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

--$75 million ULT school building bonds, series 2015.

The bonds are scheduled for a negotiated sale the week of Aug. 17th. Proceeds from the bonds will be used for the construction, acquisition and equipment of school buildings and the purchase of new school buses.

In addition, Fitch assigns an 'AA' underlying rating to the series 2015 bonds, and affirms the 'AA' on the following obligations:

--$705.9 million in outstanding ULT bonds at 'AA'.

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
STRONG FINANCIAL PROFILE: General fund reserves and liquidity remain solid, maximizing the district's financial flexibility. Management's sound and proactive fiscal practices have historically enabled annual operating surpluses despite a trend of rapid enrollment growth.

GROWING, SOMEWHAT CONCENTRATED ECONOMY: The district benefits from its proximity to the employment base of the Dallas-Fort Worth (DFW) metro area, as well as its location near the Barnett Shale natural gas field. Wealth and employment indices exceed state and national averages.

TAV RESTORED: Residential and commercial development returned taxable assessed valuation (TAV) to previous peak levels in fiscal 2015 and reversed losses in the previous four years from low natural gas prices. The district's growth prospects are positive given the availability and affordability of land.

HIGH DEBT BURDEN: Capital needs from rapidly growing enrollment will continue to drive already high debt levels. The fixed cost burden is tempered in part by the district's overall financial flexibility, some remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new debt, and limited pension and other post-employment benefit (OPEB) liabilities.

RATING SENSITIVITIES
DETERIORATION OF FINANCIAL CUSHION: The district is sensitive to a material deterioration of solid reserve levels that provide ample financial flexibility in a high growth environment. The Stable Outlook reflects Fitch's expectation that such decline is unlikely in the near term.

GROWING DEBT BURDEN: The district's rating is sensitive to a substantial increase in the already elevated debt levels. Capital plans are affordable given tax base and enrollment growth assumptions; however, issuance beyond current expectations would put downward pressure on the rating.

CREDIT PROFILE
The district is located in the northwest part of the DFW metropolitan area and encompasses a large 232 square miles that include 16 rural communities in Denton, Tarrant, and Wise counties. District population and enrollment growth have been rapid since 2000, spurred by the availability of affordable land and its location within the broad DFW metro. Median household income is well in excess of regional, state, and national averages, and the county unemployment rate has fallen to a low 3.6% as of March 2015 (compared to the state [4.2%] and nation [5.6%]).

The district typically adds between 1,000 - 1,500 new students per year, although that figure fell slightly to 809 (4.4% increase) for the 2015 academic year. Annual enrollment gains have remained in line with demographic studies that project steady increases, and the district has recently pared down projections slightly to 4%-6% annually from 7% through fiscal 2020 in light of the modest slowdown. District enrollment totaled just fewer than 20,000 students in fiscal 2015.

FINANCIAL PROFILE A CREDIT POSITIVE
Financial performance has been strong historically, characterized by operating surpluses, solid reserves, and ample liquidity. Sound management has helped to navigate the operating pressures associated with rapid enrollment growth, changes in the state funding formula, and cuts to state funding.

Audited fiscal 2014 results were better than the budgeted $2.7 million deficit, ending the year with an $11 million operating surplus (roughly 8% of the year's spending). Management reports this surplus was due to the budgeting of positions that remained vacant, and expects personnel costs to be more accurately budgeted going forward. Unrestricted general fund reserves at fiscal 2014 year-end rose to a high $71.6 million or 50% of spending, well above the district's informal target of 33%. General fund liquidity also remained solid at nearly $81 million, or about seven months of spending.

The fiscal 2015 budget was balanced; however, preliminary figures for the year that ended June 30 indicate another year of positive results. The fiscal 2016 adopted budget includes an increase in enrollment of over 500 students, a flat tax rate, and a $7.5 million use of fund balance (4% of spending) due in part to the opening of an additional high school.

UNCERTAINTY SURROUNDING STATE FUNDING
The district's current financial forecast projects annual operating gaps that grow to a substantial $35 million (18% of projected revenue) in fiscal year 2020 due to the expiration of a state tax relief program in year 2018. Fitch recognizes the forecasted imbalance as material, but also acknowledges that the district has built up very high reserves in preparation of this funding uncertainty. Given management's history of conservative budgeting practices and prudent financial management, Fitch believes the district will make necessary expenditure adjustments in order to preserve their sound financial posture.

STRONG RESIDENTIAL AND COMMERCIAL GROWTH
The district's tax base concentration in mineral values has been trending lower but is still somewhat elevated; minerals comprised 10% of fiscal 2015 TAV, down from a much higher 22% in fiscal 2011. Diversification in the tax base is a result of strong residential and commercial growth, which mitigated TAV losses caused by several years of low natural gas prices.

Modest annual average TAV declines of just 2% over fiscals 2011 - 2014 were more than restored in fiscal 2015 with almost 9% growth, followed by a very robust gain of 13.5% for fiscal 2016. Fiscal 2016 TAV totals $12.8 billion. The district projects growth of 7.5% annually through fiscal 2020 and then moderating to 1% growth by fiscal 2025. Near-term growth assumptions may be optimistic, but it's likely that continued residential and commercial development will add to TAV over the near term.

Top 10 taxpayer concentration is down slightly but remains above average at 21% in fiscal 2015, led by Devon Energy Corp at a sizeable 7% (Fitch long-term Issuer Default Rating upgraded to 'BBB+' in October 2014 with a Stable Outlook). Devon Energy has held the place of top taxpayer since 2002 and the Barnett Shale accounts for approximately a third of the firm's overall production from a geographic perspective.

HIGH DEBT LEVELS
Debt levels are elevated at $11,976 per capita and 6.5% of fiscal 2015 market value. Principal amortization is slow with about 32% retired in 10 years. Including this issuance, annual debt service is projected to climb steadily from $47 million in fiscal 2015 to $65 million in fiscal 2028. The district's debt profile is primarily comprised of fixed-rate debt, with some use of capital appreciation bonds and a modest amount (2% of outstanding principal) of variable rate bonds.

While the high debt burden is a credit concern, Fitch notes that the fixed cost burden is tempered in part by the district's overall financial flexibility, some remaining tax rate cushion below the statutory $0.50 per $100 of TAV tax rate ceiling for new debt, and limited pension and OPEB liabilities. The district has $100 million in unissued but authorized debt which it plans to issue in the near term.

Management has made a commitment to voters to maintain the debt service tax rate at the current $0.4125 throughout the bond program; the rate was increased from $0.335 in fiscal 2014. Fitch will continue to monitor the district's ability to address capital needs in relation to its tax base and budgetary flexibility.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. OPEB are also provided through TRS. The combined pension and OPEB contributions, which are set by state law, totaled $570,000 or less than 1% of spending in fiscal 2014. The district's total carrying costs for debt service and retirement benefits comprised a moderate 15% of fiscal 2014 governmental spending.

The state's funding of school districts' payments to TRS helps keep these fixed costs low. However, like all Texas school districts, the district is vulnerable to future funding changes by the state, as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 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.