Fitch Rates Round Rock ISD, TX ULTs 'AAA' PSF/ Upgrades Underlying to 'AAA'

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) guaranty and an 'AAA' underlying rating to the following Round Rock Independent School District, Texas (the district) unlimited tax bonds (ULTs):

--$105 million unlimited tax school building bonds series 2016.

The bonds are expected to price via negotiated sale the week of Jan. 11, 2016. Proceeds will be used for facility construction and acquisition, and the purchase of equipment and technology upgrades.

In addition, Fitch upgrades to 'AAA' from 'AA+' the underlying rating on the district's $716 million unlimited tax debt outstanding.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty 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 Aug. 5, 2015).

KEY RATING DRIVERS

STRONG OPERATING PERFORMANCE: The upgrade to 'AAA' recognizes the district's strong financial profile. A decade of sound operating performances has contributed to substantial general fund reserves, which aid in managing enrollment growth and state funding uncertainties.

MANAGEABLE DEBT PROFILE: The rating action also reflects Fitch's expectation that the district will continue to manage growth and keep its debt burden manageable. Relatively low carrying costs for debt service and retiree benefits are attributable largely to the significant role played by the state in funding pensions.

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

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

RATING SENSITIVITIES

MANAGEMENT OF GROWTH: The rating is sensitive to a deviation from Fitch's expectation that the district will maintain sound finances and affordable debt while managing future growth.

CREDIT PROFILE

The district is located roughly 20 miles north of Austin in Travis and Williamson Counties (Williamson County GOs rated 'AAA'/Stable Outlook).

STRONG OPERATING PERFORMANCE

Conservative budgeting and strong operating performances have enabled the district to build robust reserves over the past decade. The district completed fiscal 2015 with a $7.1 million operating surplus after transfers and healthy unrestricted general fund reserves of $219 million, representing a robust 60% of spending.

The district typically reports surplus operating results. Deficit results in fiscal 2013 and 2014 resulted from planned capital spending, reducing the need for debt issuance. The district anticipates a fiscal 2016 operating surplus, a portion of which may be used to fund nonrecurring and capital projects.

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 of 3.3% (October 2015). The district's market value per capita is above average at $120,000. TAV grew 6% on average annually over the past 10 years, fueled by residential and commercial expansion northward from Austin.

A fiscal 2016 TAV gain of 8.3% reflects ongoing home price appreciation, as well as continuing 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 fiscal 2016 TAV and include computer, semiconductor, pharmaceutical and healthcare concerns. Fitch considers the district's estimate for moderate ongoing near term TAV growth reasonable based on current trends and development underway.

Officials estimate the district is about three-quarters built out. While 10-year average annual enrollment grew by about 2.5%, officials anticipate a more moderate 1.0% annual growth rate over the next five years. Fitch will continue to monitor the impact of enrollment trends on the district's capital needs and debt requirements.

MODERATING DEBT PROFILE

Sizable overlapping debt, reflecting regional growth needs, comprises about half of the district's elevated debt burden, currently 6.1% of market value. Fitch expects the district's direct debt levels to moderate over time based on slower enrollment growth and additional TAV gains.

This issue includes funding for a new middle school and renovations to existing facilities. A final $42.75 million issuance authorized under the 2014 bond program is tentatively scheduled for the spring of 2017. A new authorization under consideration for as early as 2017 likely will address a new high school and additional infrastructure needs.

The district's fiscal 2016 debt service tax rate of $0.2925 per $100 of TAV provides ample capacity below the statutory new issuance tax rate cap of $0.500. The district anticipates a declining debt service tax rate in the near term, reflecting TAV growth outpacing new debt requirements.

The district's debt structure includes $75 million (10.5% of total district debt) in variable-rate bonds with 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 a failed remarketing, whereby the district would pay an elevated interest rate. Fitch considers the risk of a failed remarketing minimal based on the district's rating (which indicates ready market access), as well as the district's strong financial position.

STATE FUNDED PENSIONS CONTRIBUTE TO LOW CARRYING COSTS

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state's funding of Texas school districts' payments to the TRS helps keep these fixed costs down. 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.

Under GASB 67 and 68, the district reports its share of the TRS net pension liability (NPL) at 42.5 million, with fiduciary assets covering 83.2% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 2/10ths of 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB are moderate at 16% of fiscal year 2015 governmental spending.

TEXAS SCHOOL DISTRICT LITIGATION

A Texas district judge ruled in August 2014 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 and was the second such ruling in the past two years, 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.

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 would likely follow with changes intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, Zillow Group, and The Municipal Advisory Council of Texas.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996697

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996697

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, CFA, CPA
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
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, CFA, CPA
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
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com