Fitch Rates Burleson ISD (TX) Unlimited Tax Bonds 'AAA' PSF; 'AA-' Underlying; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following action on Burleson Independent School District, Texas' unlimited tax (ULT) bonds:

--$25,235,000 ULT school building and refunding bonds, series 2011 'AAA'.

The rating is based on a guaranty provided by the Texas Permanent School Fund (PSF; Insurer Financial Strength rated 'AAA' by Fitch). In addition, Fitch assigns an underlying 'AA-' rating to the series 2011 bonds.

The bonds are expected to price via negotiated sale on May 4, 2011. Proceeds will be used for facility improvements and to refund a portion of the district's outstanding debt for savings.

Fitch also affirms the following underlying rating:

--Approximately $307.3 million (post-refunding) in outstanding ULT bonds at 'AA-';

The Rating Outlook is Stable.

RATING RATIONALE:

--The district's financial position remains sound as indicated by solid reserve levels;

--The debt levels of the district are high and are expected to remain pressured due to slower taxable assessed valuation (TAV) growth. Additionally, principal amortization is very slow and the debt service tax rate is high;

--Historically large annual gains in the district's TAV flattened in fiscal 2011 due primarily to mineral value declines. Taxpayer concentration in mineral valuations is above average, although this credit concern is somewhat mitigated by the district's solid fund balance reserve levels. Fluctuations in taxable values have a neutral impact on operating revenues but do affect the district's capacity to issue new debt;

--Ample and affordable land and accessibility to the Fort Worth/Arlington metro area have fueled rapid population and enrollment growth.

KEY RATING DRIVERS:

--Solid general fund reserves must be maintained in order to offset the operating pressures associated with enrollment growth and uncertainty regarding state budget cuts;

--The district may experience near-term capital pressures if enrollment growth trends require additional, sizable facility needs and tax base growth is not comparable, since the district projects current debt levels will require a tax rate at or near the maximum allowed by statute for new debt issuances.

SECURITY:

--The bonds are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the Texas PSF guaranty.

CREDIT SUMMARY:

Located approximately seven miles south of Fort Worth along Interstate Highway 35 West, the district includes the city of Burleson (general obligation bonds rated 'AA-' by Fitch). Affordable land, new transportation routes, and proximity to the larger Fort Worth-Arlington employment base spurred residential development in recent years, which in turn fueled rapid population growth. Nonetheless, management estimates only about half of the district is currently built out. In light of such development, annual student enrollment also grew rapidly, averaging slightly more than 5% on an annual basis from fiscal 2005 - 2009. Most recently, enrollment growth slowed to less than 3% over the last two years (due in large part to the downturn of the local housing market), providing a measure of relief on capital pressures. Near-term enrollment trends are projected to remain manageable with the addition of around 250 new students annually according to external demographers.

Since fiscal 2006, the district has experienced large annual gains in its taxable values, averaging over 13%, from growth in residential property values, and more recently, mineral values. Various properties within the district's boundaries are located in workable portions of the Barnett Shale, one of the United States' largest natural gas fields. While a surge in drilling efforts contributed to most of the nearly 30% growth in fiscal 2009 TAV, declines in natural gas prices and the weakened housing market slowed fiscal 2010 tax base growth to a more moderate 7% and TAV flattened in fiscal 2011. Valuations for fiscal 2012 are projected to be fairly flat also. Taxpayer concentration is above average with 21% of total TAV from predominately energy/oil & gas business concerns.

The district has typically generated very healthy operating surpluses and maintained solid reserve levels, despite operating pressures from fast-paced enrollment growth. Fiscal 2009 results were assisted by the 10-month reporting period (the district changed its fiscal year-end to June 30 from Aug. 31). The district ended the year with an unreserved general fund balance of $23 million or approximately 39% of spending, which was well above the district's informal operating reserve target of at least three months of expenditures. For fiscal 2010, management projected flat results, but audited results fared much better with a $5.2 million surplus achieved through expenditure cuts and the collection of nearly $2 million in gas royalties. As the recurring nature of the gas royalties are uncertain, the district does not budget this revenue source but instead earmarks these funds to add to fund balance or spend for non-recurring capital outlays.

The fiscal 2011 budget was adopted with a $4 million deficit as a result of start-up expenses related to opening the district's second high school and fifth elementary school, coupled with the district's voters turning down a tax ratification election that would have enabled the district to levy an additional maintenance and operations tax of $0.13 per $100 of TAV, the maximum currently allowed by state law. However, the district now projects ending the year with a smaller drawdown on fund balance of an estimated $2.5 million. Like all school districts in the state, fiscal challenges continue and large state funding cuts over the next biennium are expected. Although the impact on state funding is still uncertain, the district is preparing for cuts to range between $4.5 million to $8 million and has already identified a total of roughly $8.3 million in expenditure reductions that may be implemented in a three tiered approach. The first tier of cuts totaling $4.5 million has been implemented in the preliminary fiscal 2012 budget.

Debt levels are high, particularly on a per capita basis, and Fitch believes they will remain so considering the slow amortization (less than 20% principal amortizes in 10 years) and flat TAV growth. Also, state support for the district's debt service has diminished over time in light of the district's property wealth. Overall debt levels approximate 8% of market value and more than $6,500 on a per capita basis. The new-money portion of this issuance is from the district's largest ever authorization of $259 million, much of which was for the district's second high school; the bonds were approved by 60% of voters in November 2006. After this sale the district will have no remaining authorization for new debt and there are no current plans for another election in the near to mid term as current educational facilities have ample capacity to absorb student enrolment growth at the currently projected levels. The district's debt service tax rate is projected to remain at or near the statutory test cap of $0.50 per $100 TAV to issue new debt, which could limit the ability to issue additional debt if TAV growth remains sluggish for some time.

In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, and IHS Global Insight.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);

--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008);

--'Tax-Supported Rating Criteria' (August 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

State Revolving Fund and Municipal Loan Pool Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.