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Feb 21 - Fitch Ratings takes the following rating action on Presidio Independent School District, Texas (the district) unlimited tax bonds: --$6.3 million outstanding unlimited tax refunding bonds, series 2006 affirmed at 'A'. The Rating Outlook is Stable. SECURITY The bonds are direct obligations of the district payable from an unlimited ad valorem tax levied against all taxable property located within the district. The bonds are additionally secured by a guarantee provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch. KEY RATING DRIVERS SOLID FINANCES; STATE DEPENDENCE: The district's financial condition is sound, with ample fund balances supported by conservative budgeting despite significant reserve draws for one-time capital projects. As a property poor district, reliance on state funding is substantial. WEAK ECONOMIC INDICATORS: The district's wealth and income indicators are well below average. Area unemployment, while declining, still exceeds state and national rates. The district's tax base is very concentrated but stable, and has seen recent strong growth. MANAGEABLE DEBT LEVELS SUPPORTED BY STATE FUNDING: District debt levels are generally moderate, but high relative to the tax base. However, district debt service is supported by significant state funding, reducing the associated budget burden considerably. Amortization is rapid and no additional near-term debt issuance is planned. Combined debt service, pension, and other post-employment (OPEB) costs are low. RATING SENSITIVITIES FINANCIAL DETERIORATION: Fitch expects the district to retain its high reserve position to counterbalance concerns over the weak economy, a credit factor that Fitch believes limits the rating to its current level. CREDIT PROFILE The district is located in Presidio County, 287 miles southeast of El Paso on the Texas - Mexico border and encompasses 806 square miles. The district's population (about 5,100 in 2011) grew by about 8% since 2000. Enrollment, about 1,350 in 2012, has fluctuated in recent years, but modest annual growth is projected in the next few years. STRONG STATE SUPPORT OF OPERATIONS As a property poor district, the district receives significant state support for both operations and debt service. State aid made up over 80% of general and debt service fund revenues in fiscal 2012. Given its strong dependence on state revenues, the district strengthened reserve levels as a cushion against recent years' state funding uncertainties. In addition, reserves were built up for anticipated capital spending needs. The district's other general fund revenues include property taxes (9.3%) and federal revenues (5.9%). State aid declined by 3.6% in fiscal 2012, and is budgeted to be essentially flat for fiscal 2013. Property tax collections, budgeted to increase in fiscal 2013, have seen prior year annual fluctuations due to delinquencies and subsequent collections, including major settlements in certain years. The district currently projects that overall fiscal 2013 revenues should meet budget targets, which Fitch views as reasonable given the district's strong budgeting track record. CAPITAL INVESTMENT DRIVES RECENT SPENDING GROWTH Instructional expenses in recent years have increased as part of the district's efforts toward teacher recruitment and improving academic performance. Capital spending has also grown with a significant increase in fiscal 2011 ($4.3 million) driving expenditure growth of 44.5% over the prior year. Capital spending held essentially steady in fiscal 2012 but is budgeted to decline in fiscal 2013 ($4.8 million) resulting in a budgeted decrease in expenditures of 10.8%. The district is projecting flat state aid levels in the next fiscal year. It has identified areas for potential fiscal 2014 cost reductions, if needed, such as pupil transportation. Student-teacher ratios are currently below state mandated levels, offering additional financial flexibility. SOLID FINANCES FEATURE STRONG ENDING BALANCES The district's general fund unreserved ending balance was a very high $22.1 million (143.5% of spending) in fiscal 2010. Balances have remained strong, though at lower levels due primarily to capital spending. The district ended fiscal years 2011 and 2012 with unrestricted balances of $16.6 million (74.6%) and $10,873 (49.4%), respectively. The fiscal 2013 budget includes a deficit of about $3 million ($2 million less capital spending), which would decrease the unrestricted balance to 39.6% of spending. However, this may be a conservative estimate, as expenditures are currently projected to come in under budget. The district's fiscal 2012 initial budget also called for an operating deficit, which was ultimately eliminated due to lower actual spending. Fitch expects the district to maintain high balances; a key credit driver and important mitigant to the credit risk associated with its limited economy. WEAK ECONOMIC INDICATORS The local economy is supported by government employment, ranching and some border trade. The economy also benefits from some tourism with Big Bend National Park and other attractions located nearby. Major employers are limited to the school district and the federal government. An international bridge crossing into Mexico, which generates some commercial activity, is being expanded to allow for additional commercial traffic. In addition, recent business expansions include the opening of the Shafter silver mine in 2012, and the construction of a new solar energy facility expected to result in 150 construction jobs. Presidio County's high unemployment rate (12% in December 2012) is reflective of the area's limited economy, agricultural/ranching nature and immigration from Mexico. The unemployment rate has been declining, but is still above state (6%) and national (7.6%) levels. Area wealth and income levels remain well below state and national averages. SMALL CONCENTRATED BASE The district's tax base is small. While it has been experiencing growth, it remains concentrated, with the top taxpayer (electric utility) at 13% of taxable assessed value (TAV), the second highest (telephone company) at 9.5%, and the top 10 at 34%. TAV has seen robust investment and growth recently with the opening of the Shafter silver mine, which led to 49.5% growth in TAV for fiscal 2013. Additional growth is expected for fiscal 2014 with the addition of the solar facility and other new business openings. District tax collections have been improving, and a large tax amount was collected in fiscal year 2012 under a court-ordered taxpayer settlement. The district's total direct property tax rate is $1.41 per $100 of valuation, with the O&M tax levy set at the state's maximum permitted rate of $1.17 per $100 of TAV. Fitch expresses concern about the district's lack of rate raising flexibility but recognizes its significant capital investment from operating funds and low carrying costs. Debt service, pension and OPEB contributions were just 1.5% of fiscal 2012 governmental (net of capital) spending, including the benefit of state support for debt service. DISTRICT DEBT SUPPORTED BY STATE FUNDING The district's debt levels are generally moderate, with debt service as a percentage of fiscal 2012 spending at about 4.1% and debt per capita at $2,143. Debt as a percentage of full value, however, is high at about 7.8%. District debt is additionally supported by state funding allocations, which lower the district's debt burden. Including state support, debt service as a percentage of spending is about 0.8%. Direct debt outstanding is rapidly amortized, with about 68.5% of principal retired within 10 years. The district currently has no plans for additional debt issuance, relying instead on pay go spending for capital needs. The district provides retirement benefits through the Teacher Retirement System of Texas (TRS). Pension costs are modest (about 0.5% 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 (excluding state debt support) and pension costs are manageable at about 4.8% of expenditures.