Fitch Affirms Round Rock ISD, TX GOs at 'AA+'; Outlook Positive

AUSTIN, Texas--()--Fitch Ratings takes the following rating action on the Round Rock Independent School District (ISD), TX bonds:

--Approximately $664 million unlimited tax bonds affirmed at 'AA+'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by revenues from an unlimited tax levied against all taxable property within the district. Series 2005, 2007, 2010 and 2010D are additionally secured by the Texas Permanent School Fund, whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

EXEMPLARY FINANCIAL PERFORMANCE: The Positive Outlook recognizes a history of strong financial performance. A decade of surplus results have contributed to substantial general fund reserves which aid in managing enrollment and state funding uncertainties.

MODERATING DEBT PROFILE: The Outlook revision also reflects moderating of a previously high level of debt. Although still above-average, a lack of recent new issuance and solid tax base growth has reduced the district's overall debt in relation to market value. Fitch anticipates the district's debt burden to remain at its current level based on amortization of existing debt in relation to current issuance plans.

ROBUST TAX BASE GROWTH: Expansion of taxable assessed valuation (TAV) over the past decade mirrors strong regional growth trends. The tax base is diverse.

STRONG DEMOGRAPHIC PROFILE: The workforce is highly educated, with above-average income. Unemployment rates trend well below average.

RATING SENSITIVITIES:

Continuation of the district's strong financial profile and continued demonstration of its ability to manage growth without increasing the debt burden could lead to positive rating action.

CREDIT PROFILE

The district is located 18 miles north of Austin (rated 'AAA' with a Stable Outlook by Fitch) within Travis County and Williamson County (rated 'AAA' with a Stable Outlook).

STRONG FINANCIAL PERFORMANCE

Conservative budgeting and strong operating performance have enabled the district to build robust reserves over the past decade. The district lost $20 million in state funding for fiscal 2012 and $10 million in 2013, about 4.5% of total spending for the biennium. Management mitigated the majority of the funding gap with attrition-based cost savings, realizing a $15.2 million net surplus in fiscal 2012. A modest $5.5 million net deficit in fiscal 2013 resulted from budgeted capital and nonrecurring expenditures.

Officials estimate a $13 million deficit, leading to an unrestricted general fund balance of $212 million (59% of spending) for fiscal 2014, reflecting a budgeted application of reserves for laptop purchases, a lighting conservation project, and technology infrastructure updates. The adopted fiscal 2015 budget reflects structural balance.

The district's M&O tax rate is at the statutory cap of $1.04 per $100 of TAV, which can be increased by an additional $0.13 with voter approval. District officials report no plans to approach voters for a rate increase.

HEALTHY LOCAL ECONOMY WITH MATURING ENROLLMENT PROFILE

Economic growth in the Austin-Round Rock area has trended well above state and U.S. averages over the past decade. A stable and diverse employment base supports a low regional unemployment rate in the range of 4.1% to 4.3 (May 2014). IHS Global Insights project the Austin area economic expansion to continue in the near term led by professional and business sector growth.

The district's market value per capita is above average at $103,000. TAV grew by more than 7% on average over the past 15 years fueled by ongoing residential and commercial expansion northward from Austin. A fiscal 2015 TAV gain of 11.2% follows five years of more moderate growth and reflects strong home price appreciation, as well as new commercial and residential development. Single family residences comprise 58% of the district's tax base; commercial and industrial properties contribute 26%. Top 10 taxpayers comprise a low 4% of TAV and include computer, semiconductor, pharmaceutical and healthcare concerns. Fitch considers the district's estimate of 6% TAV growth for fiscal 2016 reasonable based on regional trends and construction activity underway.

Officials estimate the district to be about three-quarters built out. While residential development continues throughout the district, only two tracts of property remain largely undeveloped, one held by private interests and the other bordering Interstate 35 in the northeast. Enrollment increased 2.8% on average between fiscal 2009 and 2014, a more manageable pace than the 4.6% average rate of the preceding 10 years. The district estimates enrollment growth of less than 2% per annum based on its most recent demographic study, which takes into account residential development underway and in the pipeline. Fitch will continue to monitor the impact of enrollment on the district's capital needs and debt requirements.

MODERATING DEBT PROFILE

Voters approved $299 million of GO authorization in May 2014 to fund new facilities, infrastructure and technology upgrades. The district plans to issue over the next several years with a maximum anticipated tax rate of $0.329 per $100 of TAV in fiscal 2018, below the maximum tax rate of $0.349 communicated to voters and similar to the current rate of $0.323.

Overall debt (including overlapping debt) of 5.6% of market value is above average, although down from 6.9% in fiscal 2011 based on tax base growth, the lack of recent new debt issuance and a moderate amortization rate. Fitch expects the district's debt burden to remain stable despite the planned new debt based on the district's amortization rate, with the potential to moderate over time based on the current TAV and enrollment trends.

Carrying costs for debt service, pensions and other-postemployment benefits (OPEB) are moderate at 15.9% of fiscal year 2013 governmental spending. The state's funding of school districts' payments to the Texas Teachers Retirement System (TRS) keeps costs low. However, districts are vulnerable to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013, a district judge ruled that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding and districts' inability to exercise 'meaningful discretion' in setting tax rates as constitutional flaws in the current system.

The judge agreed to reopen testimony in January 2014 after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

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

In addition to the sources of information identified in Fitch's 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. 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=847014

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Inc.
111 Congress Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1-212-908-0507
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Inc.
111 Congress Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1-212-908-0507
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com