Fitch Downgrades Crystal City ISD, TX's Underlying GO Rating to 'BBB+' from 'A-'

NEW YORK--(BUSINESS WIRE)--As part of its ongoing surveillance effort, Fitch Ratings downgrades to 'BBB+' from 'A-' the underlying rating on Crystal City Independent School District, Texas' (the district) $23.6 million in unlimited tax general obligation (GO) bonds (series 2000, 2001, 2002, 2005 and 2006). Based on a guaranty provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch, the enhanced rating for the district's securities remains at 'AAA'. The Rating Outlook remains Stable.

The downgrade reflects continuing declines in student enrollment, a very high local unemployment rate, concern over management's ability to reduce expenditures in the event of further revenue declines, and significant recent reductions in the district's assessed value in an environment of limited financial flexibility. The Stable Outlook reflects the district's reduced but still significant general fund reserves, and the revenue stability derived from the state, which provides most of the operating funds for this small district.

The district's current financial position is slightly weakened since last review, although adequate for the rating category. Total general fund reserves have fallen from $5.8 million (37% of annual spending) in fiscal 2005 to an unaudited $5.6 million (27%) in fiscal 2009. This reflects a recent draw-down for cost overruns on construction of two elementary schools, which are both now complete. The district's financial flexibility is limited, since its operating tax rate has reached its maximum statutory ceiling. If property values continue to decline, this limited tax rate will create immediate pressure on operations. Furthermore, management estimates average daily attendance for the current financial year at 1,718 students, representing an 8% decline in attendance since Fitch last rated the district. This also contributes to revenue pressure, since much of the state aid received by the district is calculated by formula based on student numbers. The district is highly dependent on state dollars, which made up 75% of total general fund revenues in fiscal 2009.

The district's nominal overall debt is very high at 14.2% of assessed value. However, Texas school districts are entitled to receive funds from the state in order to offset qualifying bonded capital expenses. Factoring in these future cash flows, Fitch estimates that the district's real overall debt is a high but manageable 6.9% of assessed value.

Crystal City Independent School District serves a large and sparsely populated area in Zavala County, which is 100 miles south-west of San Antonio and includes the commercial center and county seat of Crystal City. The district's local economy is limited, with a traditionally high unemployment rate. Zavala County's unemployment rate was a high 15.7% in October 2009. The district's total assessed value for the 2010 tax year has declined markedly from the previous year, to around 2007 levels. However, an unresolved dispute between the district and local assessors over a potentially inflated valuation in 2008 presents difficulties for Fitch in establishing a clear trend for tax base growth or contraction. In any case, the district's tax base is highly concentrated, with its top ten taxpayers representing 37% of the total.

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

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