OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Temple Independent School District, Texas unlimited tax (ULT) bonds:

--$70 million ULT school building bonds, series 2016.

The 'AAA' long-term rating for the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

The bonds are scheduled for negotiated sale the week of April 18th. Proceeds will be used to construct, renovate, and upgrade various district properties.

Fitch has also assigned an 'AA' underlying rating to the bonds, and a long-term Issuer Default Rating (IDR) of 'AA'.

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. (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

The 'AA' rating reflects the district's sound economic underpinnings, strong gap-closing capacity, and low fixed costs. Long-term liabilities will continue to be moderate and the lack of enrollment pressure contributes to expenditure flexibility. Given the stability and maturity of the district, capital needs will be minimal beyond the current authorization.

Economic Resource Base

The district is stable and mature, marked by flat enrollment trends. Prominent area industries include health care, utilities, and distribution. Growth prospects are somewhat limited given the dearth of developable land within district boundaries; however, its location in the central Texas growth corridor bode well for the Temple MSA.

Revenue Framework: 'a' factor assessment
The property taxes and state aid that support the district are expected to continue to yield modest revenue growth given the limited prospects for economic growth above inflation. The district's independent legal ability to raise revenues is limited by state law.

Expenditure Framework: 'aaa' factor assessment
The district is mature and maintains expenditure flexibility given a lack of enrollment pressure, and growth in spending is likely to trend with revenue growth. The low fixed-cost burden reflects state-support for pension and OPEB costs. There are no contractual obligations.

Long-Term Liability Burden: 'a' factor assessment
Debt and pension liability levels are moderate relative to personal income. Fitch anticipates the district's long-term liabilities will rise but remain a moderate burden on resources when the remainder of the authorization is issued in the next one to two years.

Operating Performance: 'aaa' factor assessment
The combination of the district's expenditure-cutting flexibility and solid reserve funding levels leave it well positioned to address cyclical downturns.

RATING SENSITIVITIES
Manageable Long-Term Liabilities: A material increase in long-term liabilities beyond current plans could result in a rating downgrade.
Improved Revenue Expectations: Developments that improve Fitch's assessment of the district's revenue framework, whether through increased growth expectations or enhanced flexibility, could result in an upgrade.

CREDIT PROFILE
Temple ISD is located in Bell, County, situated 65 miles north of Austin and 35 miles south of Waco and has an estimated population of 57,765. Three-quarters of the district lies in the city of Temple, whose population has grown 7.1% in the last five years. The city hosts a reinvestment zone that has proven successful in attracting capital investment to the area.

Revenue Framework

The district's operating revenues are split evenly with roughly 45% coming each from property tax and state aid. Revenue growth is primarily a function of enrollment as the state seeks to ensure a certain level of per pupil spending for all state school districts. Fitch anticipates historical enrollment stability to continue yielding revenue growth in line with inflation.

The district's general fund revenues have grown at slightly above the 2.3% U.S. CPI but below the rate of U.S. GDP over the last 10 years.

The district's M&O tax rate of $1.12 per $100 taxable assessed value (TAV) is $0.05 below the legal limit of $1.17. The district would need voter authorization to raise the rate and there are no current plans to do so. The district levies a separate, unlimited debt service tax rate that stood at $0.24 per $100 TAV as of fiscal 2016. Throughout the issuance of this authorization the rate is expected to increase an estimated $0.13 but remain within a comfortable margin under the $0.50 statutory cap for new issuance approval.

Expenditure Framework

The district's main expenditure item is personnel at 55% of general fund spending. Fitch expects expenditure growth at a similar rate to revenue growth absent policy actions, and maintains tight control over its spending within each budget cycle based on available resources.

The district's fixed cost burden is low, with carrying costs for debt, pensions and OPEB equaling 9.6% of 2015 governmental expenditures. Fitch expects the fixed-cost burden to rise to moderate levels when the district begins making debt service payments on the 2015 bond program in 2017. The district retains flexibility in staffing levels given the modest growth prospects, and does not have any labor contracts or wage pressure.

Long-Term Liability Burden

The district received a strong 64% of voter support for its 2015 bond program, the third consecutive successful bond election since 2007. Management plans to issue its remaining $66.5 million of authorization within the next two years, completing the capital improvement plan that includes the replacement of an aged elementary school and various upgrades and renovations to district facilities. If the current authorization is issued as planned, Fitch anticipates the district's debt burden will rise but remain moderate.

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 75% using a more conservative 7% return assumption.

The proportionate share of the system's net pension liability paid by the district is minimal, representing 0.58% of personal income. The district's contributions currently are limited to 1.5% of salaries (total contribution of $1.4 million in fiscal 2015).

Operating Performance

The district has maintained a strong financial cushion despite recessionary pressures and state funding cuts. The district retains adequate expenditure flexibility to manage well through economic downturns. General fund balances have held steady at around $16 million since 2007; audited fiscal 2015 general fund unrestricted reserves accounted for a healthy 22.3% of spending, or $16.7 million.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles.

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.