OREANDA-NEWS. August 24, 2015. Fitch Ratings assigns an 'AA-' rating to the following Judson Independent School District, Texas' (the district) bonds:

--\\$63.1 million unlimited tax (ULT) refunding bonds, series 2015.

The 2015 ULT bonds are scheduled to sell August 25 via negotiation. Proceeds will be used to refund certain outstanding obligations for savings and to pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are payable and secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.

KEY RATING DRIVERS

STABLE FINANCIAL POSITION: The district's financial position is sound, supported by conservative budgeting, largely balanced operations, and solid general fund reserves which are projected to remain in line with historical trends and exceed adopted policy levels.

ABOVE-AVERAGE DEMOGRAPHICS: The district is part of the stable and diverse San Antonio metropolitan economy. Area unemployment rates are low and below state and national averages. Income and wealth metrics are better than average.

TAV GROWTH; SOME CONCENTRATION: Taxable assessed valuation (TAV) gains continue to strengthen given a steady pace of new residential, retail/commercial construction as well as tax base appreciation. Taxpayer concentration is moderately high.

HIGH DEBT; LOW CARRYING COST: Overall debt levels are high and amortization of direct debt is slow. Fitch expects this debt profile will be maintained given ongoing capital needs stemming from steady enrollment gains. Carrying costs are modest largely due to the slow payout and state support for the district's pension plan.

RATING SENSITIVITIES

LOSS OF FISCAL, CAPITAL FLEXIBILITY: The rating for Judson Independent School District, Texas is sensitive to shifts in the district's financial and capital funding flexibility, which serves to mitigate some of Fitch's concerns regarding the high debt levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.

CREDIT PROFILE

SAN ANTONIO METRO DISTRICT

The district is located in the northeast part of the San Antonio metropolitan area and serves approximately 127,400 residents in the suburban communities of Kirby and Converse in addition to portions of Universal City, Live Oak, Selma, and San Antonio. Enrollment trends have moderated from prior fast-growth years (pre-2007), but the district has continued to realize steady annual gains in average daily attendance (ADA) of 1%-3% over the past five fiscal years, which has increased ADA to 21,720 students in fiscal 2015. Median household income levels exceed those of the MSA, state, and nation by about 10%.

FURTHER TAX BASE EXPANSION

District residents participate in the large and diverse San Antonio metropolitan economy. Prominent sectors include military and government employment, domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications. Employment trends have generally remained robust, offsetting solid laborforce growth over the same time period. Employment grew by 2% year-over-year and unemployment declined to a low 3.7% in March 2015 from 4.9% the year prior, which was below the state (4.2%) average and comfortably below the nation (5.6%).

TAV has steadily strengthened over fiscal years 2013-2015 after a fairly short period of stagnant performance. A solid 7% gain was realized in fiscal 2015, increasing TAV to about \\$6.8 billion. Tax base appreciation and various residential, retail, and commercial development projects contributed to another year of strong TAV growth in fiscal 2016 of approximately 10%.

The district's tax base is primarily residential at 60%, although it also includes sizeable distribution, warehousing, and food manufacturing businesses, stimulated by access to Interstate 35 which runs from Mexico to Canada. Top-10 taxpayer concentration is moderately high at 15% with the largest, HEB Grocery Company, LP, at 6.3%. Development within the district that led to sizeable population and solid enrollment gains before fiscal 2010 was spurred by the northern expansion of the San Antonio MSA employment base and housing market. Proximity to several military bases also adds to the local economy.

SOLID RESERVES PROJECTED DESPITE FISCAL 2015 DRAWDOWN

Solid general fund reserves characterize the district's sound financial position and lend healthy financial flexibility. Unreserved/unrestricted reserves have totaled no less than 20% over the last six fiscal years (fiscals 2009-2014), comfortably above the adopted policy requiring a minimum of two months or roughly 17% of general fund spending. The district has generated operating surpluses in all but one of these six fiscal years, assisted by conservative budgeting practices. State aid remains the predominate source of operating revenue at nearly 60% in fiscal 2014.

Unrestricted general fund reserves were \\$46.3 million or about 28% of spending at fiscal 2014 year-end, up from \\$40.2 million or 26.3% of spending in fiscal 2013. The district set aside \\$3 million of the fiscal 2014 reserve total for future land purchases. Liquidity remained fairly stable with general fund cash and investments totaling \\$48.3 million or about 105 days of spending.

Year-end results for fiscal 2015 are expected to improve upon budget and management's mid-year projections. Surplus operations of around \\$2 million are anticipated by management due primarily to additional revenue from slightly higher than budgeted enrollment. The year's surplus is expected to allow for a slightly moderated use of reserves (\\$4.4 million or a modest 2% of spending) in support of the district's prioritized capital projects and the acquisition of a future school site. Fitch takes comfort that reserves are projected to be maintained at about \\$43 million or 23% of operations, in line with historical trends.

The \\$185 million fiscal 2016 general operating budget was adopted as balanced and assumes modest enrollment growth of less than 1%. Increased property tax revenue primarily funds the 5% or \\$9 million growth in budgeted spending from the prior year, inclusive of a 3% across the board salary increase and additional staff to support student growth.

HIGH OVERALL DEBT BURDEN

Debt ratios remain high, reflective of the district's previous fast-paced expansion, although they are down slightly given recent population and tax base gains. Overall debt levels (including overlapping debt of various municipalities) approximate \\$5,600 on a per capita basis and 9.2% of full market value. This debt ratio calculation does not consider the state support received by the district for its debt (about 17.8% of ULT debt service in fiscal 2014) as a result of its comparatively lower per pupil property wealth. Payout is slow with about 36% of principal retired in 10 years, inclusive of the series 2015 refunding issuance (which does not extend or restructure outstanding maturities).

Preliminary plans for a future GO bond authorization are under consideration by management given the district must continue addressing its enrollment-driven capital needs; the district presently has no outstanding bond authority. Plans regarding the timing and size of bond authority to be presented to district voters have yet to be finalized.

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 in 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 totaled less than 1% of governmental fund expenditures.

The TRS funded position was 80.5% as of its Aug. 31, 2014 valuation, although Fitch estimates the funded position to be lower at 72.5% 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 despite an elevated debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) were low at 11% of governmental fund spending in fiscal 2014 due in large part to the slow pace of principal amortization and are expected to remain manageable given the modestly rising debt service schedule.

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.