OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following State of Texas constitutional appropriation bonds issued by the Texas State Technical College System (TSTCS):

--$23,565,000 constitutional appropriation bonds series 2016.

The bonds are expected to be sold via competitive sale during the week of April 4th, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations secured by 50% of the revenues appropriated annually and allocated to TSTCS out of the first money coming into the state treasury not otherwise appropriated by the Texas Constitution, as authorized under article VII, section 17.

KEY RATING DRIVERS

CONSTITUTIONALLY DEDICATED DEBT SERVICE: Constitutional appropriation bonds benefit from constitutional provisions dedicating resources to bond repayment, creating a credit standing equivalent to state general obligation (GO) bonds.

LOW DEBT: The state's debt burden remains low despite significant growth-related capital needs, especially for transportation. Amounts for debt service are constitutionally dedicated.

ECONOMIC GAINS CONTINUE: The state's economy is large and diverse. Growth continues despite the recent energy industry weakness which to date has been concentrated in specific sectors and regions. The state's oil and gas sector remains a significant source of economic activity and is subject to volatility.

SIGNIFICANT RESERVE BALANCES: Financial operations are generally conservative. The state maintains a sizable budget reserve, with a portion of natural resource receipts dedicated to funding it.

SALES TAX DEPENDENCE: Finances are dependent on consumption-based (primarily sales) taxes; volatile energy taxes are also important.

GROWTH-RELATED SPENDING PRESSURES: Longer term fiscal pressures stem from having to adequately fund the state's rapid growth. This includes expanded transportation, school funding, and water needs.

RATING SENSITIVITIES

RATING LINKED TO STATE CREDIT QUALITY: The rating is sensitive to changes in the state's GO bond rating, to which this rating is linked.

CREDIT PROFILE

Constitutional appropriation bonds, while not GO bonds of the State of Texas, have a constitutional status which creates an equivalent credit standing. Accordingly, the bonds are rated the same as the state's GO bonds. Article VII, section 17 of the Texas constitution provides for an annual appropriation over a 10-year period for various agencies and institutions of higher education. The amount appropriated is out of the first money coming into the treasury not otherwise appropriated by the constitution.

A participating institution is allowed to borrow to the extent that debt service does not exceed 50% of individual annual appropriations, and the constitution prohibits adjustments that would prevent payment of debt service. The allocation for TSTCS totals $8.7 million in fiscal 2017 and thereafter, well beyond the $3 million maximum annual debt service on the bonds, in fiscal 2019; final maturity of the bonds is in fiscal 2025. There are approximately $6.5 million in constitutional appropriation bonds outstanding for higher education institutions as of August 31, 2015, none of which has been issued for TSTCS.

Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and an economy that continues to grow despite the severe contraction in the state's globally important energy sector. Although the oil price plunge that began in late 2014 has interrupted a long period of economic and revenue momentum, the state's diversification in recent decades has left it better positioned to weather the current energy sector uncertainty relative to past cycles.

Fitch believes that the state has ample flexibility to absorb near-term economic and revenue volatility, both in the form of its very large reserve balances and a tradition of taking budgetary actions to maintain balance. Liquidity remains ample, and the state is not undertaking cash flow borrowing in fiscal 2016 to meet intra-year cash needs for the first time in decades. The state has been an economic growth leader for decades, diversifying well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. However, rapid growth and the concomitant demand for public services, including for transportation, education and water, continue to pose long-term fiscal pressures.