OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following Desoto Independent School District, Texas' (the city) outstanding debt:

--Approximately \$191 million (accreted value to date) outstanding ULT bonds at 'AA-';

The Rating Outlook is Stable

SECURITY

The bonds are payable from an unlimited ad valorem tax. In addition, most of the bonds are supported by the Texas Permanent School Fund (PSF) whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014.)

KEY RATING DRIVERS

FINANCIAL STABILIZATION: District finances have been challenged in recent years, but appear to be stabilizing, with improved reserve levels and continued positive performance expected. In prior years, the district was challenged by reduced property tax revenues and relatively flat enrollment, leading to district general fund balances declining considerably.

HIGH DEBT BURDEN; MANAGEABLE CARRYING COSTS: District debt remains high on a per capita basis and relative to market value. The district's debt service schedule escalates and includes many capital appreciation bonds (CABs). Direct debt service (net of state support), as well as overall carrying costs, including net debt service, pension and other post-employment benefits (OPEB), as a percentage of governmental fund spending are manageable.

SOLID ECONOMIC INDICATORS; DALLAS AREA SUBURBAN DISTRICT: The district's taxable assessed value (TAV) returned to growth in fiscal years 2014 and 2015 following prior year decreases. Income indicators are close to or in excess of state and national averages and poverty is below average. Local unemployment remains below the national, but above the state average. The district benefits from its participation in the Dallas-Fort Worth regional economy.

RATING SENSITIVITIES

FINANCIAL STABILITY: The rating is sensitive to the district's ability to maintain stable finances and financial flexibility, including balanced budgets and adequate reserve levels, while also addressing operating and capital needs.

CREDIT PROFILE

The district serves approximately 9,400 students and is located 15 miles southwest of downtown Dallas in a suburban area traversed by major transportation corridors. District population of about 55,000 in 2013 represents above average growth (36%) since 2000, as compared to state (27%) and national growth (13%).

District enrollment saw solid growth from 2001 through 2006 (annual average of about 4%), with more modest growth in subsequent years due to a weakened real estate market. Enrollment declined in 2012 and 2013 (2.3% and 0.8%, respectively), before returning to strong growth (5.7%) in 2014, reflecting implementation of a full-day Pre-K program, other new district programs, and an improved real estate market. Growth of 2.1% is estimated for 2015, with additional growth of about 1% projected for 2016.

FINANCIAL STABILIZATION

Weakened revenues resulting from TAV declines, combined with slowed enrollment growth, pressured district finances in recent years. From a high of \$15.8 million or 29.7% of spending in fiscal 2007, the unrestricted general fund balance declined to \$4.7 million (7.6%) of spending in fiscal 2012. Management implemented various cost saving measures to address ongoing budget challenges including across the board spending cuts, staffing reductions and hiring freezes.

Fiscal 2013, which was positively affected in part by a change in district's fiscal year from August year-end to June year-end, saw a surplus of \$4.3 million, which increased reserves to \$9.2 million. Following a modest deficit (about 1%), fiscal 2014 ended with an unrestricted reserve balance of \$8.5 million or 12.6% of spending. The district's unrestricted general fund policy targets a reserve level at 15% to 20% of spending. Current budget estimates for fiscal 2015 indicate a surplus of about \$2 million.

The district's maintenance and operations (M&O) tax rate is at the statutory cap of \$1.04 per \$100 of TAV, with an increase up to \$1.17 only possible with voter approval. While consideration was given recently to suggesting a tax rate increase to voters, the district did not ultimately follow through on the proposal.

The district's fiscal 2014 general fund cash balances declined by \$5.8 million, from \$8.2 million in fiscal 2013 to \$2.4 million in fiscal 2014. The decline reflected an IRS overpayment (about \$2.5 million) and a late state aid payment (\$2.7 million) received after the end of the fiscal year. Fiscal 2015 cash balances are expected to improve due to IRS credit for the fiscal 2014 overpayment, receipt of the fiscal 2014 late payment in fiscal 2015, and positive fiscal 2015 budget performance. Current balances (as of March 2015) total about \$10 million and are projected to be at about \$10 million at the end of the fiscal year.

SOLID ECONOMIC INDICATORS; DALLAS AREA SUBURBAN DISTRICT:

The district's solid economic characteristics reflect its participation in the Dallas-Fort Worth regional economy. Income indicators are close to or in excess of state and national averages and poverty is below average. City unemployment has declined, and at 5.5% in February 2015 remains below the comparable national average (5.8%), but above state average (4.3%).

A slowdown in building activity beginning in 2009 lead to annual declines in taxable assessed valuation (TAV). TAV returned to growth in fiscal 2014 (1.3%) and fiscal 2015 (5.9%), with additional steady growth expected. The district reports ongoing economic development activity in and near the district, including new retail establishments and some residential construction. The district's tax base is stable and without concentration. The top 10 taxpayers represent electric delivery, retail shopping, apartment, and land/investment companies

HIGH DEBT BURDEN; MANAGEABLE CARRYING COSTS

Overall debt remains high (about 10% of market value and \$4,543 per capita in fiscal 2014) due to previous levels of rapid growth. The district's debt profile includes increasing debt service and a preponderance of CABs, which limit flexibility due to long duration, slowing amortization. Fitch notes however, that the district's CABs are callable in nature. Direct debt service (net of state support of about 25%) as a percentage of governmental spending is average at about 10.5%, as is debt amortization (53% in 10 years).

The district's fiscal 2015 I&S tax rate (\$0.43 per \$100 of TAV) is close to, but under the current statutory cap of \$0.50 for new debt issuance. The district reports no imminent debt issuance plans. However, due to recent enrollment trends, the district expects the need for some additional facilities, which may result in the need for debt issuance in the next two to three years. A demographic study is currently underway to better assess these needs. The district has about \$32 million remaining from the 2007 bond authorization.

District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the state on behalf of the district, leaving the district with a modest residual contribution. The TRS funded ratio as of August 31, 2014 was 79.1%, or 72.5% based on Fitch's 7% rate of return estimate. Despite state reform to increase contribution rates, the employer contribution to TRS remains below actuarially calculated levels. The district's carrying costs, including net debt service and pension and OPEB contributions, represent a low 12.3% of fiscal 2014 governmental expenditures.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past two years 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, 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.

Following a similar ruling in February, 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates.