TEXT - Fitch rates Texas' Lewisville ISD bonds

Fri Feb 8, 2013 11:37am EST

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Feb 8 - Fitch Ratings assigns an 'AAA' rating to the following Lewisville
Independent School District, Texas' (LISD or the district) unlimited tax (ULT)
bonds: 

--$61.5 million ULT refunding bonds, series 2013A.
--$86.9 million ULT refunding bonds, taxable series 2013C.

The 'AAA' rating is based on the guarantee provided by the Texas Permanent 
School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. 

Fitch assigns an 'AA+' underlying rating to the aforementioned 2013 A and C 
bonds and an 'AA+' rating to the following bonds that do not benefit from the 
PSF Guaranty:

--$53.9 million ULT refunding bonds, series 2013B

Fitch also affirms the 'AA+' underlying rating on the district's $1.1 billion 
(pre-refunding on a non-accreted basis) in outstanding ULT bonds

The bonds are scheduled to sell the week of Feb. 11 via negotiation. Proceeds 
will be used to refund a portion of outstanding district debt for debt service 
savings and to pay related costs of issuance.

The Rating Outlook is Stable. 

SECURITY 

The bonds are payable and secured by an unlimited property tax levied against 
all taxable property within the district. The series 2013A and 2013C bonds are 
further secured by the PSF Guaranty. 

SENSITIVITY/RATING DRIVERS

STRONG FINANCIAL POSITION MAINTAINED: General fund reserves and liquidity are 
solid, enhancing the district's financial flexibility. Conservative and prudent 
fiscal management typically facilitates outperformance of the sizeable operating
deficits budgeted annually. 

FAVORABLE LOCATION AND DEMOGRAPHICS: The district benefits from its location in 
the broad Dallas-Fort Worth metro area and employment base along major 
transportation corridors. Population trends exceed those of the state. Income 
and wealth levels also are above average.

MODEST TAV TRENDS: Recently positive taxable assessed value (TAV) trends 
indicate the tax base has regained its footing from the modest, recessionary 
declines previously realized. The district's tax base is generally stable and 
has historically experienced healthy rates of growth. Prospects for further tax 
base expansion appear favorable.

HIGH DEBT LEVELS: The district's capital improvement program will continue to 
drive already elevated debt ratios. Strong voter support for bond programs and 
an above-average pace of amortization mitigate some concern over debt levels. 

WHAT COULD TRIGGER RATING ACTION

Material deterioration of solid reserve levels that provide a level of financial
flexibility consistent with the district's high-grade rating and/or weaker debt 
profile could lead to negative rating action.

CREDIT PROFILE

FINANCIAL RESULTS AGAIN OUTPERFORM BUDGET 

The district has generated operating surpluses in three of the last five fiscal 
years.  Audited fiscal 2012 results reflect management's repeated outperformance
of the year's adopted operating budget that included a large deficit under 
conservative assumptions.  Additional federal and state revenue and enrollment 
that was higher than budgeted contributed to the year's financial performance.  
Also, the district realized salary savings from budgeting full staffing costs 
and an incentivized 'early notice' program that has been offered in recent 
fiscal years, allowing the district to reduce or eliminate some of its more 
highly paid positions.

The district closed the year's nearly $18 million budgeted operating gap and 
added a sizeable $14 million to general fund reserves.  This brought the 
unrestricted fund balance up to a very strong $146.5 million or approximately 
39% of spending. This amount includes $45 million (equivalent to about 12% of 
fiscal 2012 general operational spending) held as a minimum reserve according to
the district's formal fund balance policy.

  

MODEST SOFTENING OF CURRENT YEAR'S BUDGET GAP

For fiscal 2013, the district's budget reflects a slightly larger $28 million 
state aid cut in the second year of reduced state funding levels to all Texas 
school districts over the biennium (fiscal 2012 and 2013) due to the state's own
projected revenue shortfalls. The year's $394 million operating budget was 
adopted with a sizeable $23 million drawdown, consistent with budgeting 
practices over the past four fiscal years.  Year-to-date operations are 
reportedly ahead of budget with a softened use of less than $20 million 
expected.

