[November 07, 2014]

Fitch Upgrades New Braunfels ISD, TX, ULTs to 'AA+'; Outlook to Stable

Fitch Ratings upgrades the following underlying rating on New Braunfels Independent School District, Texas (the district):

--$130.1 million unlimited tax bonds (ULT) bonds to 'AA+' from 'AA.'

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The bonds are payable from ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are insured by the Texas PSF, whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

UPGRADE REFLECTS CONSISTENT CREDIT STRENGTHS: The district has generated surplus results despite the challenging operating environment posed by recent state funding cuts, expanding general fund reserves to very high levels. Moreover, these results were achieved while prudently maintaining a modest margin of taxing flexibility for operations.

TAX-BASE EXPANSION: Residential and commercial development has resulted in double-digit tax-base growth in the last two fiscal years. Growth prospects remain positive given the district's location, which straddles IH 35 between Austin and San Antonio, and ample undeveloped land.

ROBUST ECONOMY: The district's economic base benefits from its location in the San Antonio metropolitan area. Area income levels are above state and national averages and local unemployment levels compare favorably to state and national averages.

MODERATELY HIGH DEBT BURDEN: The district's above-average debt burden reflects the accelerated enrollment growth prior to the economic downturn and associated facility construction, but it is mitigated by prospects for continued tax-base growth with manageable debt plans.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial performance and healthy economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Located 30 miles north of San Antonio, the district encompasses 75 square miles and serves primarily the city of New Braunfels (the city) (Rated 'AA', Stable Outlook by Fitch). The district's current population is estimated at 46,975 and has shown an average annual increase of nearly 3% since 2000.

STRONG FINANCIAL FLEXIBILITY

The upgrade reflects the district's strong financial profile despite operating pressures associated with recent state funding cuts. A trend of annual operating surpluses has contributed to growing reserve levels, reaching an estimated unrestricted fund balance of almost $40 million or 75% of spending in fiscal 2014. Liquidity is also favorable, with fiscal 2014 cash and investments representing nearly 90% of general fund spending. The fiscal 2014 unaudited results are better than the budgeted $459,000 drawdown; the very high $3.8 million surplus is due to conservative projections of student population growth and state and local revenues, combined with spending levels below budget.

The fiscal 2015 adopted budget includes a 3.9% increase in revenues over the prior year's budget, driven by tax-base growth and additional state aid through gains in enrollment. The budget currently projects a $1.3 million deficit, although the deficit likely will not be realized in full given the district's history of conservative budgeting and positive operating margins.

The budget maintains the current M&O tax rate at $1.0133 per $100 taxable assessed value (TAV), which is below the statutory rate cap of $1.04 (or $1.14 with voter approval). The debt service rate of $0.326 per $100 TAV has ample margin under the statutory $0.50 new money rate cap. Fitch sees margin in both tax rates as favorable, as it provides the district flexibility to address any operational or capital pressures it might face in the current growth environment.

ECONOMY SUPPORTED BY PROXIMITY TO SAN ANTONIO

ENROLLMENT AND TAX-BASE GROWTH CONTINUES

Enrollment continues to record steady gains, averaging about 2.3% growth annually from 2008-2015 with current enrollment at 8,440 students. TAV, however, increased by an average of more than 6.7% annually during the same period. The tax base quickly resumed growth post-recession with 2011 marking the only year of modest contraction. Growth resumed in fiscal 2012 and has picked up pace recently, with 11.6% growth in fiscal 2014 and certified values for fiscal 2015 marking a second year of double-digit growth at almost 12%.

Management expects additional moderate growth in student counts and TAV in the near term as the ongoing northern expansion of San Antonio, as well as the availability of affordable land within the district, continue to spur additional development. Fitch considers this expectation reasonable.

ABOVE-AVERAGE DEBT BURDEN

District debt ratios are above average, but have come down from previous levels as a result of ongoing population and tax-base expansion. Debt ratios stand at $4,345 per capita and 4.6% of market value. Debt amortization is average at 50% retired in 10 years.

The district has no remaining authorization to issue new money bonds. Given the current enrollment growth trends, the next facility need reportedly will be at the elementary school level. According to management the earliest anticipated call for a bond election would be in May 2015.

LIMITED PENSION/OPEB OBLIGATIONS

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan.

Carrying costs, including debt service, pension and OPEB contributions, were a moderate 17.4% of fiscal 2013 governmental spending, benefitting from the state making all but a small percentage of the district's annual pension contribution. However, Texas school districts are susceptible to future funding changes by the state--as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August 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 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.

Following a similar ruling in February, 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. 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 will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

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, the Municipal Advisory Council of Texas, and the 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=918115

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