OREANDA-NEWS. Fitch Ratings assigns an 'AA+' underlying rating to the following Lewisville Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--$245.4 million ULT refunding bonds, series 2016A;
--$85.8 million ULT refunding bonds, series 2016B.

The district has applied to the Texas Education Agency for approval of the series 2016A bonds under the Texas Permanent School Fund bond guaranty program.

Both series of bonds are scheduled for a negotiated sale on or about April 21, 2016. Proceeds from both series will be used to refund certain outstanding district obligations for debt service savings and to pay issuance costs.

Fitch also affirms its 'AA+' underlying rating on the district's $1.24 billion (pre-refunding, accreted basis) outstanding ULT debt.

The Rating Outlook is Stable.

SECURITY
Both series of bonds are payable from the district's levy of an unlimited ad valorem tax on all taxable property within the district. An application has been made for the series 2016A bonds to the Texas PSF bond guaranty program (for more information on the Texas PSF, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

STRONG FINANCIAL POSITION MAINTAINED: Solid general fund reserves and liquidity enhance the district's financial flexibility. Conservative and prudent fiscal management typically facilitates outperformance of the sizeable operating deficits budgeted annually.

FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in the broad Dallas-Fort Worth metro area and employment base along major transportation corridors. Population trends exceed those of the state. Income and wealth levels also are above average.

TAV GROWTH: Positive taxable assessed value (TAV) trends continue, and prospects for further tax base expansion appear favorable.

ELEVATED DEBT LEVELS: Slowing enrollment growth should moderate the district's capital plans and eventually reduce high debt ratios. The rapid pace of debt retirement will facilitate this trend.

AFFORDABLE RETIREE COSTS: The state continues to fund the bulk of pension and healthcare costs on behalf of districts, resulting in a manageable fixed cost burden to the district.

RATING SENSITIVITIES
The rating is sensitive to material changes in the district's substantial financial flexibility, which is consistent with the current rating. Any deterioration in the district's debt profile also could pressure the rating. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE
The district encompasses 127 square miles and is located about 20 miles northwest of Dallas in Denton County. It serves all or portions of 13 residential communities, including the cities of Lewisville, Flower Mound, Carrollton, and The Colony.

STRONG FINANCES
Local property taxes continue to provide the largest portion of the district's operating revenues, at two-thirds of the total in fiscal 2015. The district generated solid net operating surpluses in four of the past five fiscal years despite realizing reduced state aid over fiscals 2012-2013, enabled by management's multi-year efforts in reducing staffing costs.

Management historically outperforms the year's adopted operating budget that usually includes a moderately-sized deficit and conservative revenue and expenditure assumptions. Fiscal 2015 was no exception to this pattern, as an initial budget gap ($18.7 million or 4.4% of budgeted spending) was closed and a $10.8 million net surplus (2.6% of spending) boosted reserves. Unrestricted fund balance improved to $155.2 million or 37.2% of spending at fiscal 2015 year-end. This amount includes $45 million (equivalent to slightly under 11% of fiscal 2015 general fund spending) held as a minimum reserve according to the district's formal fund balance policy. The district's liquidity position also remains robust. General fund cash and investments at fiscal 2015 year-end totaled $183.5 million, or more than five months of operational spending.

The $446.5 million fiscal 2016 adopted operating budget increased by 4.5% year-over-year (budget-to-budget) and included a $14.1 million (3.2% of budgeted spending) drawdown on reserves. Management currently expects to narrow the year's gap to roughly $5 million, reporting that both revenues and expenditures are outperforming budget. Given its track record and consistently conservative budgeting philosophy, Fitch does not foresee material changes to the district's sound financial position.

TAV GAINS CONTINUE
The district's tax base is primarily residential in character and is roughly 75% built-out. TAV gains prior to the recession were strong, averaging a compound annual growth rate of 6.5% from fiscal years 2003 to 2009. Enrollment trends followed at a fast-paced 5% average annual growth rate during the decade from fiscal 1997 to 2007. TAV and enrollment trends subsequently moderated given the recession and the district's maturing nature. Enrollment has grown at about 1% on average annually over the last five fiscal years (fiscals 2011-2016) to a total of about 53,400 students in the 2015-16 school year.

A balanced mix of residential and retail/commercial gains saw TAV increase by 5% in fiscal 2014 and a stronger 10% in fiscal 2015. Fiscal 2016 saw a healthy 8.2% TAV gain to $27.4 billion, and management anticipates a similar increase for fiscal 2017. Further TAV increases are likely as development continues, highlighted by a recent announcement by Mary Kay Cosmetics for a new manufacturing and R&D facility in the district. Toyota's new North American headquarters in nearby Plano, presently scheduled for an early 2017 opening, is expected to generate ancillary development in and around the district.

HIGH DEBT, MANAGEABLE CARRYING COSTS
High debt ratios reflect the district's prior fast-growth years. Overall debt levels approximate $6,157 per capita and 5.9% of fiscal 2016 market value (on an accreted basis). Principal amortization is above average with roughly 76% of principal repaid within 10 years. This refunding is projected to provide sizable annual debt service savings of about $4.8 million without restructuring or extending maturities.

Management reports identification of near-term capital needs is nearing completion, and the next GO bond election may be held as early as May 2017. The district maintains some capacity in its existing school facilities. Fitch believes capital needs should remain manageable in this fairly mature district, which should reduce the district's reliance on continual tax base growth to fund them with debt.

AFFORDABLE RETIREE COSTS
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 0.2% of fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB were 18.3% of fiscal 2015 governmental spending, comprised nearly entirely of debt service.

TEXAS SCHOOL FUNDING 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.