Fitch Rates Garland ISD TX's ULT Rfdg Bonds 'AAA' PSF/'AA+' Underlying; Outlook Stable

Fitch Ratings has assigned an 'AAA' rating to the following Garland Independent School District, TX bonds:

--$41 million unlimited tax (ULT) refunding bonds, series 2016.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Additional information on the Texas PSF is available in Fitch's Aug. 5, 2015 press release, 'Fitch Affirms Texas Permanent School Fund at 'AAA'; Outlook Stable', available at 'www.fitchratings.com'.

The bonds are scheduled for negotiated sale May 10. Proceeds from the sale will be used to refund a portion of the district's outstanding bonds for debt service savings.

In addition, Fitch assigns an 'AA+' underlying rating to the bonds and affirms the 'AA+' rating on $463.5 million in outstanding ULT bonds of the district.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.

KEY RATING DRIVERS

The 'AA+' rating reflects Fitch's expectation that the district will maintain healthy financial flexibility throughout the economic cycle due to its solid expenditure flexibility and robust reserves. Although the district's revenue raising ability is very limited, Fitch expects the state funding formula to provide protection from potential shifts in the local economy.

Economic Resource Base

This relatively mature district experiences stable enrollment and is part of the broad Dallas-Fort Worth (DFW) metropolitan statistical area economy, serving an estimated population of over 300,000 in the cities of Garland, Rowlett, and Sachse. Residents have access to a diverse employment market that continues to outperform the U.S. in terms of population, employment, and income growth. Statewide economic trends are positive.

Revenue Framework: 'a' factor assessment

The state aid and property taxes that support district operations typically yield moderate revenue growth in line with the U.S. economy, based on the state's per-student funding formula. The district's independent legal ability to raise revenue is limited by state law.

Expenditure Framework: 'aa' factor assessment

The district is relatively mature and retains solid expenditure flexibility given a lack of enrollment pressure. Fitch expects growth in spending to trend with revenue growth. The low fixed-cost burden reflects state support for debt service and employee benefits.

Long-Term Liability Burden: 'aaa' factor assessment

Debt and pension liabilities are low relative to personal income. Fitch anticipates the district's long-term liabilities will rise but remain manageable as the remaining bond authorization is issued over the next three years.

Operating Performance: 'aaa' factor assessment

The district's expenditure-cutting flexibility and solid reserve funding leave it well positioned to address cyclical downturns. Conservative budget practices and revenue stability further support Fitch's expectation of continued financial flexibility.

RATING SENSITIVITIES

Manageable Long-Term Liabilities: A material increase in long-term liabilities beyond current plans could result in a rating downgrade.

CREDIT PROFILE

Revenue Framework

The district's operating revenues are derived from a mix of state funding (66%) and property taxes (31%). Revenue growth is primarily a function of enrollment as the state seeks to ensure a certain level of per-pupil spending for all state school districts.

The district's general fund revenues have grown at a rate above U.S. CPI and U.S. GDP over the past 10 years, despite state budget cuts in the 2012 - 2013 biennium. This strong trend is due in part to higher state funding for new educational programs; Fitch anticipates that enrollment stability will yield revenue growth in line with U.S. economic performance, absent policy action.

The district's tax rate for operations is at the legal limit of $1.04 per $100 of taxable assessed valuation (TAV). The district would need voter authorization to raise the rate and there are no current plans to do so. The district levies a separate, unlimited debt service tax rate of $0.31 for fiscal 2016. Management anticipates an additional rate increase of up to $0.07 through 2021 for planned bond issuance, remaining comfortably below the $0.50 statutory cap for new debt issuance.

Expenditure Framework

The district's main expenditure item is instruction at 66% of general fund spending. The district also funds some capital outlay from the general fund for facility maintenance and repairs, but Fitch expects this will subside somewhat with recent and planned bond issuances.

Fitch expects expenditure growth to align with revenue growth absent policy action, based on the current trend of relatively flat enrollment. Management indicates that the operating costs of a planned career and technology facility will be offset by higher state funding for student participation in the program.

The district's fixed-cost burden is affordable, with carrying costs for debt, pensions, and other postemployment benefits equaling 9.4% of fiscal 2015 governmental expenditures. That figure falls to 6.6% when state support for debt service is netted out. Debt service costs are expected to increase with planned debt issuance through 2018, but this is offset somewhat by spending flexibility in staffing given modest enrollment growth prospects and strong control over wages and benefits.

Long-Term Liability Burden

The district received strong voter support in 2014 (62%) for its $455 million bond program for a combination of new facilities and improvements to existing facilities. Management plans to issue the remaining $259 million of ULT authorization within the next three years, compared with amortization of $109 million within that same period. The long-term liability burden is currently affordable at 9% of personal income, and is expected to remain manageable with planned issuance.

The district participates in the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption.

The proportionate share of the system's net pension liability paid by the district is minimal, representing less than 1% of personal income. The district's contributions are currently limited by state law (total contribution of $9.9 million in fiscal 2015).

Operating Performance

The district has maintained a solid fiscal cushion despite recessionary pressures and state funding cuts, and retains expenditure flexibility to manage well through economic downturns. General fund operations have generated surplus results in each of the past six fiscal years, enabling the district to address various capital needs while still adding to reserves; unrestricted general fund balance at fiscal 2015 year-end was 35.5% of spending.

Management has demonstrated a strong commitment to maintaining operational balance and outperforming conservative budget assumptions. Fitch expects the district's conservative financial management practices to support financial flexibility throughout the economic cycle.

Texas School Funding Litigation

A Texas district judge ruled in August 2014 that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children and was the second such ruling in the past two years, found the system inefficient, inequitable, and underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion, and therefore, are unconstitutional.

The Texas attorney general has appealed the judge's latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature would likely follow with changes intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and the Municipal Advisory Council of Texas.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003984

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003984

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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