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Fitch Rates Clear Creek ISD, TX ULTs 'AAA' PSF; 'AA+' Underlying; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' PSF rating and an 'AA+' underlying rating to the following Clear Creek Independent School District, Texas (the district) unlimited tax (ULT) bonds:

--$78.65 million ULT refunding bonds, series 2012A;
--$52.855 million ULT school building bonds, series 2012B (taxable).

The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of Oct. 8, 2012 (pending market conditions). Proceeds will be used to refund a portion of the district's outstanding obligations.

In addition, Fitch affirms the following ratings for the district:

--Approximately $600 million (pre-refunding) of unlimited tax bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by revenues from an unlimited tax levied against all taxable property within the district. The PSF guaranty applies to all outstanding series but for series 2005, 2009, 2010 and 2012.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Prudent planning and cost management support a history of consistent financial results, manageable capital investment and adequate policy-level reserves. Officials have offset state-wide funding losses with cost savings during the fiscal 2012/2013 biennium.

STABLE ECONOMY: The district is located in Harris and Galveston counties, benefiting from a diverse economy with prominence in the energy and petrochemical industries. Although taxable assessed valuation (TAV) gains have slowed, management expects further growth in the near term based on residential development underway in Galveston County.

HIGH OVERALL DEBT: Overall debt is high; however the district's average fixed cost burden, including annual debt payments and pension contributions is affordable. The interest and sinking (I&S) fund tax rate provides ample capacity to support the district's expected debt-funded capital needs over the next five years.

ABOVE AVERAGE DEMOGRAPHIC PROFILE: The district's unemployment rate historically trends below state and national averages; measures of income and wealth exceed those of the state and the U.S.

CREDIT PROFILE

DIVERSIFIED HOUSTON ECONOMY
Clear Creek ISD encompasses 105 square miles and includes several cities along the upper Texas Gulf Coast. The district's tax base is well represented by all segments of the oil & gas industry characteristic of the region, but is diversified with significant presence of the financial service, retail, trade and health service sectors. Fitch notes that diversity of the local economy tempers the endemic oil & gas price volatility present in the Houston area economy. Substantial downstream energy manufacturing additionally buffers the local economy from oil & gas price declines.

Chemical and petroleum/coal products comprise the majority of the region's sizable export market (second largest U.S. export market behind New York according to IHS Global Insights), supported by a strong multimodal transportation network which includes the Houston Ship Channel. The top 10 taxpayers comprise a modest 5% of the district's $14.9 billion TAV.

The district's largely residential TAV realized compound annual growth of 5.4% between fiscal 2000 and fiscal 2010, expanding with the local economy. Softening of the housing market and low gas prices contributed to a flattening of the tax base since fiscal 2010. Although much of the district is mature, undeveloped pockets remain in the 40% represented by Galveston County, where the district anticipates further TAV gains in the next several years.

STRONG FINANCIAL PERFORMANCE
A fiscal 2011 net operating surplus of $0.5 million (0.2%) increased the unrestricted (sum of assigned, unassigned and committed fund under GASB 54) fund balance to $52.1 million (18.8% of spending and transfers out), and reflected a $7.75 million transfer to the capital projects fund. General fund transfers to the capital projects fund totaled $36 million between fiscal 2007 and fiscal 2011.

State-wide revenue cuts left the district with $17.5 million less in revenues ($13.5 million for fiscal 2012; $4 million for fiscal 2013). However, as a result of attrition-based staff reductions, reduced spending, enrollment-based revenue growth, and a one-time $5.9 million EduJob grant, the district now estimates a fiscal year 2012 operating surplus in the range of $10 million to $14 million, of which $6 million will be applied to a one-time salary supplement. Consistent with its practice, the district will also use year-end earnings in excess of two-months spending to fund capital projects.

A balanced fiscal 2013 budget includes additional attrition-based staff reductions and utility cost savings. Annual enrollment gains of 2% to 3% increase the district's revenues under the funding formula, muting the impact of the fiscal 2013 and subsequent state revenue losses.

HIGH OVERALL DEBT BURDEN
The district's overall debt (including overlapping debt of municipalities) is high at $6,630 per capita or 8.2% of market value and likely to increase given current capital needs. Officials anticipate seeking authorization in May 2013 for between $150 and 300 million of GO bonds to fund infrastructure improvements pursuant to recommendations from a soon to be completed facility assessment.

The I&S tax rate of $0.32 per $100 of TAV provides ample capacity in relation to the statutory rate of $0.50 for new debt issuance to meet the district's capital needs into the foreseeable future. Debt amortization is about average with 47.3% of debt scheduled for repayment in the next 10 years.

Long-term liabilities related to pensions are low and are limited to the district's participation in the state Teacher Retirement System (TRS), a cost-sharing multiple employer plan. Other post-employment benefits (OPEB) are also provided through TRS. The district's annual required contributions for pension and OPEB are determined by state law, and totaled $4.3 million in fiscal 2011, or a low 1.6% of operating expenditures.

The district's total carrying cost burden (annual debt service payments, pension and OPEB contributions) represent a manageable 17.5% of fiscal 2011 spending.

ABOVE-AVERAGE DEMOGRAPHICS
A historically low unemployment rate reflects ready access to the Houston employment market. A local rate of 6.6% as of July 2012 is improved from the prior year due to 3.9% year-over-year job growth and compares favorably to state (7.5%) and U.S. (8.6%) averages for the same period. The district's poverty rate trails state and national averages; median household income exceeds that of the state and U.S.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 Global Insight, Zillow.com, 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

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Fitch Ratings
Primary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
Fitch, Inc.
111 Congress Ste. 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-1608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings