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

--$100 million ULT school building bonds series 2015.

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

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

CONCENTRATED ECONOMY: The district's tax base increased significantly in recent years due to a surge in oil prices. The expanding energy sector exposes the district to increased cyclicality, especially in the near-term given the slump in oil prices. State funding mechanisms should offset the impact of a potential tax base contraction on district operating revenue.

LARGELY BALANCED OPERATIONS; SOUND RESERVES: The district's financial operations have been largely balanced despite needing to manage enrollment-related capital needs on pay-as-you basis. The recent moderation of student body growth and the voter-approved bond program should relieve some operating pressure.

MODERATE BUT GROWING DEBT BURDEN: The district's debt metrics are moderate, although levels are expected to rise given the large bond program authorized by voters in 2013. Pension and other-post employment benefit (OPEB) liabilities are minimal.

RATING SENSITIVITIES

MAINTENANCE OF HEALHY FINANCIALS: The rating is sensitive to shifts in the district's healthy financial performance and maintenance of adequate reserves while addressing ongoing capital needs.

CREDIT PROFILE

United ISD encompasses a sizable 2,450 square miles in Webb County with the Rio Grande River forming a portion of its western boundary. The district serves an estimated population in excess of 165,000 which includes a portion of Laredo (general obligation bonds rated 'AA' with a Stable Outlook by Fitch), the third most populous city on the U.S.-Mexico border.

GROWING, CONCENTRATED ECONOMY

TAV (taxable assessed value) has expanded by two-thirds since 2011, reflecting a growing oil and gas sector as well as the region's extensive transportation network supporting international trade, warehousing and distribution businesses. Residential and mineral values each comprise 30% of the base, followed by commercial/industrial at 15%.

Top 10 taxpayers make up a high 25% of 2015 TAV, and include oil and gas, refinery, and utility companies. The district reports a preliminary TAV gain of 5% for fiscal 2016, due largely to ongoing oil and gas asset appreciation for the tax period (as of Jan 1, 2015). Contraction is expected in the following fiscal year due to the tax base's exposure to cyclicality in the energy sector. Ongoing residential development in the district will likely offset some of the anticipated losses.

The city of Laredo's unemployment rate of 4.2% as of March 2015 (down from 5.1% 12 months prior) is on par with the state and compares favorably to the national rate. A growing employment base is supported by drilling, oil field support services, and a stable base of top employers representing government, education, medical, and retail sectors of the economy.

The district's income and wealth levels are steadily improving but continue to lag state and national averages. As a property-poor district under Chapter 42 of the Texas Education Code, the district currently receives state support for both operations (55% of general fund revenues in fiscal 2014) and debt service (15%). State funding mechanisms would mostly offset the impact of potential TAV losses on district operating revenue.

OPERATING PRESSURES ABATED

The district typically generates favorable results despite enrollment-based operating and capital funding pressures. Fiscal 2014 operating results were modestly negative due to a one-time restructuring of the district's special education program that affected revenue received from the state. Reserves remained adequate at 25% at year-end.

Management's projections for a modest surplus in fiscal 2015 appear reasonable, reflecting further revenue growth despite some stagnation in enrollment and savings on the expenditure side. Preliminary plans for the fiscal 2016 budget include a marginal increase in the tax rate for debt service and flat enrollment.

MODERATE DEBT; SIZABLE BOND AUTHORIZATION

Debt levels rise with this issuance but remain moderate at $4,230 per capita or 4% of market value, in part due to the district's history of paygo financing for capital needs. The amortization rate slows to about 44% of principal scheduled for repayment within 10 years.

The district's $408 million bond program, approved by voters in 2013, is funding land acquisition and construction of several new campuses. Proceeds will also fund security and technology purchases and other facility renovations. This issuance represents the second of four phases, with the remaining $209 million in authorizations scheduled for 2016 and 2017.

Fitch expects the debt burden to remain affordable based on the district's conservative assumptions for tax base growth. The district anticipates a maximum rate of $0.2849 per $100 to service debt on the bond program given current projections, with ample room under the $0.50 statutory new money cap. The current rate is a low $0.1749.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other post-employment benefits (OPEB) are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled $2.6 million or a low 0.6% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a low 7% of governmental spending, net of state aid for debt.

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