Feb 22 - Fitch Ratings has affirmed its 'AA-'underlying rating on the following Hitchcock Independent School District, Texas' (the district) obligations: --$20.3 million in outstanding ULT school building and refunding bonds, series 2008. The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited ad valorem tax pledge against all taxable property within the district. In addition, the bonds are secured by the Texas Permanent School Fund (PSF) whose bond guaranty program is rated 'AAA' by Fitch. KEY RATING DRIVERS RETURN TO BALANCED OPERATIONS: The district recorded a net surplus in fiscals 2011 and 2012 following three years of deficits. The favorable financial performance resulted from cost cutting, enrollment growth and the benefit of one-time grant monies. HIGH DEBT: The district's overall debt is high and the interest and sinking fund (I&S) tax rate is at the state attorney general's cap for new debt issuance. However, future capital needs are expected to be minimal in the near term based on existing capacity and moderate enrollment projections. RESUMED HOUSING DEVELOPMENT: Tax base growth in the district has historically been strong, but was halted in 2009 due to the impact of Hurricane Ike combined with a weaker economy and depressed housing market. Moderate fiscal 2013 taxable assessed valuation (TAV) growth reflects commercial and industrial (C&I) expansion and a pickup in residential construction activity. BELOW AVERAGE ECONOMIC INDICATORS: Income and wealth levels trend somewhat below state and national averages. RATING SENSITIVITY FAVORABLE FINANCIAL PERFORMANCE: Fitch expects the district to retain sound reserve levels to counterbalance concerns over a small service area and revenue constraints, credit factors that Fitch believes combine with elevated debt to limit the rating to its current level over the foreseeable future. CREDIT PROFILE The district is located in Galveston County (the county, general obligation debt rated 'AA+' with a Stable Outlook by Fitch) adjacent to Texas City and 10 miles northwest of the city of Galveston, serving a population of about 8,800 including the City of Hitchcock. INDUSTRIAL BEDROOM COMMUNITY The county's economy is centered on petrochemicals, port activities, tourism and the University of Texas Medical Branch. District residents benefit from two major road systems that allow easy access to employment opportunities outside the district's borders, enabling many in the district to take advantage of the petrochemical job market in nearby Texas City. A December 2012 unemployment rate of 6.8% is improved from 8.6% a year ago and compares favorably to the U.S. rate of 7.6%, but remains elevated in relation to the state average of 6% for the same period. New single family properties largely contributed to a more than doubling of the district's tax base in the decade leading up to 2010, mirroring growth of the region's economy. However, the destruction caused by Hurricane Ike in September 2008 along with the subsequent recessionary pressures experienced nationwide contributed to a TAV loss of 10.3% between fiscal 2010 and 2012. C&I expansion and the resumption of residential development increased fiscal 2013 TAV by a sound 3.2%, with favorable prospects over the near term based on a reported increase in building permits. The district's fiscal 2012 TAV of $477 million is 68% residential and is without tax base concentration. Top taxpayers represent real estate, energy, retail, telecom, and rail concerns. IMPROVED FINANCIAL POSITION The district strengthened its reserves in fiscals 2011 and 2012 through cost cutting, aided by enrollment growth and federal grant monies. A fiscal 2011 net operating surplus of $249,000 (2.2% of spending) reflects staff reductions, a salary freeze and the benefit of $362,704 in federal grant monies. Officials continued the salary freeze and eliminated further positions in fiscal 2012. This, combined with an enrollment gain of 100, allowed the district to more than offset per-pupil state funding losses of about $388,000. The district completed the year with a $1.1 million (10.6% of spending) net surplus. Unrestricted general funds of $3.3 million (31.3% of spending and transfers out) exceed the district's fund balance target for unassigned general funds equal to 20% of spending. Officials report expected fiscal 2013 break-even results based on further enrollment gains and cost management. Revenue flexibility through tax rate adjustment is limited by the district's current maintenance and operations tax rate which resides at the cap of $1.04 per $100 of TAV, above which voter authorization is required. The district reports no immediate plan to pursue a tax ratification election. HIGH DEBT/MANAGEABLE CARRYING COSTS Overall debt levels are high at 10.1% of market value, with an average amortization rate of 49% in 10 years. Although the I&S tax rate of $0.50 per $100 of TAV is at the statutory cap for new debt issuance, the district does not anticipate the need for significant new debt in the mid-term given the ample capacity provided by new facilities. The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan; other-post employment benefits (TRS-Care) are also provided through TRS. The district's combined pension and other post-employment benefits, which are set by state law, totaled $208,400 or a low 1% of governmental spending in fiscal 2012. The district's debt and retirement carrying costs equate to a manageable 13.6% of governmental fund spending for fiscal 2012.