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

--$121.4 million unlimited tax refunding bonds series 2016.

The bonds are expected to sell via negotiation the week of April 4, 2016. Proceeds will be used to refund outstanding obligations for savings without extending final maturity.

In addition, Fitch has affirmed the 'AA-'underlying rating on the district's $289.3 million (prerefunding basis) outstanding ULTs. Fitch does not rate the district's ULT refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee 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
SOUND FINANCIAL PROFILE: The district demonstrates sound financial management through consistently positive financial performance, robust fund balance levels and conservative budgeting.

HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS: Debt levels are elevated and amortization is slow. No new money debt issuance is planned, as the capital projects fund reserve remains sufficient to meet near-term capital needs.

MODERATE ENROLLMENT GROWTH: The district serves Burleson and surrounding areas south of Fort Worth, which have historically experienced rapid growth. The district realized a solid 5.5% enrollment gain in fiscal 2016, after more modest growth in the previous three years, but does not face immediate facility pressure given the fiscal 2016 opening of a new middle school.

RATING SENSITIVITIES
SOUND FINANCES; MANAGEABLE GROWTH: The rating assumes continuation of sound finances and the district's ability to accommodate enrollment growth within available resources.

CREDIT PROFILE
Located approximately seven miles south of Fort Worth along Interstate Highway 35 West, the district serves approximately 11,000 students from the city of Burleson and surrounding areas.

GROWING BEDROOM COMMUNITY

Burleson's affordable land, convenient transportation routes, mineral exploration activity, and proximity to the larger Dallas-Fort Worth-Arlington employment base have combined to fuel rapid population growth. Management estimates only about half of the district is currently built out, and planned residential and commercial developments suggest growth will continue for the near- to intermediate-term.

Economic indicators are favorable, with a low city of Burleson unemployment rate at 3.2% in January 2016 (versus 4.4% in Texas) and above-average incomes. Regional median household income is above the state and national averages.

STABILIZING TAX BASE

Improving residential property prices and new residential and commercial development contributed to strengthening of the tax base in fiscal 2015 and 2016. It had been flat-to-modestly declining for the prior four years, largely due to fluctuations in Barnett Shale mineral values. Top-10 taxpayers, making up 9.15% of fiscal 2016 taxable assessed value (TAV), are still somewhat concentrated in the energy sector.

Fluctuations in taxable values have no impact on total operating revenues, as the state backfills on a per-pupil basis, but TAV changes affect the district's capacity to issue new debt due to the debt service tax rate currently being at the maximum statutory rate.

STRONG REVENUE GROWTH; CONSISTENT FINANCIAL PERFORMANCE

The district's revenues have grown at a strong 6.2% compound annual rate over the last 10 years, reflecting rapid enrollment. The district typically generates operating surpluses and was able to add to reserves even during the recession with effective cost control. The district completed fiscal 2015 with a net operating surplus of $5.1 million and unrestricted general fund reserves of $24.8 million, or 31% of spending. Officials anticipate similar 2016 reserves. The district may approach voters in the next couple of years to seek an increase in its maintenance & operation (M&O) tax rate from the current statutory maximum of $1.04 per $100 of TAV. The district could tap up to an additional $0.13 with voter approval.

State funding provides half of the district's operating revenues. The district's most recent demographic study projected annual 2% enrollment increases over the next five years; however, the district commissioned an updated demographic study to be released in mid-April due to the recent enrollment uptick.

The district also receives Barnett Shale mineral royalties. Due to the unpredictability of the revenue stream (between several hundred thousand to over one million dollars annually in recent years), the district applies these funds to capital outlays in accordance with its conservative management policies.

HIGH DEBT, MANAGEABLE CAPITAL NEEDS

Fitch expects the district's overall debt, at 8.8% of market value, to remain high based on a slow 10-year principal amortization rate of 26%.

The district has no remaining bond authorization and is constrained from returning to voters for GO authorization in at least the near term. The district currently levies a debt service tax rate at the $0.50 cap that the state attorney general imposes on school districts as a test before approval of new money debt issuance.

However, capital requirements appear manageable for the near term without additional debt. The district's immediate facility needs were addressed through conversion of an old elementary school to a middle school, funded from capital projects reserves.

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 in order 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 proportionate share of the system's net pension liability paid by the district is minimal, representing less than 0.5% of fiscal 2015 market value. The district's contributions are currently limited to 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $767,797 in fiscal 2015). Carrying costs for debt service, pensions and OPEB were moderate at 19.6% of fiscal 2015 governmental spending, composed nearly entirely of debt service and reflecting strong state pension support and a slow 10-year amortization rate of 31%.

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.