Fitch Rates Hays Consolidated ISD, TX's ULT School Bldg Bonds 'AAA'PSF/'AA-' Und.; Outlook Stable

Fitch Ratings assigns an 'AAA' rating to Hays Consolidated Independent School District, Texas' (CISD; the district) unlimited tax (ULT) bonds as follows:

--$52.4 million ULT school building bonds, series 2014.

The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. Fitch also assigns an underlying rating of 'AA-' to the series 2014 bonds.

The bonds are scheduled for negotiated sale the week of August 12. Proceeds will be used for various capital projects.

Fitch also affirms the following ratings:

--$296.4 million in outstanding ULT bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. The bonds are also secured by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

EXPANDING TAX BASE: The district's tax base continues to expand, with future potential growth tied to continued development along the IH-35 corridor and the district's proximity to Austin north of the district and San Marcos to the south. Enrollment growth has mirrored population growth that more than doubled in the past 10 years.

SOLID RESERVES: Financial performance is favorable marked by healthy fund balance levels and good liquidity.

GROWTH PRESSURES DEBT PROFILE: Debt levels are high reflective of the district's rapid infrastructure growth. The district's debt levels are expected to remain high given the prospects for continued growth.

RATING SENSITIVITIES

ACCELERATED GROWTH: The district is sensitive to enrollment growth that exceeds current projections and pressures the district to increase facility capacity. The Stable Outlook reflects Fitch's expectation that the district's strong financial practices provide sufficient flexibility to manage the rapid growth environment.

CREDIT SUMMARY

The district comprises over 215 square miles in northern Hays County ('AA'/Stable Outlook) along the IH-35 corridor between Austin and San Antonio. According to IHS, Austin continues to be one of the country's top-growing metros as measured by payrolls, and was one of the first areas in the country to move from recovery to expansion post-recession.

RAPID RESIDENTIAL DEVELOPMENT

The composition of the district's tax base has quickly transformed from rural to urban. Residential construction continues to develop rapidly as Austin housing pressures expand development southward and growth in San Marcos pushes development northward. Housing starts in 2013 were up 20% from the previous year and the median new home price in the district hit an all-time high of $210,000 in first quarter 2014 (1Q'14). Compared to the greater Austin area median new home price of $249,000, the district's affordability appears to be a major driver of new home sales. Fitch expects residential growth to continue at a rapid pace.

The new residential development coupled with the desirability of the district is reflected in taxable assessed value (TAV) that was resilient post-recession, and that expanded by approximately 6% and 7% in fiscals 2013 and 2014, respectively. Fiscal 2015 certified values show another year of strong growth at 8.5%, continuing a trend that Fitch believes is likely to persist. District enrollment has grown 7% annually on average for the past 10 years, almost doubling its student population to an estimated 18,000 for the 2014-2015 school year. Management expects more recent moderating trends in growth to carry on for the next several years, averaging approximately 4% increases year-over-year.

County unemployment indicators are positive, characterized by growth in total employment and improvement in the unemployment rate to 4.1% in May 2014 from 5.4% just one year prior (well below state and national rates). Median household income is 139% of the state and 135% of the nation.

POSITIVE FINANCIAL MARGINS YIELD SOLID RESERVES

Hays CISD has reported an annual operating surplus for at least the last 10 fiscal years, reflecting the district's ability to manage expenses in line with revenue growth. Fiscal 2013 ended with a $2 million addition to reserves, bringing unrestricted fund balance to a strong 31% of spending and in excess of the 25% formal fund balance policy. The district adopted a $2 million deficit budget in fiscal 2014 for one-time spending, but management does not expect to draw on reserves due to underspending of the budget and additional revenue from state and federal governments.

The fiscal 2015 budget includes the third round of salary increases in an effort to bring the district's compensation matrix in line with peers. An increase in student population of 700 students (4.1%) will contribute to a 5% increase in state funding from the previous year. Fitch views the district's history of strong financial management practices as a credit strength and an important mitigant to the concern over rapid enrollment growth.

DEBT BURDEN REMAINS HIGH

Debt levels are very high at $8,000 per capita and 11.7% of market value including the 2014 issuance, but carrying costs are affordable given state aid for debt service that averages 25%. Unlike many fast-growing Texas school districts, Hays does not push out debt service through the use of capital appreciation bonds (CABs), keeping amortization at an average 49% retired in 10 years.

Voters approved the 2014 issuance with comfortable margins, and the bonds will address facility capacity at the middle school level in addition to an array of technological upgrades and the purchase of buses. Given current enrollment projections the district may seek another bond election for a high school as early as 2017, keeping debt levels high for the foreseeable future as growth continues.

The district's operations and debt service tax rate remained stable at $1.04 and $0.4213 per $100 TAV, respectively, from fiscals 2008-2014, but will increase in 2015 due to the 2014 issuance. The debt service tax rate will increase to $0.4977 to accommodate the new debt, just under the new issue cap of $0.50.

LOW PENSION OBLIGATIONS

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit (OPEB) healthcare plan. Including debt service, pension and OPEB contributions, carrying costs were below average at 12.1% of fiscal 2013 governmental spending, benefitting from the state's strong support for school district pension funding. However, districts are susceptible to future funding changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013 a district judge ruled 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, found the system "inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels . . .." The judge also cited inadequate funding and districts' inability to exercise "meaningful discretion" in setting tax rates as constitutional flaws in the current system.

The judge agreed to reopen testimony in January 2014 after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', Aug. 13, 2010.

'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2014.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843376

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.