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

--$45.7 million ULT school building and refunding bonds, series 2016.

The 'AAA' long-term rating for the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.
The bonds are scheduled for negotiated sale the week of January 28th. Proceeds will be used to acquire, design, renovate, construct, and equip school facilities.

Fitch has also assigned an 'AA+' underlying rating to the bonds and affirmed the 'AA+' underlying rating on the following outstanding bonds (pre-refunding):
--$126.3 million ULT 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

STRONG FINANCIAL FLEXIBILITY: The district has consistently generated surplus results despite spending pressures from enrollment growth. Moreover, these results have been achieved while prudently maintaining a modest margin of taxing flexibility for operations. General fund reserves are very high.

TAX-BASE EXPANSION: Residential and commercial development has resulted in significant tax base growth of late after a period of more modest growth post-recession. Growth prospects remain positive given the district's location, which straddles IH 35 between Austin and San Antonio, and ample undeveloped land.

ELEVATED DEBT BURDEN/AFFORDABLE CARRYING COSTS: The district's elevated debt burden reflects the accelerated enrollment growth and associated facility construction. Concerns are mitigated by prospects for continued tax base growth with moderate debt plans. Furthermore, overall carrying costs for debt and retiree costs are affordable due to significant state support for retiree costs.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: The rating is sensitive to shifts in the district's strong financial performance.

CREDIT PROFILE

Located 30 miles north of San Antonio, the district encompasses 75 square miles and serves primarily the city of New Braunfels (the city) (GO rated 'AA', Stable Outlook by Fitch). The district's current population is estimated at 51,363 and has shown an average annual increase of nearly 3% since 2000.

STRONG FINANCIAL FLEXIBILITY

District finances are characterized by a strong trend of annual operating surpluses that have led to growing reserve levels, reaching an unrestricted fund balance of over $40 million or 76% of spending in fiscal 2015. Liquidity is also favorable, with cash and investments representing over 80% of general fund spending. The fiscal year 2015 results were better than the budgeted $1.3 million drawdown; the very high $3.4 million surplus is due to conservative projections of student population growth and state and local revenues, combined with spending levels below budget.

The fiscal 2016 adopted budget assumed 3% enrollment growth, 4% tax base growth, and management reports no material variances year-to-date. The budget maintains the current M&O tax rate at $1.0133 per $100 taxable assessed value (TAV), which is below the statutory rate cap of $1.04 (or $1.14 with voter approval). The debt service rate of $0.326 per $100 TAV has ample margin under the statutory $0.50 new money rate cap. Fitch sees margin in both tax rates as favorable, as it provides the district flexibility to address any operational or capital pressures it might face in the current growth environment.

ROBUST CENTRAL TEXAS ECONOMY

The local economy centers on tourism, manufacturing, distribution, healthcare, and retail trade. The city's location and access to the extensive economic bases of both San Antonio and Austin offers residents additional employment opportunities, as reflected in the area's historically low unemployment rate. The city's low unemployment rate of 2.9% in November 2015 consistently trends below the rates of the San Antonio metropolitan statistical area (MSA; 3.8%) and the state (4.5%). Median household income levels are above average.

ENROLLMENT AND TAX-BASE GROWTH CONTINUES

Enrollment continues to record steady gains, averaging about 2.3% growth annually from 2008-2015 with current enrollment at 8,400 students. TAV, however, increased by an average of more than 6.7% annually during the same period. The tax base quickly resumed growth post-recession with 2011 marking the only year of modest contraction. TAV for fiscal 2016 marked the strongest year-over-year gain since the recession at 14%, bringing the tax base to over $4 billion.

Management expects additional moderate growth in student counts and TAV in the near term as the ongoing northern expansion of San Antonio, as well as the availability of affordable land within the district, continue to spur additional development. Fitch considers this expectation reasonable given recent trends.

ABOVE AVERAGE DEBT BURDEN

Debt ratios are elevated at 5,521 per capita and 6% of market value. Debt amortization is moderate with 58% retired in 10 years.

The proposed bonds are the first issuance of the $62.8 million authorized by voters in November 2015. Management will first address immediate elementary capacity needs, high school renovations, and other capital projects. The remaining authorization may be issued as soon as the first quarter of the 2017 calendar year, yet management's commitment to maintaining the tax rate at current levels will play a role its timing.

LIMITED PENSION/OPEB OBLIGATIONS

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.
Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $7.3 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 2/10ths of 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB are affordable at 15.1% of fiscal year 2015 governmental spending.

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. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.