Fitch Rates Round Rock ISD, TX ULTs 'AAA' PSF; 'AA+' Und; Outlook Positive

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following Round Rock Independent School District, Texas (the district), unlimited tax bonds (ULTs):

--$75.6 million unlimited tax school building bonds, series 2015;

--$75.6 million variable rate unlimited tax school building bonds, series 2015.

The bonds are expected to sell via negotiation on Feb. 2, 2015. Proceeds will be used for construction, acquisition and equipment of school buildings.

In addition, Fitch assigns an 'AA+' underlying rating to the series 2015 bonds and affirms the 'AA+' rating on the district's $621.7 million unlimited tax debt outstanding.

The Rating Outlook is Positive.

SECURITY

The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee program rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sept. 4, 2014.)

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: A decade of mostly surplus results has contributed to substantial general fund reserves which aid in managing enrollment and state funding uncertainties as well as provided funding for capital needs.

MANAGEABLE DEBT PROFILE: Above-average overall debt reflects growth of overlapping municipal debt issuances. Relatively low carrying costs for annual debt service, pension and other post-employment contributions (OPEB) reflect affordable debt and state supported pension and OPEB.

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:

MANAGEMENT OF GROWTH: Continuation of the district's strong financial profile and continued demonstration of its ability to manage growth without affecting the affordability of its carrying costs 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 completed fiscal 2014 with healthy unrestricted reserves of $211.8 million, representing 59.5% of spending.

The district typically realizes surplus results. Deficit results in fiscal 2013 and 2014 resulted from planned capital spending, reducing the need for debt issuance. Consistent with historical performance, officials anticipate completing fiscal 2015 favorably to budget, adding modestly to reserves.

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 and population 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 3.9% to 4% (November 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 $110,000. TAV grew 6% on average over the past 10 years fueled by ongoing residential and commercial expansion northward from Austin. A fiscal 2015 TAV gain of 14.1% 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 5.7% of TAV and include computer, semiconductor, pharmaceutical and healthcare concerns. Fitch considers the district's estimate of 3% to 4% TAV growth for fiscal 2016 conservative based on current trends and development 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 annually between fiscal 2009 and 2014, and officials anticipate near term growth of about 1.5% per annum. Fitch will continue to monitor the impact of enrollment on the district's capital needs and debt requirements.

MODERATING DEBT PROFILE

These issues represent the initial offerings pursuant to $299 million authorized by voters in May 2014 to fund new facilities, infrastructure and technology upgrades. Terms of the variable-rate bonds include a three-year initial fixed-rate term, a soft put-back to bondholders in lieu of liquidity support, and the option to periodically reset the rate to a long-term fixed basis. The risk to the district is in the case of a failed remarketing whereby the district would pay an elevated, but manageable interest rate. Fitch considers the risk of a failed remarketing minimal based on the district's rating which indicates strong market access, as well as the district's strong financial position.

The district's current interest and sinking fund (I&S) tax rate of $0.298 provides ample capacity in relation to the statutory rate of $0.500 per $100 of TAV. The district plans to issue over the next several years with a maximum anticipated tax rate of $0.322 in fiscal 2018, below the maximum tax rate of $0.349 communicated to voters.

Sizable overlapping debt, reflecting regional growth needs, comprises about half of the district's elevated overall debt, 6% of market value. Fitch expects the district's direct debt burden to remain stable despite planned new issuances given its average amortization rate, with the potential to moderate over time based on the current TAV and enrollment trends.

Carrying costs for debt service, pensions and OPEBs are relatively low at 15.4% of fiscal year 2014 governmental spending. The state's funding of school districts' payments to the Texas Teachers Retirement System (TRS) helps keep these fixed costs low. However, like all Texas school districts, the district is 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

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, University Financial Associates, CoreLogic/Case-Shiller Home Price Index, IHS Global Insight, 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=978725

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1 212-908-0507
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1 212-908-0507
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com