OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and assigns an 'A+' underlying rating to the following Rio Grande City Consolidated Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--$31.015 million ULT refunding bonds series 2015B.

The bonds are scheduled for negotiated sale the week of October 19. Proceeds will be used to redeem outstanding debt for debt service savings.

In addition, Fitch takes the following rating action:

--$113 million (pre-refunding) ULT debt affirmed at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

REDUCED FINANCIAL FLEXIBILITY: Reserves are a key mitigant to the district's above-average tax base concentration, high level of dependence on state funding, and historically flat enrollment trends. Fitch is concerned that estimated fiscal 2015 reserves drop below the district's 60-day reserve target, and will monitor the district's initiatives to restore them in the near term through cost savings and revenue enhancements.

TAX BASE CONCENTRATION: The district's tax base is heavily concentrated in oil and gas properties, contributing to volatility associated with commodity prices.

SUBPAR DEMOGRAPHICS: Wealth and educational attainment levels are very low and unemployment remains high.

HIGH DEBT; AFFORDABLE PENSIONS: Debt ratios are high, although the impact of long-term liabilities on the budget is manageable due to strong state support of debt service, employee pensions and other post-employment benefits (OPEB). The district does not have any near-term new money debt issuance plans.

RATING SENSITIVITIES

STRUCTURAL BALANCE: Fitch expects the district to restore reserve adequacy in the next couple of years. Inability of the district to restore structural balance and sound reserves will likely result in a negative rating action.

CREDIT PROFILE

The district is located along the U.S.-Mexico border in Starr County. It is large at approximately 417 square miles and sparsely populated at a district-estimated 57,123.

OIL AND GAS BORDER ECONOMY

Starr County's economy is based on agriculture and oil and gas production, comprising 44.5% of fiscal 2016 taxable assessed valuation (TAV). Top 10 payers make up a high 49% of TAV, with the top payer, Los Vientos Windpower III LLC, contributing 21.5%.

TAV dropped 19% between fiscal 2010 and 2015 due to reduced mineral values, but the impact on the district's operating budget was largely offset by increased state support under the current funding formula which backfills declines in local property tax revenues from lower TAV. The district's fiscal 2016 TAV rose 19% due largely to the addition of the Los Vientos Windpower III LLC (Duke Energy Renewables Wind, LLC) and Net Mexico Pipeline properties.

The wind power property is subject to abatement (for maintenance and operating purposes) over the next several years, but tax base losses will be backfilled by economic development and supplemental payments from Duke. These payments, as well as additional wind projects are expected to offset the loss of the first project on the tax roll and contribute to stability of the tax base in the next several years.

The district's below-average wealth and employment indicators are typical of many Texas-Mexico border communities. The district's median household income is one-half the U.S. average and poverty is double the U.S. rate. The county's unemployment rate is high at 13% as of August 2015.

OPERATING DEFICITS DIMINISH FINANCIAL CUSHION

State sources contributed a high 77% of fiscal 2014 operating funds, followed by property tax revenue (12%) and federal funding (9%). Despite flat enrollment, the district maintained unrestricted reserves in excess of its informal two months of spending target over the past five years in anticipation of drawdowns in fiscal 2013 and 2014 to fund a new high school.

Reduced fiscal 2014 unrestricted reserves of $16.2 million (14.2 % of spending) fall just below the district's two-month fund balance target. The district estimates completion of fiscal 2015 with an operating deficit of $4.3 million and reserves of $11.8 million (11.6% of spending) due largely to wage and salary adjustments. The district plans to outperform its fiscal 2016 budget deficit of $2.9 million through cost savings and expected annual supplemental revenues pursuant to its agreement with Duke Energy Renewables Wind, LLC.

Fitch will continue to monitor the district's finances in relation to restoration of reserves and ability to balance spending with recurring revenues. The district's maintenance and operations tax rate is at the maximum statutory level ($1.17 per $100 of TAV). Ongoing structural imbalance and further reduction of the district's financial cushion will likely result in a rating downgrade.

AFFORDABLE LONG-TERM LIABILITIES DUE TO SIGNIFICANT STATE SUPPORT

Fitch considers the district's debt burden high without consideration of state support at 7.5% of full market value. The debt service burden represents a moderate 6.3% of spending, and a low 1.7% considering state support. Principal amortization is within the low end of moderate at 44% in 10 years.

District officials do not maintain a formal capital improvement plan but note that current facilities have adequate capacity to accommodate continuing enrollment gains, if realized, over the medium term. There are no near-term new money debt issuance plans.

Carrying costs for debt service, pensions and OPEB are low at 7.2% of fiscal 2014 governmental spending and a very low 2.6% of spending considering state debt service support. The state's funding of school districts' payments to the Texas Teachers Retirement System 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 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 consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.