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

--$68 million ULT school building bonds, series 2016.

The 'AAA' long-term rating on the bonds is based on a guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. For additional information on the Texas PSF rating please see Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

The bonds are scheduled for competitive sale on Feb. 10. Proceeds will be used to fund facility maintenance, construction projects, technology upgrades, vehicle and bus purchases, and pay the costs of issuance.

Fitch also assigns an underlying 'AA+' rating to the series 2016 bonds and affirms its 'AA+' underlying rating on $222.5 million of outstanding parity ULT debt.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.

KEY RATING DRIVERS
SOUND FINANCIAL RESOURCES: The district's sound financial profile features a healthy fund balance and liquidity position despite mixed operating results the past several years. This robust fiscal cushion tempers the risks associated with expense pressures linked to the opening of new facilities.

STABLE UNIVERSITY-CENTERED ECONOMY: Texas A&M University, one of the largest universities in the state, is the economic engine for the area and continues to drive economic expansion. Local wealth and income levels are below average due to the large student population. The jobless rate is low.

ELEVATED DEBT BURDEN: Debt burden ratios are high and will remain elevated over the medium term given the need for additional debt issuance and a moderate amortization rate. Mitigating factors include tax rate capacity to support additional debt and strong community support for bond propositions.

AFFORDABLE LEGACY COSTS: The state funds the bulk of retiree pension and healthcare costs, resulting in very low costs to the district for these benefits.

RATING SENSITIVITIES
GROWTH PRESSURES: Failure to maintain sound reserves and liquidity as the district faces growing enrollment and debt may lead to negative rating action.

CREDIT PROFILE
The district is located in east-central Texas approximately 90 miles equidistant from Houston and Austin. The district serves the city of College Station, which is most notably home to Texas A&M University, the flagship campus of the Texas A&M University System (system revenue bonds rated 'AA+', Stable Outlook).

District enrollment totaled 12,971 to begin fiscal 2016 and increased by a 3.5% annual average rate the past five years. Officials expect this trend to persist in the near term.

FINANCIAL RESOURCES PROVIDE FLEXIBILITY

The district's fiscal cushion has remained very strong over a period of several years of somewhat uneven operating performance. Total general fund balance oscillated between 35%-50% of spending from fiscal years 2009 to 2014. During this period, budgets were pressured by increased operating costs associated with the opening of new school facilities, as well as state funding cuts in fiscal 2012-2013. District officials actively managed expenses through a combination of staff reductions - chiefly through attrition - and other discretionary spending adjustments.

Deficit budgets were tempered by a small shift of the debt service tax rate to operations in fiscal 2013. The general fund tax rate is now at the statutory maximum without voter approval ($1.04 per $100 of taxable assessed value [TAV]); however, the district retains some flexibility within the maximum permitted with voter approval ($1.17). Fiscal 2015 unrestricted general fund balance equaled 33% of expenditures ($29.8 million), after essentially break-even operations outperformed a deficit budget due to enrollment and tax base growth exceeding conservative assumptions.

FUND BALANCE TO REMAIN HEALTHY

The fiscal 2016 $99 million general fund budget was adopted with another operating deficit of $1.8 million. The deficit reflects start-up costs for three new schools, including additional staff. The district is also implementing a 2% pay raise for staff. Under current forecasts, management expects that larger than budgeted enrollment growth will produce higher state revenue and balanced year-end operations. The year-to-date enrollment increase is 5% over the previous year (budget assumes 4% growth).

Out-year general fund forecasts demonstrate budget balance through fiscal 2017, assuming no change in the state funding formula. Reimbursements from 2016 bond proceeds for anticipatory capital projects are expected to offset new school start-up costs. Management currently projects fund balance to remain above $28 million through fiscal 2020, which at more than 25% of forecasted spending would still provide a satisfactory fiscal cushion relative to the district's overall credit profile and risks associated with the high debt burden.

Fitch expects that any further draws on fund balance will be at the discretion of management for one-time costs, as continuing enrollment gains yield additional operating revenues and keep potential required wealth transfer payments at lower levels. However, annual deficits beyond and/or larger than current forecasts would signal a structural budget imbalance and could place downward pressure on the rating.

ECONOMY BENEFITS FROM UNIVERSITY PRESENCE

The area economy benefits significantly from the presence of Texas A&M University, whose fall 2015 enrollment surpassed a record 58,000. The university's growth continues to drive area economic expansion and housing development. Near-term prospects for continued growth are good, as undergraduate applicant demand is strong and the university was awarded a multi-billion-dollar grant from the Department of Homeland Security to establish a major pandemic vaccination center (currently under construction).

Additional area business expansions are reportedly occurring in the city's biomedical corridor, zoned in 2013 for healthcare related businesses. District management also reports that there is active residential and multi-family housing development underway.

Area unemployment levels are typically well below those of the state and nation, and the metro area's October 2015 unemployment rate of 3.5% is very low relative to the state rate of 4.5% . Per capita income of residents is below average due to the large student population and discounts of income from outside sources.

TAV remains on a positive trajectory, averaging a 6.2% annual growth rate from fiscal years 2012-2016; the fiscal 2016 TAV is $7.84 billion. Continued annual growth of at least 3% is projected over the near term, reflecting expected residential and business expansions.

HIGH DEBT REFLECTS ENROLLMENT GROWTH

The district's overall debt levels will be $5,201 per capita and 7.3% of full market value following this issuance, which Fitch considers to be above average. Debt service costs consumed 16% of general government expenditures in fiscal 2014, but will climb to 19% of spending in fiscal 2017. The series 2016 bonds are structured so that total debt service increases 23% next year (fiscal 2017), requiring up to a 5.8% tax rate increase depending on tax base gains.

Principal amortization is moderate with 53% retiring in 10 years. Fitch's concerns over the growing debt and tax burden are tempered by the historically strong community support for recent bond elections; the 2015 authorization received approval from 72% of voters.

This offering is the first from a November 2015 bond authorization, and will be followed by an anticipated $68 million issuance in 2017. These two sales will finance three new campuses to support projected enrollment gains of 4% over the next four years, which is consistent with the recent historical trend. The district's projected debt service tax rate of up to $0.40 per $100 of TAV in fiscal 2018 would remain sufficiently below the state's statutory $0.50 tax rate ceiling for new money debt issuance.

OTHER LONG-TERM LIABILITIES MANAGEABLE

Retiree pension and healthcare benefits are provided to employees through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer 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's ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $13 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 0.2% of the district's fiscal 2015 market value.

Other post-employment benefit (OPEB) contributions paid by the district are nominal, as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2015 totaled a very low 0.2% of governmental fund expenditures.

The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs reasonable in the face of a high and growing debt burden.

TEXAS SCHOOL DISTRICT LITIGATION

A 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 taxes are effectively a statewide property tax due to a 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.