Fitch Rates Sharyland ISD, TX Series 2011 ULT Bonds 'AAA' Based on PSF; 'AA-' Und; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the Sharyland Independent School District (ISD), Texas (the district) unlimited tax (ULT) bonds:

--$8.819 million ULT refunding bonds, series 2011 - 'AAA'

The 'AAA' long-term rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch Ratings. Fitch also assigns an 'AA-' underlying rating to the series 2011 bonds.

The bonds are expected to price via negotiation the week of July 11, 2011. Proceeds will be used to refund a portion of the district's outstanding ULT bonds for debt service savings.

Fitch also affirms the following:

--$67.7 million (net of refunding) outstanding ULT bonds at 'AA-'

The Rating Outlook is stable.

RATING RATIONALE:

--Sharyland Independent School District (the district) has maintained sound financial operations amid a high enrollment growth environment, although general fund reserves have declined in recent years.

--The district has experienced very strong taxable assessed valuation (TAV) growth which moderated in fiscal years 2009 and 2010 due to the recession.

--Debt levels are manageable, and amortization is slow.

--Previously very rapid enrollment growth has subsided to a moderate pace.

KEY RATING DRIVERS:

--Management expects to seek voter approval in November 2011 on a tax rate swap and bond authorization in the range of $45 million - $55 million to fund construction of a new high school.

--Healthy general fund reserves are needed to offset the financial pressures associated with enrollment growth.

--Anticipated enrollment growth will generate additional capital needs and will likely prevent debt levels from declining materially for some time.

SECURITY:

The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, the bonds are secured by the Texas Permanent school fund (PSF) guaranty.

CREDIT SUMMARY:

Located between the cities of Mission and McAllen, the district is a relatively affluent bedroom community for both municipalities. The district's primarily residential tax base has grown by an annual average of 11% since fiscal 2006, with a slower rate of less than 3% in the past several years, reflecting the recession and softening of the local housing market. As a "property poor" district under Chapter 41 of the Texas Education Code, the state currently contributes about 60% of the district's general fund revenues.

The district's financial performance is historically strong, despite the increased costs associated with growth pressures. The fiscal 2010 unreserved general fund balance of $11.2 million equates to 15.5% of spending, approximating the lower range of the fund reserve target and reflecting $3.1 million of one-time capital expenditures in fiscal 2010 from fund balance. Officials expect to complete fiscal 2011 with an increased unreserved general fund balance in excess of $12.0 million.

Despite expected fiscal 2012 state funding reductions of $3.9 million, the district anticipates balancing the budget with enrollment-based revenue growth and $5.8 million in expenditure cuts, including fewer positions, salary freezes, and a variety of program reductions. Additionally, the district will benefit in fiscal 2012 from one-time federal grants totaling $2.2 million.

Enrollment is expected to increase 4.5% to 5.0% in the near term, necessitating the construction of a new high school by 2015. Bond issuance to fund construction of the high school, expected to cost up to $55 million, requires voter authorization and operations of the new campus could place additional pressure on the district's O&M tax rate, already at the statutory cap of $1.04 per $100 of TAV. The school board has authorized a consultant to investigate implementation of a tax rate swap, currently envisioned to shift $0.13 from the district's debt service tax rate to the operating tax rate (voter authorization is needed to exceed the O&M tax rate cap of $1.04), allowing the district to maintain the same total tax rate of $1.20 for fiscal 2012 and to delay a debt service tax rate increase to fiscal 2013. The tax rate swap would additionally provide an estimated $5 million increase in state funding, to mitigate the debt burden of the high school and fund O&M costs of the facility upon completion. Fitch believes that while the tax rate swap structure currently maximizes state aid, it is unconventional and may be discontinued, placing this additional revenue gained from the swap at risk. Upon school board approval, the district expects to bundle the tax rate swap voter authorization with a bond authorization election in November 2011.

The district's overall debt burden on a per capita basis is moderate at approximately $2,704 per capita and 3.6% as a percentage of market value, with state funding supporting about 30% of the annual debt service requirements. Potential additional debt associated with the construction of a new high school would push debt levels higher. Principal amortization is slow at 34% in 10 years. The district's current debt service tax rate of $0.16 per $100 of TAV is well below the statutory threshold to issue new debt but would increase with the proposed additional debt.

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

In addition to the sources of information identified in the 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. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 08, 2010).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

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

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