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

--$156.91 million refunding bonds, series 2016.

The bonds are expected to sell via negotiation the week of April 11, subject to market conditions. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.

In addition, Fitch has affirmed the 'AA-' rating on the district's approximately $407.9 million in outstanding ULT bonds.

The Rating Outlook is Stable.

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

REVENUE GROWTH; ADEQUATE RESERVES: Strong revenue growth reflects a history of rapid enrollment growth. The district maintains adequate financial flexibility by managing costs within available resources.

MANAGEABLE LONG-TERM LIABILITIES: Fitch anticipates debt to remain elevated based on enrollment projections and slow amortization. Affordable carrying costs (debt service, pension and other post-employment benefit contributions) reflect strong state pension support and the district's manageable debt issuance plans.

STRONG ECONOMIC METRICS: The regional economy is characterized by tax base growth, above-average median household income, and low unemployment. Top employers represent the airline and defense industries, as well as government, education, and health service sectors.

RATING SENSITIVITIES

GROWTH AFFORDABILITY: The current rating is premised on the district's ongoing ability to manage growth as demonstrated by affordable carrying costs and maintenance of stable finances.

DEBT PROFILE: The current rating also assumes tax base growth adequate to support new debt issuance without increasing the overall debt burden and improvement over time in the district's debt amortization rate.

CREDIT PROFILE
Eagle Mountain-Saginaw ISD is located approximately seven miles from the center of Fort Worth. The district includes the northernmost portion of Fort Worth as well as the cities of Saginaw and Blue Mound.

GROWING LOCAL ECONOMY WITH STRONG DEMOGRAPHICS

Eagle Mountain-Saginaw ISD enrollment grew by a rapid 5.7% average annual rate over the past 10 years, but has realized more moderate 2.6% annual growth since 2013. Enrollment gains reflect expansion of the regional economy.

The district's median household income is 139% of the Texas average, with a poverty rate less than half of the state level. The city of Fort Worth unemployment rate of 3.9% as of January 2016 compares favorably to the state rate of 4.4% for the same period.

The district's top 10 taxpayers are represented by oil & gas, utility, financial and commercial concerns, with moderate top-taxpayer concentration, 11.14% of fiscal 2016 TAV. The district does not face near-term, material exposure to low oil & gas prices; mineral values comprise a modest 3% of the district's fiscal 2016 market value.

CONSISTENT OPERATING PERFORMANCE

Eagle Mountain-Saginaw ISD's revenues grew by a high compound annual rate of 11.5% over the last 10 years, mirroring enrollment gains and an expanding tax base. Property tax revenues contribute 53% of the district's operating revenues and state funding 47%.

A history of generally positive operating margins and sound reserves reflects the district's management of expenditures at a pace below that of revenue gains. The district completed fiscal 2015 with an unrestricted general fund balance of $30.2 million representing a sound 19.9% of spending. A net deficit of $1.25 million (.8% of fiscal 2015 spending) resulted from the funding of $2.7 million in nonrecurring capital projects from fiscal 2015 operating revenues.

Officials project a dip in fiscal 2016 reserves to $27.5 million (18% of spending) due to $6 million in property tax revenues the district estimates it will not realize in fiscal 2016. Operational problems with Tarrant County's recently implemented appraisal software resulted in a backlog of appraisal updates and reduced property tax revenues.

The district is committed to a balanced fiscal 2017 budget and restoration of reserves to its two-and-a half month policy target over the next several years. Fitch considers this reasonable based on the strength of regional growth, updates to and viability of the appraisal district software, and the district's track record of strong fiscal management.

ELEVATED DEBT; ONGOING NEEDS

Fitch expects overall debt, at 8.5% of fiscal 2016 market value, to remain elevated based on the district's ongoing growth-related debt needs despite solid tax base growth. Fitch anticipates issuance against the district's $163 million in authorization over the medium term at a pace supported by growth in TAV.

Fitch anticipates that the district will maintain adequate capacity in relation to the statutory cap of $.50 for new debt issuance based on flexibility provided by its 2014 tax rate restructuring that allows a portion of operating funds to be used for debt service and tax base growth supported by regional trends. The district's fiscal 2016 I&S tax rate is $0.37 per $100 of TAV. Eagle Mountain-Saginaw's tax base has grown by a strong 4.9% average rate over the past four years.

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 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 currently are limited to the 1.5% of salaries and the pension costs for salaries as described above (total contribution of $3 million in fiscal 2015). Carrying costs for debt service, pensions and OPEB were 17.6% of fiscal 2015 governmental spending, comprised nearly entirely of debt service. The moderate burden reflects 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.