Fitch Affirms Lake Travis ISD, Texas' ULT GOs at 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'AA+' rating on the following Lake Travis Independent School District (ISD), Texas' (the district) unlimited tax (ULT) general obligation (GO) bonds:

--Approximately $278 million in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy against all taxable property within the district. The bonds are also insured as to principal and interest repayment from a guaranty provided by the Texas Permanent School Fund (guaranty rated 'AAA' Stable Outlook by Fitch).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial profile is a positive credit factor, characterized by large reserve levels and ample liquidity. Solid fiscal performance has been aided by a consistent record of conservative budgeting practices and annual enrollment growth.

DIVERSE ECONOMY; GROWTH CONTINUES: The district is part of the larger Austin-Round Rock metropolitan statistical area (MSA) regional economy, which continues to demonstrate low unemployment and a healthy local housing market. Both the district's tax and enrollment base have steadily expanded as housing construction continues in the area.

ABOVE-AVERAGE SOCIO-ECONOMIC PROFILE: District income, wealth and educational attainment metrics are well above MSA, state, and U.S. averages.

ELEVATED DEBT BURDEN: The district's overall debt burden is high, particularly on a per capita basis. Fitch believes solid population and tax base growth are likely to continue, making the burden decline somewhat over time, although this will be balanced against measured debt plans to address future school facility needs in the near term.

AFFORDABLE PENSION COSTS: The state continues to fund the bulk of retiree pension and healthcare costs on behalf of districts, resulting in an affordable fixed cost burden to the district.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial position. Maintenance of sizeable reserves while addressing operating and capital needs supports rating stability.

FUTURE ENROLLMENT GROWTH PRESSURES: Fitch believes the district presently maintains a moderate level of capacity in its school facilities. The district may experience capital pressures if enrollment growth substantially outpaces tax base growth.

CREDIT PROFILE

Lake Travis ISD has approximately 49,350 residents and is located roughly 18 miles west of Austin, TX. The area is largely residential and recreational in nature.

PART OF THE AUSTIN METRO ECONOMY

The Austin area is among the top performing U.S. metro area economies. MSA unemployment fell slightly from 5.2% the year prior to a low 4.2% in September 2014, and remained below the rates of the state (5%) and U.S (5.7%) for that month. The city is the state capital and home to the University of Texas at Austin (University of Texas System; rated 'AAA' by Fitch), as well as six other colleges and universities. The large state government and higher education employment base has provided a stabilizing presence and economic buffer for the city during downturns. Technology manufacturing is another key area employment sector, led by Dell, IBM, Samsung and others.

CONTINUED GROWTH IN DESIRABLE RESIDENTIAL COMMUNITY

Above-average income and wealth levels characterize the district's population base; median household income equaled roughly 184% of the state and 179% of the U.S. in 2012. The district has realized steady growth in its enrollment and tax base in recent years. Enrollment grew at a rapid average annual rate of about 6% over fiscals 2008-2015. The district's fall 2014 enrollment was approximately 8,800 students, reflective of a slightly higher 7% gain to date in fiscal 2015. Management is updating near-term operating and capital plans with an expected demographic study to determine if stronger rates of annual enrollment growth will persist in the near term given the various new single- and multi-family residential projects underway.

Taxable assessed valuations (TAV) have also continued to strengthen after realizing a modest, one-year recessionary contraction in fiscal 2011. TAV grew at an average annual growth rate of roughly 6.4% from 2008-2015, inclusive of a strong 11% increase (with about 60% of the year's gain attributable to new construction) in fiscal 2015. Fitch believes growth rates may temper somewhat, but TAV gains should continue with an active housing market, plans for a new, large retail center, and the growing regional economy.

EXEMPLARY FINANCIAL PERFORMANCE

The district's financial position is strong, as evidenced by an audited fiscal 2014 unrestricted general fund balance level of just under $30 million or 35.7% of annual spending. Fund balances have exceeded 20% of spending for each of at least the past 10 audited years, maintaining a high degree of financial flexibility through two national recessions. General fund cash/investments in fiscal 2014 totaled $31.5 million or about 4 1/2 months of operational spending.

The district routinely budgets a modest operating deficit using conservative assumptions for attendance-based state revenues. Expenditure control throughout the year typically results in a modest operating surplus at year-end. In preparing the fiscal 2015 budget, management implemented its first phase of various staffing efficiencies that partially offset the added costs of operating new schools as well as providing a 2% salary increase. The $93.3 million fiscal 2015 budget was again adopted with a $2.2 million draw on reserves, but management projects a balanced result at year-end. Fitch believes this is a reasonable projection as prior years' fiscal performance has generally been positive relative to the budget and does not foresee substantial changes to the district's strong financial position.

ELEVATED DEBT BURDEN

The district's overall debt burden remains elevated at 5.1% of fiscal 2015 market value and quite high $8,925 per capita, although this is down slightly from prior years given recent population and TAV gains in conjunction with the lack of debt issuance by the district. Principal amortization is somewhat below average at 40% repaid in 10 years.

Fitch expects debt levels to remain stable if not decline slightly with continued growth and management's reported adequate facilities capacity for the intermediate term. Preliminary plans for a future GO bond authorization in 2017, estimated at approximately $160 million, are presently under consideration by management and remain comparable to earlier district projections.

Maximum annual debt service as a percentage of fiscal 2014 general and debt service fund expenditures is high at 22%. Reflecting the strong tax base, however, the debt service tax rate remains comfortably below the $0.50 per $100 of TAV statutory test for new debt issuance at $0.37. If further economic gains do not materialize, the rate could increase beyond prior expectations, causing the fixed debt costs and ability to issue new debt to become a greater credit concern.

AFFORDABLE RETIREE COSTS

Fitch's concern about the district's overall long-term liabilities is lessened by its low retiree cost burden. Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. District employees contribute to TRS for pensions at 6.4% of annual payroll, and the state pays the local district's contributions (6.4% of payroll in fiscal 2013), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. Other post-employment benefit (OPEB) contributions paid by the district are nominal as the state and employees also pay the bulk of these costs. Total pension and OPEB contributions made by the district in fiscal 2014 totaled less than 1% of governmental fund expenditures.

TRS is adequately funded at 80.8% as of Aug. 31, 2013, though Fitch estimates the funded position to be lower at 72.8% when a more conservative 7% return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of an elevated debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a manageable 13% of governmental fund spending in fiscal 2014 due in part to slower than average amortization. Starting in fiscal 2015, pension contributions for all districts in the state rose to 1.5% on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

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, IHS Global Insight, and the Municipal Advisory Council of Texas.

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=976975

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78801
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3729
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-1608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78801
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3729
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-1608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com