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

--$103.9 million ULT refunding bonds, series 2016.

The 'AAA' long-term rating reflects the guarantee of the Texas Permanent School Fund (PSF; bond guarantee program is rated 'AAA' by Fitch).

The bonds are expected to sell via negotiation the week of Jan. 25. Proceeds will be used to refund certain outstanding bonds for interest cost savings and pay issuance costs.

Fitch also assigns an underlying 'AA-' rating to the series 2016 bonds and affirms its 'AA-' underlying rating on the district's $319.4 million (non-accreted, pre-refunding) outstanding ULT debt.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the district's levy of an unlimited ad valorem tax on all taxable property within the district and also carry the Texas PSF bond guaranty (for more information on the Texas PSF, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

EXCELLENT FISCAL TRACK RECORD: Consecutive years of positive operating results over the past decade have yielded strong fund and cash balances. Management continues to maintain a balanced operating profile despite ongoing cost pressures from rapid enrollment growth.

STRONG ECONOMY/FAVORABLE DEMOGRAPHICS: District residents enjoy access to the broad and diverse San Antonio metropolitan statistical area (MSA) (city of San Antonio ULTGOs rated 'AAA' by Fitch). District wealth and educational attainment levels are slightly above average and poverty and unemployment rates are very low.

HIGH DEBT BURDEN POISED TO GROW: The district's debt profile remains the key credit weakness. Fitch anticipates a continued high debt burden given the capital pressures driving debt needs. The district actively manages its tax rate to maintain adequate headroom under the state's statutory tax rate limit on new money debt issuance.

AFFORDABLE LEGACY COSTS: The state continues to fund the bulk of retiree pension and healthcare costs on behalf of districts, resulting in an affordable fixed cost burden to the district.

RATING SENSITIVITIES

DEBT ISSUANCE & CAPACITY: Fitch expects the district to continue its prudent management of growth-related capital needs and debt plans and to monitor tax base trends and the state's tax rate capacity parameters.

FINANCIAL FLEXIBILITY: Preservation of its strong fiscal cushion is an important mitigant to the district's high debt burden and will be a key determinant in rating stability.

CREDIT PROFILE
The district sits about 25 miles northeast of downtown San Antonio and is bordered by two major interstate highways to its north and south. The fiscal 2015 student count was approximately 15,000 and enrollment continues to expand at about 5% annually.

FINANCIAL PERFORMANCE A CREDIT POSITIVE
The tenured management has generated positive operating margins (before capital outlays) in each of the last 10 audited fiscal years (2005-2015). Conservative budget assumptions for attendance-based state revenues and expenditures, as well as careful cost-monitoring throughout the year, underpin the district's strong fiscal track record.

General fund operations in fiscal years 2014 and 2015 benefitted from the partial restoration of per pupil state funding levels. This, in conjunction with added revenue from expanding enrollment, allowed management to maintain budgetary balance against growing operational costs.

Year-end fiscal 2015 performance resulted in an unrestricted general fund balance of about $41 million or a robust 38% of spending, which was down modestly from $43.5 million or 46% in fiscal 2014. Planned stadium improvements and expansion of a school wing drove the fiscal 2015 $2.6 million net drawdown for pay-go capital (2.4% of spending).

The $110.3 million fiscal 2016 general operating budget is balanced. A 3% pay increase for all employees is included as well as 60 additional staff/teachers in order to maintain service levels for the growing enrollment base. In total, these two budget initiatives are estimated to have a recurring cost of about $5.3 million. Management reports the year's enrollment and operating trends are presently in line with budget projections. Fitch does not foresee substantial changes to the district's strong financial performance and position.

FAVORABLE LOCATION IN SAN ANTONIO METRO AREA
The district benefits from its proximity to the broad economic base of the San Antonio metropolitan area and location along two major interstate highways (IH-35 and IH-10). Randolph Air Force base is located adjacent to the district and the military remains a large area employment sector. Other key employment sectors of the San Antonio area include government, domestic and international trade, health and education services.

Wealth and income metrics of the district are favorable, with per capita and median household income equal to 104% and 141% of the nation and a low poverty rate. The area's 3.1% unemployment rate in November 2015 is very low and better than the state (4.5%) and national averages (4.8%) and has trended lower than average for several years.

CONTINUING TAX BASE & ENROLLMENT GROWTH
The district's predominantly residential tax base saw extraordinary growth through 2009. The availability of affordable land drew development northward from San Antonio, spurring some attendant retail and commercial development. Taxable assessed value (TAV) growth slowed coming out of the recession but still registered 4.1% compound average annual growth from fiscal years 2010-2014. TAV has continued to strengthen through fiscal 2016. The district realized a strong 9% gain in fiscal 2015, bolstered by completion of a large Amazon distribution center, which added roughly 2.6% ($100 million) to the tax base. This was followed by a roughly 4% TAV gain in fiscal 2016 due largely to further growth in residential values as well as industrial inventory.

Significant enrollment growth has accompanied the residential development, varying from 4%-6% annually in the past five years. Attendance increased by 3% in fiscal 2015 or roughly 500 students. District officials expect this pace of growth to continue or somewhat strengthen over the near term given the recent increases in new homes being built in the district. The enrollment growth will continue to drive increases in the operating budget and capital needs.

HIGH & RISING DEBT
Debt ratios are high at approximately $6,200 per capita and 9% of fiscal 2016 full market value. Fitch's debt ratio calculation includes the currently accreted value of capital appreciation bonds (CABs) and does not consider annual state support for debt service as it is subject to legislative appropriation. Debt ratios will remain elevated given the future capital needs of the district. Despite elevated debt ratios, debt service consumed a manageable 13% of governmental fund expenditures in fiscal 2015 and is projected with this refunding to reach maximum annual debt service (MADS) in 2016 at $25 million (before considering any offsetting state debt service aid, as the latter is subject to changes based on tax base and enrollment trends).

PRESSURE TO MANAGE TAX RATE & RETAIN DEBT CAPACITY IS EVIDENT
Officials are assuming moderate annual TAV growth of between 3.5% and 5% for tax rate planning purposes. Fitch believes the TAV growth assumptions are plausible given the development underway and 4% average annual growth rate in the last five years; however, lower TAV growth than presently forecast may push tax rates closer to the state's $0.50 tax rate ceiling for new money debt issuance. This would diminish the district's already limited debt capacity and potentially require debt restructuring to carve out additional capacity.

This offering refunds certain outstanding series to take largely level debt service savings of $2 million annually that does not extend maturities. The amortization is slow with 37% of outstanding principal retired in 10 years.

Depending on TAV and population growth, future capital needs may lead to yet higher debt ratios. These needs include additional campuses and expansion of existing school facilities to accommodate the enrollment growth. A new elementary school and high school renovations are projected to be the key items in the next bond election planned for November 2016, sized at between $100 million-$125 million. Initial bond program plans anticipate minimal to no tax rate impact with the aforementioned annual TAV growth.

Fitch's concern about the district's overall long-term liabilities is lessened in part however by its low retiree cost burden. 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 $13.7 million, with fiduciary assets covering 83.3% 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 roughly 2/10ths of 1% of the district's fiscal 2016 market value. Other post-employment benefit (OPEB) contributions paid by the district are also nominal as the state and employees also pay the bulk of these costs. Carrying costs for debt service, pensions and OPEB are low at 13% 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 change 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.