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Fitch Rates Lewisville ISD, Texas' GO ULTs 'AAA' TX PSF/'AA+' Underlying; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Lewisville Independent School District, Texas' (LISD or the district) unlimited tax (ULT) bonds:

--$34.2 million ULT school building bonds, series 2012C.

The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. The series 2012C bonds are scheduled to sell Oct. 16 via competitive sale. Proceeds will be used to construct and renovate various school facilities and to pay related costs of issuance.

Fitch also assigns an 'AA+' underlying rating to the series 2012C bonds and affirms the 'AA+' rating on the district's $1.05 billion in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited property tax levied against all taxable property within the district and are further secured by the PSF Guarantee.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION MAINTAINED: General fund reserves and liquidity remain solid. By fiscal 2012 year-end, management expects to add a healthy $8 million to reserves, which will further enhance the district's financial flexibility. Conservative and prudent fiscal management typically facilitates outperformance of the sizeable operating deficits budgeted annually.

FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in the broad Dallas-Fort Worth metro area and employment base along major transportation corridors. Population trends have exceeded the metro area and state. Income and wealth levels also are above average.

MODEST TAX BASE GAINS: Modest taxable assessed valuation (TAV) gains were realized in fiscals 2012 and 2013. The district's tax base is generally stable and has historically experienced healthy rates of growth. Prospects for further tax base expansion appear favorable.

HIGH DEBT LEVELS: The district's large capital improvement program will further drive already above-average debt ratios. Strong voter support for bond programs, recent deceleration of capital pressures related to growth, and a better than usual pace of amortization mitigate some concern over debt levels.

WHAT COULD TRIGGER A RATING ACTION

The restoration of structural balance in the near to medium term and maintenance of solid reserve levels are key to preserving credit quality.

CREDIT PROFILE

FINANCIAL RESULTS OUTPERFORM BUDGET

Audited fiscal 2011 results positively addressed some of Fitch's previously expressed concerns with improvement over the year's adopted operating budget that included mid-year expectations of a $10 million net deficit. The district closed the year with the addition of $12.6 million to general fund reserves, which brought the unassigned fund balance up to a strong $87.3 million or approximately 23% of spending. The larger, year-end $133 million total general fund balance position, equivalent to about 36% of spending, also included $45 million held as a minimum reserve on the balance sheet. In practice, the district typically maintains reserves well above its stated minimum. Revenue gains from higher than budgeted enrollment and non-recurring EduJobs/federal stimulus funds contributed to the year's financial performance as well as salary savings from an incentivized 'early notice' program that allowed the district to reduce or eliminate some of its more highly-paid positions.

SOLID RESERVES DESPITE STATE FUNDING CUTS

At fiscal 2012 year-end, management projects an increase to already solid reserves with the addition of roughly $8 million to the total general fund balance, bringing it up to approximately $141 million or nearly 38% of spending. Management narrowed the year's budgeted operating deficit of nearly $18 million largely through conservative budgeting practices that included salary savings from full staffing costs not realized as well as revenue gains from higher than budgeted enrollment.

For fiscal 2013, the district faces additional budgetary pressure from a slightly larger $28 million state aid cut in the second year of reduced state funding levels to all Texas school districts over the biennium (fiscal 2012 and 2013) due to the state's own projected revenue shortfalls. The year's $394 million operating budget was adopted with a sizeable $23 million drawdown, which remains consistent with budgeting practices over the past four fiscal years. Year-to-date operations are reportedly running in line with projections.

Although management indicates there is the possibility of a drawdown on the district's solid financial cushion at fiscal 2013 year-end, Fitch believes a reduction of reserves at the high level budgeted is unlikely given the district's historical operating performance. Also, Fitch takes comfort from management's reported consideration of an improved, formal reserve target of three months or 25% of spending that could provide a floor yet still maintain reserves and a level of financial flexibility consistent with the district's high-grade rating. Currently, the district's formal fund balance policy requires the maintenance of a minimum of $45 million in general fund reserves, which is only about 12% of fiscal 2012 spending levels.

DEBT LEVELS TO REMAIN ELEVATED

Debt ratios are high but not out of context with areas that have experienced fast-growth. Overall debt levels approximate $5,300 on a per capita basis and 6% of market value. Principal amortization is slightly above average with roughly 56% of principal maturing within 10 years, which in general compares favorably to other fast-growth school districts in the state. The debt service burden on the budget is high at 19% of fiscal 2011 general and debt service spending but mitigated by the district's overall financial flexibility reflected in ample reserves and tax rate cushion.

Approximately $254 million in authorized but unissued bonds remain from the nearly $700 million bond package approved by 58% of the voters in May 2008, the largest in the district's history. The next new money issuance of approximately $70 million is projected in the spring of 2013 to finish funding the construction of various ninth grade centers. Management reports issuances will also consider further tax base expansion as plans are to stay below the maximum debt service tax rate promised voters of $0.44 per $100 of TAV as the borrowing continues.

In general, issuance plans have slowed from original expectations given reduced capital pressures from moderated enrollment growth. A recently completed facilities assessment has also allowed management to sharpen its focus on district wide facility needs. As a result, roughly $160 million of the outstanding bond authorization is planned for near-term use on additional school facilities and renovations while the remainder (about $25 million) will be set aside to provide a cushion towards facility contingency needs.

MODEST TAV GROWTH SUSTAINED

The district's tax base is stable and primarily residential in character. Gains made in prior fiscal years have historically been strong, averaging a compound annual growth rate of 6.5% from fiscal years 2003-2009. After two years of moderate TAV decreases, the trend was reversed with a modest 2% TAV gain in fiscal 2012. Another 2% TAV gain was realized in fiscal 2013, which is in line with management's expectations for fiscal 2014. Nonetheless, higher TAV increases appear likely over the intermediate-term given the development underway on the first phase of a large retail store and distribution center that is anticipated to add about $1 billion in additional value at completion.

LISD encompasses 127 square miles and is located about 20 miles northwest of Dallas in Denton County. The district serves all or portions of 13 residential communities, including the cities of Lewisville, Flower Mound, Carrollton, and The Colony. Roughly 75% of the district is built-out and both enrollment gains and growth in TAV have moderated as the district's service area has matured. Unemployment rates in Denton County are consistently below regional, state, and national averages and local wealth measures exceed state and national levels by 10%-60%, depending on the community within the district's boundaries.

On average, enrollment has grown just over 1% annually over the last five fiscal years compared with a roughly 5% average annual growth rate during the prior decade from fiscal 1997-2007. District enrollment totaled 52,300 students in fiscal 2013. Full build-out of the district is estimated at 65,000 students.

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 report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, 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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Source: Fitch Ratings