Although management indicates there is the possibility of a drawdown on the 
district's solid financial cushion at fiscal 2013 year-end and a comparable 
drawdown anticipated in preliminary fiscal 2014 budget preparations, Fitch 
believes a reduction of reserves at the high level budgeted is unlikely given 
the district's historical operating performance. Fitch takes comfort from 
management's practice of maintaining reserves well above its stated minimum, 
noting unreserved/unrestricted reserves have been no less than roughly 20% of 
spending since fiscal 2008.

HIGH DEBT/ MANAGEABLE CARRYING COSTS 

Debt ratios are high, reflecting the district's prior fast-growth years.  
Including near-term plans for the next new money issuance, overall debt levels 
approximate $6,000 on a per capita basis and 7% of market value on an accreted 
basis. Principal amortization is slightly above average with roughly 53% of 
principal maturing within 10 years.  The district's debt profile is primarily 
comprised of fixed-rate debt with some use of capital appreciation bonds.  
Inclusive of the planned new money issuance, annual debt service is projected to
rise to a maximum of $112 million (maximum annual debt service ) in fiscal
2021, up from $90.5 million in fiscal 2012.  The MADS burden on the budget is 
high at 23% of fiscal 2012 general and MADS spending but mitigated by the 
district's overall financial flexibility reflected in ample reserves and some 
tax rate cushion.

Approximately $254 million in authorized but unissued bonds remain from the 
nearly $700 million bond package approved by 58% of the voters in May 2008, the 
largest in the district's history.  The next new money issuance of about $90 
million will finish funding the construction of various ninth grade school 
facilities. Management reports issuances will also rely on further tax base 
expansion as plans are to stay at or below the maximum debt service tax rate 
promised voters of $0.45 per $100 of TAV as the borrowing continues.  The 
district's fiscal 2013 interest and sinking (I&S) fund tax rate of $0.41 per 
$100 of TAV provides little margin under the promised rate but some capacity in 
relation to the statutory cap of $0.50 for new debt issuance, benefitting from 
TAV growth and some buy down with debt service fund balance.

A recently completed facilities assessment has allowed management to sharpen its
focus on district-wide facility needs. As a result, most of the outstanding bond
authorization is planned for near-term use on prioritized school facility and 
technology needs while approximately $30 million will be set aside to provide a 
cushion towards facility contingency needs.  Initial study of the district's 
capital needs to be addressed by a future bond election will begin in fall 2013 
according to district officials.  Although future capital needs exist, Fitch 
believes they should remain manageable in this fairly mature district.  This 
should reduce the district's reliance on continual tax base growth to fund 
capital needs with debt.

OTHER LONG-TERM LIABILITIES MODERATE

The district's pension and other post-employment benefit (OPEB) liabilities are 
limited because of its participation in the state pension plan administered by 
the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, 
multiple-employer plan in which the state rather than the district provides the 
bulk of the employer's annual pension contribution. 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. Carrying costs for the district (debt 
service, pension, OPEB costs, net of state support) totaled a manageable 18% of 
governmental fund spending in fiscal 2012, reflective largely of the district's 
annual debt load.

MODEST TAV GROWTH SUSTAINED

The district's tax base is stable and primarily residential in character. Gains 
made in prior fiscal years have historically been strong, averaging a compound 
annual growth rate of 6.5% from fiscal years 2003-2009. After two years of 
moderate TAV decreases, the trend was reversed with a modest 2% TAV gain in 
fiscal 2012. Another 2% TAV gain was realized in fiscal 2013, which is in line 
with management's expectations for fiscal 2014.  Fitch believes higher but still
moderate TAV increases are likely over the intermediate term given the 
development underway on the first phase of a large retail store and distribution
center that is anticipated to add about $1 billion in additional value at 
completion. 

LISD encompasses 127 square miles and is located about 20 miles northwest of 
Dallas in Denton County. The district serves all or portions of 13 residential 
communities, including the cities of Lewisville, Flower Mound, Carrollton, and 
The Colony. Roughly 75% of the district is built-out and both enrollment gains 
and growth in TAV have moderated as the district's service area has matured. 

Unemployment rates in Denton County are consistently below regional, state, and 
national averages and local wealth measures exceed state and national levels by 
10%-60%, depending on the community within the district's boundaries.

On average, enrollment has grown just over 1% annually over the last five fiscal
years compared with a roughly 5% average annual growth rate during the prior 
decade from fiscal 1997-2007. District enrollment totaled 52,300 students in 
fiscal 2013. Full build-out of the district is estimated to top out at 
65,000-70,000 students.
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