salary savings, that should maintain reserves above policy. This is in contrast to the year's $25 million adopted budget gap (3% of spending) that included full staffing costs.

The preliminary $992 million fiscal 2016 general operating budget is up about 8% from the prior year, largely attributable to a roughly $86 million increase in the year's property wealth transfer payment. A modest enrollment decline is projected by the district's outside demographer, but this may be partially mitigated by the district's student recruitment efforts. Included in the budget is a 3% across the board salary increase (estimated at about $15 million) that will allow the district to build its regional competitiveness for teachers. Internal spending cuts that focus on enrollment-driven, staffing reductions are projected to largely offset both the increased cost of pay raises as well as the year's student-related revenue loss. Structural operating imbalance is initially funded with a $22 million drawdown on reserves (or about 2% of budgeted spending) for the fourth fiscal year. Fitch expects this use of reserves will narrow again over the fiscal year given the district's historical operating performance. The district presently projects maintaining unassigned reserves in line with policy at just under 24% of spending by fiscal 2016 year-end.

A multi-year financial forecast through fiscal 2019 currently projects moderate although growing structural imbalance annually, up from $22 million in fiscal 2016 to $36.5 million (3.2% of general fund spending) in fiscal 2019, driven in large part by rising annual recapture payments from a growing tax base without sufficient counterbalancing spending actions and annually diminished reserve levels.

Fitch views these forecasts with some concern given the finite nature of the reserves, although recognizes the moderate size of the annual imbalance to budget and the likely conservative nature of the forecasts. Fitch assumes in the current rating action management will take appropriate steps to address the structural operating imbalance as the district nears its policy reserve threshold. Absent such developments, Fitch would likely reconsider the district's rating. An operating tax ratification election also remains available to the district that would require voter approval.

DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE

Overall debt levels remain moderate at approximately $2,500 per capita and 2.4% of market value. The district will refund all of its currently outstanding commercial paper with the series 2015A issuance; the district is one of few Texas school districts to utilize such a program. Principal amortization remains slightly above average at 54% in 10 years.

Solid TAV gains have generally mitigated the debt service tax rate impact of the district's borrowings, enabling the district to implement its capital plan with limited tax rate impact. The district expects to reduce its debt service tax rate by another $0.02 per $100 TAV in fiscal 2016 despite its planned near-term issuances, utilizing about $10 million of debt service fund balance and what Fitch believes to be are reasonable TAV growth assumptions.

The district anticipates continued utilization of its commercial paper program (issuing up to $125 million annually) and fixing it out into long-term debt allowable from its remaining bond authority, which totals about $485 million, largely for renewal/expansion of existing facilities. The district may consider re-approaching voters in May 2016 for a GO bond authorization that would largely address those specific capital items (athletic, safety priorities) not approved by voters in 2013.

AFFORDABLE RETIREE COSTS

Pension and other post-employment benefit (OPEB) liabilities (largely healthcare benefits) are limited because of the district's participation in the state pension program administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan for which the state provides the bulk of the employer's annual pension contribution. Total pension and OPEB contributions made by the district in fiscal 2014 totalled less than 1% of governmental fund expenditures.

The TRS funded position was 80.8% as of Aug. 31, 2013, although Fitch estimates it to be lower at 72.8% when a more conservative 7% return assumption is used. 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; the district consistently funds its annual required contributions. Increases in pension funding requirements beyond the 1.5% increase for all districts in fiscal 2015, while not presently anticipated, could create additional budget pressure.

The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) were low at 9.5% of governmental fund spending in fiscal 2014, made up largely of the district's annual debt load.

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