OREANDA-NEWS. August 04, 2015.  Fitch Ratings has affirmed the following Pampa Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--\\$42.4 million ULT school building bonds series 2007 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy 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

COMMODITY ACTIVITY DRIVES CONCENTRATED RESOURCE BASE: The area economy remains substantially concentrated in and dependent on volatile chemical manufacturing, oil production and related industries, particularly given its fairly remote location in the north Texas panhandle. Enrollment expectedly fluctuates based on energy sector trends; economic growth over the last five years was preceded by a sharp decline from the previous expansion period.

COST FLEXIBILITY AND RESERVES ARE KEY: Commodity price volatility drives assessed value and enrollment fluctuations, resulting in challenging revenue budgeting. The district's proven ability to adjust spending, cutting both instructional and capital expenditures in the past to ensure fiscal balance, and its maintenance of high reserves, are key offsetting factors.

MODERATE DEBT BUT CAPITAL PRESSURE EXISTS: Fitch expects debt levels to remain moderate, but the very low debt service burden on the budget could grow to more moderate levels over time due to slow principal amortization. The district does not prepare a formal multi-year capital plan, thus creating uncertainty about future borrowing needs.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: Fitch expects the school district to continue with timely expense reductions in response to revenue fluctuations to retain ample cushion.

CREDIT PROFILE

The district serves the city of Pampa, TX and portions of surrounding Gray and Roberts Counties in the Texas panhandle about 56 miles northeast of Amarillo. Population within the district was 21,179 as of 2014. District enrollment in 2015 was 3,524, up 2% from the prior year, but down 4% from the 2013 high.

COST CUTTING & RESERVES UNDERSCORE FINANCIAL FLEXIBILITY

The district has grown unrestricted reserves in each of the previous three years to \\$11.8 million in fiscal year 2014, or 36% of annual expenditures including transfers. Fiscal 2014 results reflect an addition of over \\$1M to reserves. Management's ability to cut expenditures in the past to preserve the level of reserves is an important offsetting factor.

A lease agreement with the county for new drilling sites led to one-time revenue gains in fiscal 2012 (\\$1 million), 2014 (\\$5.4 million), and another expected in 2016 (\\$1.6 million) which are generally available for operations and maintenance expenditures. If the new wells on the leased land successfully begin producing oil, the district could receive ongoing royalty payments that would not impact the state's funding formula for the district. Management is conservative and does not budget for one-time leasehold drilling revenues, however over half of the fiscal 2014 leasehold revenues supported one-time cost overages for the district's new administration building.

Recent annual revenues have also increased due to a better funding picture of schools at the state level and recent enrollment and TAV increases. The district's maintenance and operations (M&O) tax rate is at the statutory cap of \\$1.04 per \\$100 of TAV. The district does not have plans to pursue a tax ratification election to tap the additional 13-cents available under current statutory provisions.

The district projects balanced results in fiscal 2015 and maintenance of high unrestricted general fund balances. The fiscal 2016 adopted budget is balanced and up 6% over the prior year, largely driven by enrollment growth needs.

CONCENTRATED, OIL-BASED ECONOMY SEES GROWTH LEVEL OFF

The school district's tax base is very concentrated and volatile, as assessments for property owners in the oil/gas industry are closely tied to commodity prices. Concentration among the top 10 taxpayers is a high 25%. The top taxpayer in the district, Halliburton Energy Service (Halliburton Company's long-term Issuer Default Rating is 'A-' with a Stable Outlook by Fitch), constitutes a large 8.6% of the total tax base.

Fiscal 2015 market value per capita of \\$74,000 is up from \\$58,000 in fiscal 2011, reflecting a healthy tax base growth. More recently, with the decline of oil prices, the TAV has leveled off with just a 0.6% TAV growth in fiscal 2015 compared to an 11.6% gain in the prior year as rising home prices and new construction rose. Gains from the recent opening of G2X Energy's sizable methanol plant assessed at \\$45M, which will hit the district's tax base in fiscal 2016, will likely be offset by other TAV contraction related to oil price declines. Fitch expects continued volatility to TAV levels in the long term.

BELOW-AVERAGE WEALTH AND INCOME INDICATORS

The district's median household income is equal to 84.6% of state and 82.7% of U.S. averages, but grew at a rapid pace in recent years. The unemployment rate in Gray County was 4.5% as of May 2015, which is above the state level but below the national level, as has been the case much of the prior decade.

UNCERTAIN ENROLLMENT GROWTH PRESSURES CAPITAL PLANNING

The district's facilities are currently at maximum capacity with the use of portable classrooms relieve overcrowding. Despite the failure of a \\$30m bond vote put to voters in May 2015, the district remains within their legal class size limits. The district is currently discussing the possibility of bringing another bond to vote in the near future; however, the decline of oil and corresponding decline in enrollment growth is expected to make increasing capacity less of a necessity.

A statutory cap limits the district rate to \\$.50 for the issuance of new debt. The district, which completed fiscal 2014 with a rate of \\$.27, has ample capacity under the cap. Overall debt is a moderate \\$3,129 per capita and 4.4% of market value in fiscal 2014. Principal amortization is slow, with about 30% retired within 10 years, resulting in a currently low (7.4% of spending) but increasing debt service burden on the budget. Fiscal 2014 governmental spending included a significant increase due to one-time capital spending. The debt service burden on the budget in fiscal 2013 was higher at 8.4%.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teacher's Retirement System of Texas (TRS). The district's low annual required contribution is based on salaries in excess of the statutory cap. Other post-employment benefits (OPEB) are similarly provided through TRS. The district's carrying costs are a very low 7.9% of governmental spending, reflecting a slow principal amortization and low required OPEB/Pension contributions.

TEXAS SCHOOL DISTRICT 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. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.