Nov 13 - Fitch Ratings has assigned an 'AAA' PSF rating and an 'AA-' underlying rating to the following Canutillo Independent School District, Texas (the district) unlimited tax (ULT) bonds: --$6.2 million ULT refunding bonds, series 2012. The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of Nov. 19, 2012 (pending market conditions). Proceeds will be used to refund a portion of the district's outstanding obligations. In addition, Fitch affirms the following ratings for the district: --Approximately $86.6 million (pre-refunding) of unlimited tax bonds at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are secured by revenues from an unlimited tax levied against all taxable property within the district. The PSF guaranty applies to all outstanding series except 2006. KEY RATING DRIVERS SOUND FINANCIAL PROFILE: Ample general fund reserves reflect conservative budgeting and cost management, supplemented by a reduction in fiscal 2011 summer accruals associated with the district's shift of their fiscal year end coincident with the school year cycle. Enrollment based revenue gains and a maintenance & operations (M&O) tax rate increase offset fiscal 2012/2013 state funding cuts to maintain balance. STEADY ECONOMIC GROWTH: Rapid residential and commercial development continues to expand westward from El Paso, creating healthy gains in the district's taxable assessed valuation (TAV). Continuing regional development throughout the recession reflected the economic impact of the Fort Bliss military expansion, a growing health care sector, and strong international investment. STRONG VOTER SUPPORT: Approval of a combined tax ratification election (TRE) and bond authorization in May 2011 were approved by a wide margin, supporting facility expansion and infrastructure improvements. ABOVE-AVERAGE DEBT: Overall debt levels are moderately high, and will be pressured by ongoing facility needs based on current enrollment projections, with a new debt issue anticipated in early 2013. A moderate interest & sinking (I&S) fund tax rate provides adequate debt capacity over the medium term. CREDIT PROFILE The district is located in the less developed northwestern corner of El Paso County (rated 'AA' with a Stable Outlook by Fitch), serving a population of about 27,000 over 67 square miles which include portions of the City of El Paso and neighboring rural areas. HIGH-GROWTH BI NATIONAL DISTRICT The district receives residual growth from El Paso and nearby Santa Teresa, New Mexico, a significant commercial hub and port of entry into Juarez, Mexico. Officials expect current average daily attendance of nearly 5,800 students to grow considerably in the next five years due to the availability of affordable land, the extensive transportation network traversing the district, and master planned development projects currently underway. The district's $1.8 billion tax base increased more than 9% annually between fiscal 2007 and 2013 reflecting the economic impact of the $5 billion Fort Bliss military base expansion and influx of international investment which muted the effects of the recession. Expectations for additional near term growth are supported by extensive commercial and residential development underway in the Paseo Del Norte region of the district, and a widely anticipated deployment of at least 9,000 additional troops to Fort Bliss during fiscal 2013. The district has some exposure with top ten taxpayers totaling 15.7 % of taxable value in fiscal 2012 and a retail center, the El Paso Outlet Center Holding LLC, at 5.6%. Hoover, Inc. (2.2%) is the second largest with companies such as ADP Inc., B Steel Properties I Ltd., and Leviton MFG Co Inc. rounding out the list. IHS Global Insights points to the region's younger-than-average population as a key strength, supporting strong service sector growth; however, relatively low skill levels limit high-paying job growth. The latest unemployment rate of 8.8% for August 2012 is improved from the prior year supported by 2.7% job growth, but remains above the state (7.0%) and national (8.2%) averages for the same period. SOUND GENERAL FUND BALANCE The district generally outperforms the budget and maintains adequate fund balance levels. State funding comprises 60% of total revenues, supported by strong enrollment growth and reflecting the district's property poor classification. A fiscal year 2011 operating surplus of $7.8 million includes the effects of attrition-based cost savings ($2.7 million) and a decrease in summer accruals associated with shifting the district's fiscal year end from August to June ($5.0 million). The resulting unrestricted general fund balance of $11.4 million represents a strong 29.8% of spending and transfers out. REVENUE GROWTH BOLSTER/SUPPORTS OPERATIONS Fiscal 2012 operations benefited from enrollment based revenue growth, recurring cost savings, and $3.5 million of revenues associated with the M&O tax rate increase from $1.04 to $1.17 per $100 of TAV, which offset operating costs of an expanding student population and $2.1 million in state funding cuts. The district expects to add an estimated $1.5 million to general fund balance for fiscal 2012. Officials report a balanced fiscal 2013 budget which includes modest pay increases and an additional $900,000 of state funding cuts. The M&O tax rate is at the statutory cap, subsequent to the TRE election, limiting further ad valorem tax revenue growth aside from TAV appreciation. In light of continuing enrollment growth and school funding uncertainty, officials report that the district is identifying further cost savings and prioritizing programs and capital needs. The district has been able to manage growth to date without resorting to portable facilities or materially larger class sizes. ABOVE AVERAGE DEBT / CONTINUING CAPITAL NEEDS The district's overall debt, reflecting the benefit of state support, is above-average at 7.2% of market value. Principal amortization is slow at 39% in 10 years. School building bonds to be issued in the first half of 2013 will fund a K-8 facility in the growing Paseo Del Norte region of the district and infrastructure improvements throughout the district, bringing the overall debt to 8.1% of fiscal 2012 market value. The new $21 million issue is projected to bring the district's I&S tax rate to a maximum of $.36 per $100 of TAV over the next several years, based on reasonable TAV and enrollment growth assumptions. The district retains adequate debt capacity in relation to the attorney general's tax rate cap of $0.50 for new debt issuance. AFFORDABLE PENSION BENEFITS 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 combined pension and OPEB contributions, which are set by state law, totaled $700,000 or a modest 1.8% of general fund spending. Carrying costs including debt service are manageable at 15.9% of general and debt service fund spending (reported for fiscal 2010 given an irregular 2011 reporting period), with a similar metric expected for fiscal 2012.