TEXT-Fitch affirms Harlandale ISD, Texas ULT bonds at 'AA-'

Feb 15 - Fitch Ratings takes the following rating action on Harlandale
Independent School District, Texas' (the district) unlimited tax bonds:

--$18.2 million outstanding unlimited tax refunding bonds, series 2009 affirmed
at 'AA-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

SOLID FINANCES: The district's financial condition has improved significantly in
recent years. Reserves are expected to be maintained at strong levels given
management's conservative budgeting.

ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO: The district benefits from its
location within the city of San Antonio, TX, the second largest city in the
state. Area employment has shown recent annual growth and unemployment remains
lower than county, state, and national levels. Concerns regarding a declining
tax base are mitigated by a state aid formula that compensates property-poor
districts for tax base declines.

MANAGEABLE DEBT LEVELS REFLECT STATE SUPPORT: District debt levels are
manageable due to significant state funding support for debt service, though
amortization of debt is very slow. No additional near-term debt issuance is
planned. Combined debt service, pension, and other post-employment (OPEB) costs
are also manageable.

LOW INCOME AND WEALTH INDICATORS: The district's wealth and income indicators
are well below average.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: Financial deterioration leading to significantly
reduced reserves below the district's policy level could result in a downgrade.

SECURITY

The bonds are secured by and payable from the levy of a continuing direct annual
ad valorem tax without limit as to rate or amount on all taxable property within
the district.

CREDIT PROFILE

Encompassing 13.7 square miles, the district is located within San Antonio,
about three miles south of the downtown center. The urban area is mostly
residential interspersed with a limited number of commercial establishments.
District population fell nearly 3% between 2000 and 2011. Enrollment saw
declines in the 2000s, but recent performance has been positive, averaging about
1.4% annual growth since 2008. Improved student counts reflect the initiation
and expansion of a district Pre-K program, as well as the district's efforts to
increase attendance rates.

SIGNIFICANT STATE SUPPORT

As a property poor district under the Texas Education Code, the district
receives significant state support for both operations and debt service. State
aid constituted about 76% of general and debt service fund revenues in fiscal
year 2012. Like other Texas school districts, the district had initially
budgeted for over $1 million in annual reductions in state funding for fiscal
years 2012 and 2013. Growth in average daily attendance (ADA) above budgeted
levels in both years, however, mitigated funding reductions. The district saw
overall state aid growth in fiscal year 2012, which is expected to continue in
fiscal year 2013. Total fiscal year 2013 general fund revenues are budgeted to
increase by about 2%, reflecting growth in state revenues and property tax
collections.

SOLID FINANCES FEATURE STRONG ENDING BALANCES

The district has dramatically increased general fund ending balances in recent
years, with consistently large annual operating surpluses since increasing the
O&M millage rate in fiscal 2009. The general fund unreserved ending balance
increased from a weak $3 million (2.8% of spending) in fiscal year 2008 to a
high $53.7 million (51.2% of spending) at the end of fiscal year 2012.

The fiscal year 2012 $56.9 million total ending balance included an assigned
balance of $9.7 million to cushion against potential state funding reductions
and a $12 million committed balance set aside for one-time capital spending
initiatives. District finances were bolstered by the voter approved O&M tax
increase together with spending reductions and receipt of federal stimulus
funds. With the tax increase, the district's O&M tax levy is at the state's
maximum permitted rate of $1.17 per $100 of TAV.

FISCAL YEAR 2013 BALANCE DRAWDOWN EXPECTED

The district's fiscal year 2013 general fund budget assumes a total deficit of
about $6.8 million. This reflects a budgeted $1.8 million operating deficit,
with the remainder resulting from planned one-time capital spending from the $12
million committed balance set-aside. Actual performance is expected to be
better, however, as revenues are projected to be over budget by about $2
million. This results primarily from higher than budgeted average daily
attendance (ADA) levels that will increase state funding, but also from federal
revenue figures coming in higher than budgeted.

Even assuming an unrestricted balance reduction of $6.8 million for fiscal year
2013, the ending balance would still be strong at about 37% of expenditures. The
district expects to continue spending down the $12 million committed balance
set-aside for capital needs over the next two years. Fitch expects the district
will continue to adhere to its policy of maintaining a general fund balance of
two months' spending.

ECONOMY BENEFITS FROM LOCATION IN SAN ANTONIO

The district is small but benefits from its location within the broader city of
San Antonio economy (city limited tax bonds rated 'AAA' with a Stable Outlook by
Fitch), which is primarily composed of military and government, domestic and
international trade, tourism, health care, financial services, and
telecommunications sectors. City employment has shown recent annual growth and
unemployment remains lower than county, state, and national levels. The city's
unemployment rate was 5.5% as of November 2012, down from 6.8% a year prior and
below county (5.7%) state (5.8%) and national (7.4%) rates. However, district
wealth indices are below average and poverty rates are well in excess of state
and national levels.

Taxable assessed value (TAV) has seen annual declines since fiscal year 2009,
following prior years' growth. The downturn has been related to the high number
of foreclosure sales which have lowered overall residential values. TAV dropped
14% from fiscal 2009 to fiscal 2013. Annual declines have lessened (3% in fiscal
year 2012 and 1.5% in fiscal year 2013) and continued moderation is expected in
fiscal year 2014 as the district is seeing housing improvement, with increased
sales and fewer foreclosures. Concerns regarding declines in TAV are somewhat
mitigated by a state aid formula that compensates districts for tax base
declines, although the district's voted levy makes them more vulnerable to
declines than other districts. The district's tax base is fairly diverse, with
the top 10 taxpayers representing about 11% of total valuations.

MANAGEABLE DEBT LEVELS INCLUDING STATE SUPPORT

The district's debt levels are very high relative to the tax base but more
manageable taking into account state funding allocations. On a gross basis debt
burden is 17.1% of market value and $4,169 per capita. Including this support,
debt burden is still high relative to market value (7.8%) but low on a per
capita basis at $1,887. Direct debt outstanding is slowly amortized with only
about 39% of principal retired within 10 years. Proceeds from recent bond issues
have been used to refund prior district bonds for savings. The district
currently has no plans for additional debt issuance.

The district provides pension and retirement health benefits through the Teacher
Retirement System of Texas (TRS). Pension and OPEB costs are modest (about 1.6%
of spending). As of Aug. 31, 2012, the TRS funded ratio was 81.9% or 73.8% using
Fitch's more conservative 7% discount. Combined debt service (including state
support), pension, and OPEB costs are low at about 5% of expenditures.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

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
U.S. Local Government Tax-Supported Rating Criteria