Fitch Rates Mabank ISD, TX ULTs 'AAA' TX PSF; 'AA' Underlying

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating based on the Texas Permanent School Fund (PSF) and an 'AA' underlying rating to the following Mabank Independent School District (ISD), Texas (the district) unlimited tax (ULT) bonds:

--$8.9 million ULT refunding bonds, series 2015.

The bonds are expected to price via negotiation the week of April 20, 2015. Proceeds will be used to refund outstanding obligations for level debt service savings with no extension of maturities.

Fitch also affirms $36.9 million (pre-refunded basis) of outstanding district ULT bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district, without limitation as to rate or amount 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

SOUND FISCAL PROFILE: The district's solid financial performance is reflected in ample general fund balances. The tenured management team typically outperforms its structurally balanced budget.

STABLE ECONOMY: The largely rural economy continues to transition into a residential community, driving steady tax base growth. Mabank is a popular recreational destination drawing weekend visitors from nearby Dallas-Fort Worth that have spurred residential and commercial growth.

MODERATE DEBT: Fitch anticipates debt to remain moderate and affordable, taking into account the potential impact of new debt issuance. Low carrying costs (debt service payments, pension and other post-employment benefit (OPEB)) reflect slow principal amortization and strong state funding of pension contributions.

RATING SENSITIVITIES

SOUND FINANCES: The current rating anticipates that the district will maintain a solid financial profile characterized by structural balance and healthy reserves.

DETERIORATION OF DEBT PROFILE: A deterioration of the district's debt profile reflected in a sharp increase in debt burden or further material reduction in principal payout would not be consistent with the current rating.

CREDIT PROFILE

Mabank ISD is located in an agricultural and oil producing area approximately 50 miles southeast of Dallas serving a population of about 25,000, with boundaries that include portions of Kaufman, Henderson and Van Zandt Counties.

AGRICULTURAL-BASED ECONOMY

The three principal communities in the district are Mabank, Gun Barrel City and Seven Points. Nearby Cedar Creek Reservoir is a major tourism attraction, and improved highway access to the area from Dallas over the past decade has generated both residential and commercial development. The Kaufman County unemployment rate improved to 4.5% as of January 2015 (from 5.9% in Jan. 2014), on par with the rate for Texas and below the 6.1% national average rate for the same period. The improvement reflects steady growth of the employment base over the past two years.

Taxable assessed valuation (TAV) appreciated by a compound annual growth rate of about 3.5% over the past eight years ending in fiscal 2015. The district attributes much of the growth to the development surrounding Cedar Creek Reservoir, the fourth largest lake in Texas. The reservoir is 18 miles long and provides 320 miles of shoreline, most of which has been built out. The short commute to Dallas benefits the community, with reported summer weekend populations increasing 10-20 times that of year-round residents.

The district anticipates modest near term tax base growth as farmland continues to be converted for residential property usage, especially in northern Kaufman County. Officials report recent replenishment of Cedar Creek Reservoir to capacity, a plus for tourism. New commercial and retail development supplement modest additions to the residential property base.

The district's full value per capita is below average for the 'AA' median at $62,000 for fiscal 2015; the tax base is without concentration. With a total tax rate of $1.38 per $100 of TAV, including a maintenance and operations (M&O) tax rate at the statutory cap of $1.04, the tax burden is moderate. The district does not have immediate plans to seek an M&O tax rate increase.

STRONG FINANCIAL PERFORMANCE

State funding provides about half of the district's general fund revenues. Officials have managed finances prudently in an environment of relatively flat enrollment and state-wide funding cuts over the past several years. Solid fiscal 2014 unrestricted reserves of $7.2 million (28.2% of spending) are up from $4.6 million (20.1% of spending) in fiscal 2011. The improvement reflects cost cutting during the state-wide funding cuts in fiscal 2012/2013, and the benefit of improved state funding in fiscal 2014.

The district expects to end fiscal 2015 with like reserves. Consistent with the district's history of fiscal management, officials report a structurally balanced fiscal 2016 budget.

MANAGEABLE DEBT

The overall debt burden is moderate at 3.1% of market value; principal amortization is below average at 30% within 10 years. The district's board is in preliminary discussion about the possibility of going to voters for a future bond authorization. This current rating is based on Fitch's understanding that the district's debt burden would remain moderate subsequent to a potential new money issuance.

The district's interest and sinking fund tax rate of $.34 per $100 of TAV is well below the $0.50 statutory cap for new debt issuance, and officials expect the rate to remain relatively flat for the foreseeable future.

Carrying costs for debt service, pensions and OPEB are low at 11.9% of fiscal year 2014 governmental spending, and lower at 11.3% of spending, taking into account state support for debt service. The state's funding of school districts' payments to the Texas Teachers Retirement System 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

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, 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, S&P/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=982838

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
+1-212-908-0507
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
+1-212-908-0507
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com