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Fitch Affirms Midlothian ISD, TX's GO ULTs at 'A+' Underlying; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms its underlying 'A+' rating on Midlothian Independent School District, Texas' (Midlothian ISD) outstanding unlimited tax (ULT) bonds as follows:

--Approximately $144 million in ULT bonds (excluding series 2011 A-C and 2012 which are not rated by Fitch).

The Rating Outlook is Stable.

SECURITY: The bonds are secured by an unlimited ad valorem tax pledge of the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA', Stable Outlook by Fitch)

KEY RATING DRIVERS

FINANCIAL PROFILE PRESERVES FLEXIBILITY: Consistently strong financial performance is a stabilizing credit factor. The district has posted positive financial results in each of the past five fiscal years. Management has maintained strong reserves despite state funding cuts, which provides added financial flexibility.

HIGH DEBT BURDEN AND MINIMAL CAPACITY: Incorporated in the rating, which is below average for a school district, is the district's weak debt profile. Debt levels that include overlapping debt are high, although this is not atypical for Texas school districts that grew rapidly. Principal amortization is very slow. The current debt structure and debt service tax rate (although unlimited) leave little room for issuance of new money debt for additional facilities. Concerns are mitigated by the district's relatively level debt service schedule which alleviates upward pressure on the tax rate, flat enrollment trends projected over the near term, and present facility capacity.

STABLE ECONOMY: The district's economy and tax base are anchored by large industrial manufacturers and distribution concerns. Taxpayer and sector concentration remain high while unemployment fell to 7.6% as of June 2012, reflective of solid employment trends. Historically strong tax base growth halted with the recession and subsequent effect on the housing market; a moderate, cumulative 6.5% taxable assessed valuation (TAV) decline has been realized over fiscals 2010-2012. Near-term TAV projections anticipate flat to modest growth.

BETTER THAN AVERAGE SOCIOECONOMIC INDICATORS: Income and wealth levels in the district typically exceed those of the county, state, and U.S.

WHAT COULD TRIGGER A RATING ACTION

UNREALIZED GROWTH PROJECTIONS: The district's current forecast anticipates a debt service tax rate at or slightly below the $0.50 test cap, assuming modest, near-term TAV growth. If this projected growth does not materialize, the district will either have to levy a tax exceeding $0.50 (which will preclude the district from new money borrowings) or will have to regularly refinance the existing debt to remain below the cap. Either scenario would represent a weakening in the district's debt profile and would be inconsistent with the current rating level. Negative rating action could also result from materially lower reserves.

CREDIT PROFILE

STRONG RESERVES MAINTAINED

The district's financial performance is a favorable credit factor. Since fiscal 2007, the district has generated a healthy operating surplus, strengthening its reserves moderately every year. Unreserved/unrestricted balances have been no less than 23% over fiscal years 2007-2011. For fiscal 2011, management increased the year's unrestricted general fund balance by approximately $2.7 million, bringing the total to $21.8 million or 38.5% of spending. Liquidity remained comparable to the prior year at $19.2 million in cash/investments or slightly over four months of general operational spending.

State funding cuts implemented for the current state biennium (fiscals 2012 and 2013) that totaled nearly $8 million were addressed by district management with spending cuts that included a reduction of workforce and other departmental and administrative cost saving measures. The district received about $1 million in EduJobs funds in fiscal 2012 that provided a modest offset to general fund spending. Conservative spending practices throughout the year in conjunction with the budget cuts are favorably projected to produce another, positive $3 million operating surplus at year-end. For fiscal 2013, balanced operations are budgeted with spending remaining relatively flat at $56 million.

HIGH DEBT BURDEN; STRAINED DEBT PROFILE

Not unlike other, previously fast-growth Texas school districts, overall debt levels are high, particularly on a per capita basis, at 9% of market value or $10,000 per capita. Issuance of nearly $77 million in new money since Fitch's last review largely for the first phase of the district's second high school, along with a moderate, cumulative decline in TAV over fiscal years 2010-2012 has also boosted debt levels. Amortization remains slow at just under 20% of principal retired in 10 years, reflecting the use of capital appreciation bonds to minimize tax rate impacts.

In an effort to further mitigate the near-term tax rate impact and stay at or below the statutory $0.50 per $100 TAV test for new money debt, the district extended its amortization schedule from 25 to 40 years and included a portion of the new money as variable rate debt. The $50 million issued as variable rate (not rated by Fitch) is in initial rate mode through July 31, 2014; at the remarketing date of Aug. 1, the bonds are subject to mandatory tender. An external liquidity provider is not required as the option to tender is not available to bondholders. In total, this variable rate issuance totals about 21% of total debt outstanding, which is within the district's debt management guidelines of no more than 30%.

Fitch views the district's current debt profile as weak and pressured, although still fitting within the rating category. The debt service burden on the budget is moderately high at 18% of fiscal 2011 general and debt service spending, but mitigated by the district's overall financial flexibility reflected in ample reserves. The plan of finance anticipates maintaining a debt service tax rate at or slightly below $0.50 per $100 TAV tax rate under modest, near-term TAV growth assumptions in order to support debt outstanding. Any excess debt service funds generated from higher than projected TAV gains would likely be used to retire variable rate debt early rather than buy down the debt service tax rate, according to management. Fitch takes some comfort from the relatively minimal increase in annual debt service necessary to reach maximum annual debt service at $15.2 million in 2036; annual debt service in fiscal 2013 totals $14.9 million. Also, management reports no plans to issue new money over the next five to seven years given only flat, near-term enrollment growth projected and capacity in existing facilities. The district maintains nearly $21 million in authorized but unissued debt for its next elementary school.

TAX BASE MAINTAINS STABILITY AFTER EXPERIENCING MODERATE CUMULATIVE DECLINE

Affordable land and accessibility to the larger Dallas Fort Worth metro area employment base drove a fast pace of tax base and enrollment expansion in the district from residential development prior to the recession. Nonetheless, estimates indicate less than half of the district is currently built out. District income and wealth metrics are above average, exceeding the county, state, and U.S. The area's unemployment rate of 7.6% in June 2012 reflected a higher year-over year decline as compared to the metro area and state due to solid employment gains while remaining on par with the state (7.6%) and below the nation's rate (8.4%).

Strong, annual enrollment gains began to taper to a still healthy 3%-4% starting in fiscal 2008, in line with the housing market downturn. At about 7,500 students in fiscal 2013, current enrollment trends are flat. Demographic studies now anticipate modest to flat gains over a somewhat lengthier period through 2017 before a return to moderate enrollment gains.

Aside from residential development, the district's tax base has historically included a large and stable industrial component, comprising cement, steel, and electric power producers, as well as various distribution centers. Subsequently, sector and taxpayer concentration remains high. In fiscal 2012, the top 10 taxpayers, including their values within the tax increment reinvestment zone (TIRZ) that the district participates in, represented about 33% of the district's tax base. While forgoing operating tax revenue from property within the TIRZ (which is offset by additional state aid), the district utilizes the full value of property both in and outside of the TIRZ for its debt service tax levy. Typically solid TAV gains that averaged over 7% annually halted in fiscal 2010, resulting in a moderate, cumulative 6.5% TAV decline through fiscal 2012. TAV is projected to remain stable in fiscal 2013.

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 the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc, and IHS Global Insight.

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
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Rebecca C. Moses, +1-512-215-3739
Director
Fitch, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
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Senior Director
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Managing Director
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elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings