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TMCNet:  Fitch Rates San Antonio ISD, TX ULTs 'AAA' TX PSF; 'AA' Underlying

[August 20, 2014]

Fitch Rates San Antonio ISD, TX ULTs 'AAA' TX PSF; 'AA' Underlying

AUSTIN, Texas --(Business Wire)--

Fitch Ratings assigns an 'AAA' rating to San Antonio Independent School District, Texas (the district) bonds as follows:

--$50 million variable rate unlimited tax (ULT) refunding bonds, series 2014A;

--$50 million variable rate ULT refunding bonds, series 2014B.

The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of 'AA' to the series 2014A and series 2014B bonds.

The bonds are scheduled for negotiated sale the week of Aug. 25. Bond proceeds will be used to refund outstanding notes and restore capacity for the district's commercial paper program.

In addition, Fitch also affirms the following ratings:

--Approximately $595 million in outstanding ULT bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district payable from a continuing direct annual ad valorem tax levied by the district without limit as to rate or amount. The bonds are further secured by the Texas Permanent School Fund (PSF) guarantee, whose Insurer Financial Strength is rated 'AAA' by Fitch.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The district typically outperforms the budget and achieves surplus results.

STATE FUNDING RELIANCE: The district relies on state funding for the majority of its operations. Sound reserves and cost containment measures help to mitigate the district's exposure to state funding uncertainties.

MIXED DEBT PROFILE: Overall debt is high, but its impact on the budget is manageable, reflecting state support for debt service. Well-funded pensions also reflect strong state support.

SAN ANTONIO METRO ECONOMY: A low unemployment rate results from the city's broad and growing economy. The district's inner city service territory is characterized by low wealth and high poverty levels.

RATING SENSITIVITIES

SOUND FINANCES DRIVE STABLE OUTLOOK: Fitch expects the district to maintain its sound financial profile to counterbalance concerns over high debt levels and below average wealth levels, credit factors that Fitch believes limit the rating to its current level in at least the near term.

CREDIT PROFILE

The district encompasses 79 square miles in downtown San Antonio (the city, Fitch GO rated 'AAA'), which is located in Bexar County. The district serves over 53,700 students.

BROAD ECONOMY WITH MILITARY PRESENCE

The district benefits from its location within the broad and diverse city of San Antonio. The city's economy includes a sizable military presence and strong representation by trade, tourism, healthcare, finance, and telecommunication sectors. Employment gains reflect the strength of tourism and construction activity, as well as the impact of nearby Eagle Ford Shale drilling. The city's unemployment rate of 5% as of June 2014 compares favorably to a U.S. rate of 6.3% for the same period.

The district's median household income represents just 57.6% and the poverty level about double the U.S. average, a profile not dissimilar to other inner city districts. Fiscal 2014 taxable assessed valuation (TAV) per capita is a low $44,000. After posting gains through fiscal 2010, the district's tax base flattened over the subsequent three years. TAV increased by a solid 3.4% in fiscal 2014 with an additional 4% gain expected in fiscal 2015.

SOUND FINANCES DESPITE ENROLLMENT DECLINES AND STATE FUNDING CUTS

The district addressed financial pressure stemming from a recent history of declining enrollment and fiscal 2012-2013 biennium state funding cuts with school closures and leaner staffing levels. These expenditure cuts achieved significant savings and have allowed the district to consistently maintain structural balance.

The district completed fiscal 2013 with a $1.8 million net surplus after a $9 million (2.3% of total spending) transfer largely to the strategic initiatives fund and for facility maintenance The district established the strategic initiatives fund for periodic compensation increases to address the competitive labor market, deferred facility maintenance, and technology.

Fiscal 2013 unrestricted reserves of $63.7 million represent an adequate 15.9% of spending. Officials estimate fiscal 2014 unrestricted reserves at a similar level. The fiscal 2015 budget is structurally balanced and assumes flat enrollment.

ELEVATED DEBT; ONGOING CAPITAL NEEDS

Overall debt, including a sizable overlapping component, is high at 8.1% of fiscal 2014 market value. However, the district's debt service burden consumes a moderate 7.7% of fiscal 2013 governmental expenditures and a lower 5.6% of spending considering state support for debt service.

Fitch anticipates overall debt to remain elevated due to the district's ongoing capital needs. The district expects to largely complete its current capital program -- renovation of 21 schools -- by November 2015. Officials expect to issue about $200 million ($102.4 million in remaining GO authorization and up to $100 million of commercial paper) to complete the program. The district does not anticipate seeking additional GO authorization prior to 2017.

The district established a commercial paper program in April 2014 with a $100 million capacity; Royal Bank of Canada serves as liquidity provider. The variable rate refunding bonds now offered represent the district's first variable rate unlimited tax obligations (VRULTs), outside of the commercial paper program. The VRULTs will restore capacity in the district's commercial paper program.

Terms of the district's series 2014 VRULTs include three and four year initial fixed rate terms, a soft put back to bondholders in lieu of liquidity support and optionality to periodically reset the rate to a long-term fixed basis. Fitch believes this structure presents a manageable risk in terms of interest rate exposure. These offerings plus the commercial paper program capacity comprise 26% of the district's debt total.

Fitch estimates the district's variable rate debt to remain within the district's target of 30% based on issuance plans through fiscal 2015. Variable rate debt at the maximum target level would expose the district to a high level of interest rate risk, especially for a school district. Fitch therefore views this somewhat liberal policy with concern.

In the case of a failed remarketing for the series 2014 bonds, the district would face a risk of paying an elevated interest rate, expected to be capped at a fixed-rate ranging from 6%-8% as applicable to the district's outstanding VRDOs. The district maintains healthy reserves in its debt service fund (cash and investments totaling $69.1 million at fiscal 2013 year-end), and Fitch believes that this cushion serves as a mitigant to interest rate exposure.

MANAGEABLE CARRYING COSTS

The district participates in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension plan. Other post-employment benefits (OPEB) contributions paid by the district are modest. Total carrying costs for debt service, pension, social security, and OPEB, net of state support, are low at 10.9% of fiscal 2013 governmental spending.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013, a district judge ruled 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, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...'. The judge also cited inadequate funding and districts' inability to exercise 'meaningful discretion' in setting tax rates as constitutional flaws in the current system.

The judge agreed to reopen testimony in January 2014 after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=854894

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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