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

--$28.19 million ULT refunding bonds, series 2016.

The bonds are expected to price via negotiation the week of March 28. Proceeds will be used to refund outstanding obligations for debt service savings without extending final maturity.

In addition, Fitch has affirmed the 'A+' underlying rating on $32.6 million of school building bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty 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
ENERGY-CENTRIC RESOURCE BASE: The area economy is concentrated in and dependent on the energy industry. Enrollment fluctuates based on energy sector trends.

COST FLEXIBILITY AND RESERVES ARE KEY: Commodity price volatility drives assessed value and enrollment fluctuations. The district's proven ability to adjust spending, cutting both instructional and capital expenditures in the past to ensure fiscal balance, and its maintenance of high reserves, are significant mitigating credit factors.

STATE OFFSETS TAV DECLINES: Fluctuations in taxable assessed valuation (TAV) have a neutral impact on total operating revenues, as the state backfills on a per-pupil basis. TAV changes the ability to issue new debt due to the statutory debt service tax rate cap of $0.50 per $100 of TAV, but the district maintains ample capacity below the statutory cap.

MODERATE LONG-TERM LIABILITIES: Fitch anticipates the district's debt burden to remain moderate given the lack of near-term issuance plans. Low carrying costs reflect the state's assumption of most pension contributions and a slow principal amortization rate.

RATING SENSITIVITIES
MAINTENANCE OF SOUND RESERVES: Fitch expects the school district to continue with prudent cost management in order to maintain a sound financial cushion.

CREDIT PROFILE
The district serves a population of about 18,150 in the city of Pampa, TX and portions of surrounding Gray and Roberts Counties in the Texas panhandle about 56 miles northeast of Amarillo.

CONCENTRATED, OIL-BASED ECONOMY

The local economy is concentrated in the energy industry and Pampa ISD's tax base is sensitive to changes in oil and gas prices. Top 10 taxpayers represent 28% of fiscal 2016 market value; top taxpayer Halliburton Energy Service (Halliburton Company's long-term Issuer Default Rating is 'A-' with a Stable Outlook), constitutes a large 6.6% of fiscal 2016 market value.

Fiscal 2016 market value of $1.6 billion reflects four-year compound annual growth of about 2%, but a more modest year-over-year increase of 1%, as the addition of a new methanol plant offset ongoing softness in the energy market. Although the district anticipates near-term stability of the tax base, Fitch anticipates the potential for continued volatility dependent on oil prices. Gray County unemployment of 5.9% as of December 2015 is up from 3.2% the year prior and has edged above the rate of 4.2% state-wide for the same period.

SOUND FINANCES AND ADEQUATE RESERVES

Pampa ISD revenues grew by an average rate of 2.8% during fiscal 2013 through 2015, provided in roughly equal amounts by property taxes and state support. More robust 5.4% average annual 10-year growth mirrors expansion of the energy economy in the region. Concerns over potential property tax revenue declines are mitigated by the state funding formula which backfills such declines.

District fiscal 2015 unrestricted reserves of $6.4 million, 19% of spending, are down from $12 million (35.9% of spending) in fiscal 2014. The decline is due to the budgeted spenddown of $5.4 million associated with fiscal 2014 oil & gas lease revenues. Officials project reserves to remain stable at about $6.4 million in fiscal 2016.

Pampa ISD enrollment realized annual changes of (0.5%) to 5.6%, averaging 2.3% between fiscal 2009 and 2015, before realizing a 4.3% decline to 3,674 in fiscal 2016. Fitch anticipates the potential for modest enrollment declines in the near term depending on the duration of low oil prices. The district retains expenditure flexibility, primarily through staffing flexibility, which Fitch anticipates will be used to achieve a balanced fiscal 2017 budget.

The district's maintenance and operations (M&O) tax rate is at the statutory cap of $1.04 per $100 of TAV. The district does not have immediate plans to pursue a tax ratification election to tap the additional 13-cents available under current statutory provisions.

MODERATE DEBT; NO NEAR-TERM CAPITAL NEEDS

Fitch anticipates Pampa ISD's debt burden (3.7% of fiscal 2015) to remain moderate based on a lack of near-term issuance plans. The district applied approximately $5.4 million of fiscal 2014 oil & gas lease revenues to fund infrastructure and facilities improvements and new vehicles during fiscal 2015. Additional receipt of $1.7 million in oil & gas lease revenues during fiscal 2016 was used for ADA compliance upgrades at the high school football stadium.

Pampa ISD expects facility capacity to be adequate for the next several years based on the recent enrollment dip and its enrollment projections. The district's interest and sinking fund (I&S) tax rate of $0.27 per $100 of TAV is well below the statutory cap of $.50 for new debt issuance, providing ample headroom to issue should the tax base realize further declines.

LIMITED PENSION/OPEB OBLIGATIONS
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption. Contributions are determined by state statute, rather than actuarially, and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.

The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts - as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

The district's proportionate share of the system's net pension liability is minimal, representing less than 0.5% of fiscal 2015 market value. The district's contributions currently are limited to 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $674,877 in fiscal 2015). Carrying costs for debt service, pensions and OPEB were low at 9.8% of fiscal 2015 governmental spending, reflecting strong state pension support and a slow 10-year amortization rate of 38%.

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.