[August 24, 2016]

Fitch Affirms Paris ISD, TX's ULT Bonds at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the following ratings for Paris Independent School District, Texas (the district) at 'AA-':

-- $48.6 million unlimited tax (ULT) bonds (accreted basis);
-- Long-Term Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district. The bonds are further backed by the Texas Permanent School Fund bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas PSF bond guaranty program see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA-' IDR reflects the district's limited economic growth prospects, given its remote location and sound financial profile. Population, enrollment and unemployment have been relatively flat over the past decade. The district's operating profile is characterized by solid expenditure flexibility, low expectations for revenue growth, and high reserve levels. Flat enrollment projections in the near-term limit capital needs and associated borrowing.

Economic Resource Base
Serving a population of roughly 22,000, the district's enrollment of approximately 3,500 has seen slow decline and is at a lower level now than in 2005. The mainly built-out district has had flat taxable assessed value growth in recent years, but exhibits a diversified employment base, with the top 10 taxpayers including manufacturing, utilities, and financial services.

Revenue Framework: 'bbb' factor assessment
A combination of local property taxes and state aid supports district operations. The natural pace of revenue growth is expected to remain modest, given historical performance and continued flat to declining enrollment. The district's legal ability to raise revenues is limited.

Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given limited capital needs and current enrollment trends. The district regularly budgets for pay-go capital spending, providing expenditure flexibility. The district's very low carrying costs reflect state support for retiree benefits, bolstering spending flexibility, while slow debt amortization tempers flexibility.

Long-Term Liability Burden: 'aa' factor assessment
The combined burden of long-term debt and pension liabilities is moderate as a share of local personal income. Fitch expects debt levels to decrease in the near-term, given the district's limited enrollment growth and lack of debt plans. Retiree benefit obligations do not represent a significant burden.

Operating Performance: 'aaa' factor assessment
The 'aaa' operating performance assessment reflects the district's ample reserve funding levels and ample level of spending flexibility in the event of revenue declines.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's expenditure flexibility and healthy reserve levels, which have indicated rating stability.

CREDIT PROFILE

The district serves most of the city of Paris, the county seat of Lamar County, and is located in the Northeast corner of the state. The district's remote population and recent population trends limit economic prospects. District per capita personal income lags county, state, and national averages.

Revenue Framework
Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).

Approximately 70% of fiscal 2015 district revenues cae from state aid, with the remainder generated largely by property tax revenues. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments. Enrollment increased by approximately 100 students in 2016, but decreased in nine of the prior 11 years.

District revenues have grown at a compounded annual growth rate of 1.6% over the last decade, performing below both national CPI and GDP growth. Fitch expects the natural pace of district revenue growth in future years to track this below average historical performance, given that enrollment is expected to continue its flat to declining trends and revenues are driven by enrollment. Fitch's expectations for strong state revenue growth somewhat offsets concerns related to potential enrollment declines, as state aid is tied to overall state revenue performance.

The district's independent legal ability to raise revenues is limited, as the fiscal 2015 maintenance and operations (M&O) tax rate is at the legal limit of $1.17 per $100 TAV. The district levies a separate unlimited debt service tax rate of $0.285 per $100 TAV, below the statutory cap of $0.50 per $100 TAV for new debt issuances.

Expenditure Framework
The district spends the majority of its operating budget on instruction, consistent with most school districts. The district does not face any pressure related to enrollment, compensation, or capital spending, given the district's current enrollment profile, limited capital needs, and favorable labor environment.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given current expenditure trends, capital needs and the enrollment-based state funding formula.

The district's solid expenditure flexibility reflects a large degree of control over workforce costs and affordable carrying costs for debt service, pension and other post-employment benefits (OPEB) of 7.6% of fiscal 2015 governmental spending. Carrying costs benefit from state support for debt service, district pension and OPEB costs.

Long-Term Liability Burden
The district's long-term liability burden is moderate at 11.4% of total personal income, and is comprised mainly of the district's slowly amortizing debt. Capital needs are limited and funded on a pay-go basis. The district has no near-term debt issuance plans.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. 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 in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance
The district's financial cushion remains well above the level Fitch views as necessary for a 'aaa' assessment and is expected to remains strong under a moderate economic stress. Fitch believes the district would use a combination of its solid expenditure flexibility, conservative budgeting and very strong reserves to maintain a healthy reserve safety margin in a moderate economic decline scenario.

The district consistently budgets conservatively on both the revenue and expenditure sides and expects break-even results for fiscal 2016. The district has added to fund balance in each year following the recession. Fiscal 2017 budget is balanced without the use of reserves and includes modest pay-go capital expenditures for maintenance.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010750
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010750
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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