OREANDA-NEWS. Fitch Ratings has affirmed Lockhart Independent School District, Texas' (the district) approximately $58.5 million of unlimited tax (ULT) debt at 'AA' as follows:

--ULT school building bonds, series 2014.

In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA'.

SECURITY

The bonds are payable from an unlimited ad valorem tax pledge against all taxable property within the district. The bonds are further backed by the PSF bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund, see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA' rating is based on the district's strong operating performance and solid expenditure flexibility. Fitch expects the long-term liability burden to remain a moderate burden on the economic resource base.

Economic Resource Base

The district, located in central Caldwell County, serves a 2014 population of roughly 25,000. The district spans approximately 300 square miles along the southern bounds of the Austin-Round Rock metropolitan area, and includes the commercial center and county seat of the city of Lockhart. Fitch believes long-term growth prospects are favorable given the district's desirable location. The district's enrollment growth over the past five years has averaged about 3% annually. Historically, the tax base was primarily composed of agriculture, farming, and ranching but has diversified more recently into manufacturing.

Revenue Framework: 'a' factor assessment

Fitch expects strong revenue growth over the medium term based on projected enrollment growth similar to historical performance. The district's legal ability to raise revenues is limited, as the current operating tax rate resides at the legal limit, without voter approval.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth should remain in line with or modestly above that of revenues. Solid expenditure flexibility incorporates management's control over headcount and salaries and a low fixed-cost burden which incorporates state-support for debt service, pension and OPEB costs.

Long-Term Liability Burden: 'aa' factor assessment

A bond issuance in 2014 addressed many of the district's large capital needs over the medium term, which supports Fitch's expectation that the long-term liability burden, currently about 14% of personal income, will remain a moderate burden on resources.

Operating Performance: 'aaa' factor assessment

Fitch expects the district to maintain a high level of financial flexibility through an average economic downturn due to sizeable reserves and sound expenditure flexibility. Disciplined budget management practices support the district's history of consistently favorable operating performance.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's strong financial flexibility, which Fitch expects it to maintain through the economic cycle.

CREDIT PROFILE

The district's facilities are all located in the city of Lockhart. The facilities include five elementary campuses, one junior high campus, one freshman campus and one high school campus. Enrollment is approximately 5,400 students.

The district's tax base has historically performed well, growing steadily from fiscal 2006 through fiscal 2015. The 8% decrease in assessed value (AV) in fiscal 2016 is primarily attributable to the additional $10,000 homestead exemption applied in that year, which is expected to be offset with a hold harmless increase in state funding approved by the state legislature. Preliminary AV numbers for fiscal 2017 point towards a return to growth.

The district's population and enrollment have also demonstrated steady and modest annual growth. The recent flat performance in enrollment in fiscal 2016 (and again conservatively budgeted for in fiscal 2017) partially reflects a decline in employment in the oil and gas industry. Nevertheless, long-term growth prospects are favorable, based on residential development activity taking place within the district. Projections for a moderate growth scenario call for 2% average annual growth over the next 5 years.

Revenue Framework

Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment, and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach, whereby the combination of local and state funding for operations meets a predetermined per pupil amount (which varies from district to district).

Approximately 70% of district operating revenues come from state aid, with most of the remainder generated by property tax revenues. The substantial level of state support is a function of the district's lower property wealth levels. State aid is provided on a per-pupil basis tied to enrollment, which has steadily increased in recent years. Enrollment trends drive revenue performance, as any variations in property tax revenues due to assessed value performance will be offset with state aid adjustments.

The district's general fund revenues have grown at a compound annual growth rate of approximately 4% over the past 10 years, marginally above the growth rate for U. S. GDP. Fitch expects revenue growth in future years to be similar to historical performance, given current enrollment trends and expectations for positive enrollment growth in the upcoming years.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate is at the legal limit of $1.04 per $100 TAV and would need voter authorization to be raised to the statutory limit of $1.17. There are currently no plans to do so. The district levies a separate, unlimited debt service tax rate of $0.2905 per $100 TAV, well below the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

Similar to other school district's instructional costs accounted for the bulk of spending in fiscal 2015.

Fitch expects the district's natural spending pace will remain equal to or slightly exceed revenue gains based on its current expenditure trends, capital needs, and the enrollment-based state funding formula.

The district's labor costs are quite malleable given the lack of group/collective bargaining or contractual agreements and short employment contracts. Fixed carrying costs for debt, pensions and OPEB are very low, at approximately 7% of 2015 governmental expenditures. This incorporates state support of roughly 25% of total debt service costs in fiscal 2015. Carrying costs also benefit from state support for the vast majority of school district pension and OPEB costs. Fitch expects the district's carrying costs to remain low considering the district has no current debt plans.

Long-Term Liability Burden

The district's long-term liability burden is estimated by Fitch to be a moderate 14% of personal income. Direct debt constitutes a little over 80% of the district's overall debt portfolio. Current capital plans including renovations, expansion projects, and new facilities, including additional capacity at the high school and the construction of a new elementary school are being funded by a 2014 bond program. Fitch expects the district's long-term liabilities to remain within a moderate range based on current capital plans and below-average 10-year debt amortization.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68, TRS's assets covered 83.3% of liabilities (using an 8% return assumption) as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption. The state assumes the majority of TRS' employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts as evidenced by a relatively modest 1.5% of salary contribution requirement, effective in fiscal year 2015. The proportionate share of the system's net pension liability paid by the district is minimal.

Operating Performance

The district has maintained an ample financial cushion with high reserve funding levels despite recessionary pressures and state funding cuts, garnering a 'aaa' assessment.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles.