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

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

--Approximately $267 million in outstanding ULT bonds.

In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied against all taxable property within the district and are further backed by the Texas Permanent School Fund bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA+' IDR reflects the district's diverse economic resource base and healthy overall financial profile. The district's strong operating profile is supported by a sound level of expenditure flexibility, expectations for continued strong revenue growth, and exceptionally strong gap-closing capacity. Strong enrollment growth is expected to require manageable capital spending in the near term. As a result, Fitch recognizes that the district's moderate long-term liability burden may increase, but expects it to remain at moderate levels.

Economic Resource Base

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. Major taxpayers include retail and healthcare firms, which serve the district's rapidly-growing residential base.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. The natural pace of revenue growth is expected to remain strong, given historical performance and ongoing enrollment growth. The district's legal ability to raise revenues is limited.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given manageable enrollment-driven operating and capital needs. The district retains solid spending flexibility with moderate carrying costs, reflecting state support for retiree benefits.

Long-Term Liability Burden: 'aa' factor assessment

The combined burden of long-term debt and pension liabilities represents a moderate share of resident personal income. Fitch expects debt levels to increase while remaining moderate, given the district's debt plans for the construction of new facilities and expectations for continued growth in the resource base. Retiree benefit obligations do not represent a significant burden on resident income.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's ample gap closing capacity relative to Fitch's expectations of revenue sensitivity to economic cycles, with a solid level of spending flexibility supplemented by a large reserve cushion.

RATING SENSITIVITIES

Growth Management: The rating is sensitive to the district's ability to continue to successfully manage growth as demonstrated by its strong expenditure management and long-term liability profile. Debt issuance beyond current projections would likely lead to downward pressure on the rating.

CREDIT PROFILE

The district has approximately 50,000 residents and is located roughly 18 miles west of Austin, TX. The area is largely residential and recreational in nature. District income, wealth and educational attainment metrics are well above MSA, state, and U.S. averages. Population and enrollment have both grown substantially over the last decade to approximately 10,000 students in fiscal 2017, with future growth projected within the expanding Austin-Round Rock MSA.

Revenue Framework

Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district). The state of Texas' ('AAA'/Outlook Stable) favorable revenue growth prospects bode well for K-12 funding in the medium term.

Approximately 88% of district fiscal 2015 revenues were derived from property taxes, with a modest 10% from state aid. The dominance of property tax revenues is driven by the economic strength of the district's tax base, which is projected to maintain high levels of growth with continued regional economic expansion. Enrollment, which is a key component of state funding, has nearly doubled over the last decade, generating strong revenue growth. The district's demographer projects similar enrollment gains in the intermediate term, driving expectations for additional state aid. Fitch's expectations for revenue growth are based on the anticipated tax base appreciation and additional enrollment, given the district's minimal revenue-raising ability.

District revenues have grown at a compounded annual growth rate of 5.7% over the last decade, exceeding national CPI and GDP. Fitch expects the natural pace of district revenue growth in future years to remain in line with historical performance, expectations for tax base appreciation and strong enrollment growth.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is $1.04 per $100 taxable assessed value (TAV) and would need voter authorization to be increased to the statutory limit of $1.17. The district levies a separate, unlimited debt service tax rate of $0.37 per $100 TAV, two-thirds of the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Management plans to seek voter approval for a tax rate swap whereby the district transfers $0.02 from the debt service fund and increases the M&O rate to $1.06. If approved, management expects the swap to yield an additional $2 million in state aid, which would flow to the general fund each fiscal year for subsequent transfer to the debt service fund. Fitch views the tax rate structure as unconventional, but notes a number of Texas school districts have instituted similar swaps. Fitch also recognizes the debt service tax rate could be raised without voter authorization to repay outstanding debt and reverse the tax rate swap if needed.

Expenditure Framework

The district spends the majority of its operating budget on instruction, and also funds a considerable share of capital needs through a separate capital projects fund to which it transfers surplus general fund revenues.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given that the district's strong growth prospects for revenues and manageable enrollment pressure and related capital needs.

The district's solid expenditure flexibility reflects substantial control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB) of 19.4% of fiscal 2015 governmental spending. Carrying costs are overstated due to the district's early repayment of outstanding principal through redemption resolutions. Absent these early redemptions the district's carrying costs are substantially lower, providing flexibility to address future debt service costs without pressuring spending. Carrying costs benefit from state support for all but a small percentage of district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is moderate at about 18% of resident personal income and is comprised almost entirely of the district's outstanding direct and overlapping debt, which amortizes at a comparatively slow pace of nearly 37% in 10 years. The district's future capital needs suggest debt levels will likely increase in future years as the district expands facilities to meet the demands of enrollment growth. The maintenance of the liability burden at a moderate level will hinge on the district's ability to manage debt issuance with commensurate growth in the district's underlying economic base.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68 reporting, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. The state assumes the majority of TRS' employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts, as evidenced by a relatively modest 1.5% of salary contribution requirement, effective in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has maintained their financial cushion at robust levels despite recessionary pressures and state funding cuts, garnering an 'aaa' financial resilience assessment. Fiscal 2015 available reserves were $30.4 million, or a high 33.5% of spending. Fitch believes the district would use its considerable expenditure flexibility to maintain a high level of financial flexibility in a moderate economic decline scenario.

The district has demonstrated a strong commitment to maintaining financial flexibility. Budgeting is conservative, and management has been proactive in using excess revenues to boost reserves. The district projects a modest deficit of $750,000 for fiscal 2016 (less than 1% of spending) and has no plans to materially reduce fund balance in the near term.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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+1-512-215-3729
or
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or
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Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
George Stimola
Associate Director
+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com