Feb 8 - Fitch Ratings has affirmed the following outstanding bonds for Calallen Independent School District, Texas (Calallen or the district): --$44.8 million ULT bonds at 'AA-' The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited ad valorem tax pledge against all taxable property within the district. KEY RATING DRIVERS BUDGET PRESSURE/SOUND RESERVES: The district has implemented cost saving measures to maintain solid reserves despite revenue pressures associated with sizable tax base declines, low enrollment growth and state funding cuts. Fitch believes large reserves are important to maintenance of the rating given tax base concentration. CONCENTRATED BUT STABLE LOCAL ECONOMY: Petrochemical tax base concentration exposes the district to economic cyclicality, which is somewhat mitigated by the stability of an employment base anchored by military, education, government and health services. Unemployment is low, with above-average measures of income and wealth. HIGH DEBT/LOW BURDEN: Overall debt levels are above average. The district's low carrying costs reflect slow amortization of direct debt and affordable pension and OPEB obligations. MANAGEABLE CAPITAL NEEDS: Growing enrollment levels require expanded elementary school capacity in the next several years. RATING SENSITIVITIES LOSS OF FINANCIAL FLEXIBILITY: Lack of capacity or voter approval for additional debt when needed to address tight elementary school capacity could place pressure on the operating budget and lead to negative rating action. CREDIT PROFILE Calallen ISD is a small, 40 square mile district located within the northwestern portion of Corpus Christi, the eighth largest city in Texas whose general obligation bonds are rated 'AA' by Fitch, with a Stable Outlook. PETROCHEMICAL CONCENTRATION/ STABLE EMPLOYMENT The district includes a small portion of Corpus Christi, an industrial and commercial center dominated by the petrochemical industry and boasting the 6th largest deep water port in the nation measured by tonnage. Calallen's top ten taxpayers account for 22% of fiscal 2012 taxable assessed valuation (TAV), with the top taxpayer, Equistar Chemicals LP, representing a high 15%. Concentration was reduced from recent highs due to Equistar's 2009 chapter 11 restructuring which included negotiated TAV reductions in 2009 and 2010. Since then, the tax base has remained stable. Residential property comprises 59% of the fiscal 2013 market value of $1.3. Officials anticipate moderate near term TAV growth based on residential and industrial development supporting the nearby Eagle Ford Shale drilling activity. Fitch believes this expectation is reasonable. Top employers include the Corpus Christi Army Depot, Corpus Christi ISD, CHRISTUS Spohn Health Systems, H.E.B. Grocery, the City of Corpus Christi and Corpus Christi Naval Air Station. This diversity lends stability to an unemployment rate which typically trends below state and national averages, 5.4% as of October 2012. The district's median household income represents 141% and 136% of state and national averages respectively. MITIGATION OF STATE FUNDING CUTS Modest revenue growth over the past five years flat TAV, low enrollment growth and state funding cuts. A fiscal 2012 net surplus of $338,000 (1.2% of spending) resulted from attrition-based savings, a salary freeze, reduced work days and Edujob monies which offset state funding cuts of $1.6 million. Officials anticipate a modest fiscal 2013 deficit associated with $800 thousand of additional state funding cuts and catch-up salary adjustments, not entirely offset by moderate enrollment gains. The district's maintenance & operation (M&O) tax rate increased to the maximum rate of $1.17 per $100 of TAV in fiscal 2011 following a voter-approved transfer of $0.125 from the interest & sinking (I&S) fund. The swap provides the district with approximately $700,000 in additional state aid for operations which the district flows to the general fund balance each fiscal year for subsequent transfer to the debt service fund. Fitch views the tax rate structure as unconventional, but recognizes that the I&S rate could be raised without voter authorization to repay the bonds or reversed if needed. The fiscal year-end 2012 unrestricted general fund balance totaled $7 million, or a sound 24.4% of spending and transfers out. Material reductions in current reserve levels would represent a credit concern, especially in light of the local economy's heavy dependence on the cyclical oil & gas and petrochemical industries. MANAGEABLE DEBT Overall debt levels are above average at $3,742 per capital and 5.8% of market value. Amortization is slow at 32.6% in ten years. Reported near to mid-term capital needs are manageable. The district's fiscal 2013 I&S tax rate is low at $.189 per $100 of TAV, providing ample capacity in relation to the statutory cap of $.50 for new debt issuance. The district contributes to the TeacherRetirement 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 combined pension and OPEB contributions, which are set by state law, totaled $312 thousand, or a low 0.4% of governmental spending in fiscal 2012. The district's low carrying costs, 8.6% of governmental fund spending for fiscal 2011, reflect a slow amortization rate and affordable pension and OPEB contributions.