OREANDA-NEWS. Fitch Ratings has affirmed $301.6 million of Pearland Independent School District, Texas (the district) unlimited tax bonds at 'AA'. In addition, Fitch has affirmed the district's Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

The 'AA' IDR reflects the district's stable economic resource base and strong overall financial profile. The district's sturdy operating profile is supported by solid expenditure flexibility, expectations for steady revenue growth, and exceptionally strong gap-closing capacity. Continued increasing enrollment and facility improvements are expected to require additional capital spending in the near term. As a result, the district's long-term liability burden is expected to grow but remain in the moderate range.

Economic Resource Base

The district is located in Brazoria County, serving a 2014 population of approximately 100,340. Enrollment of approximately 21,700 students has increased steadily in recent years, due largely to the growing population in the Houston Metropolitan Area. Taxable assessed value (TAV) has also exhibited steady increases due to high demand for available property. The local economy is anchored by the medical and manufacturing industries.

Revenue Framework: 'a' factor assessment

Revenue growth has been strong, in excess of the national rate of inflation and GDP for the 10 years through 2014. Future revenue gains will likely track enrollment growth given the state funding framework, with the district's independent legal ability to raise revenues limited by state law.

Expenditure Framework: 'aa' factor assessment

Spending growth is expected to trend in line with to marginally above revenue growth. The low fixed-cost burden for debt service and retiree benefits reflects state-support for long-term liabilities. Individual, short-term employee contracts enhance the district's spending flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The district's long-term liability burden is moderate in relation to the local resource base. This liability is expected to increase with additional borrowing plans but should remain manageable.

Operating Performance: 'aaa' factor assessment

The district has a strong history of operating surpluses and healthy reserves; these features, combined with budget flexibility, demonstrate significant financial resiliency.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility and robust reserve levels, which Fitch expects it to maintain through a typical economic cycle.

CREDIT PROFILE

Pearland ISD serves most of the city of Pearland, the city of Brookside Village, and unincorporated areas in Brazoria County. The district consists of a total of 23 campuses, including four high schools, four junior high schools, four middle schools and 11 elementary schools. Enrollment in 2015 totaled 20,574 students and has registered annual increases averaging 2.6% over the past five years.

Revenue Framework

Approximately 55% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. The moderate level of state support is a function of the district's above average property wealth levels. State aid is provided on a per-pupil basis tied to enrollment, which has increased in recent years. Enrollment trends drive revenue performance, as any variations in property tax revenues due to TAV performance will be offset by state aid adjustments.

District revenues have grown at a compounded annual growth rate of about 6% over the last decade, performing significantly higher than national CPI and GDP growth. Fitch expects the natural pace of district revenue growth in future years to be slightly lower than historical performance, given current enrollment trends and expectations for district build out. The district's most recent demographic study (fall 2015) suggests the district will achieve build-out in the 2025-2026 school year with an enrollment of roughly 23,000 students.

The district's independent legal ability to raise revenues is limited, as the current maintenance and operations (M&O) tax rate of $1.04 per $100 TAV would need voter authorization to be increased to the statutory limit of $1.17. Management reports no current plans to do so. The district levies a separate unlimited debt service tax rate of $0.37 per $100 TAV, well below the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

The district spends a significant amount of its operating budget on instruction. The district also funds some annual capital outlay from general fund revenues for maintenance and repairs on facilities.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given expected moderate enrollment growth and upcoming capital needs.

The district's solid expenditure flexibility reflects substantial control over workforce costs and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB) of approximately 11% of fiscal 2015 governmental spending(net of state debt service support). Carrying costs benefit from state support for the vast majority of district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is moderate at approximately 13% of personal income and is made up of an even mix of direct and overlapping debt. The district's large capital needs indicate that debt levels will likely increase in the near to medium term. The proportionate share of the system's net pension liability paid by the district is minimal.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to 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 increased its financial cushion to exceptionally strong levels despite recent recessionary pressures and state funding cuts, contributing to the 'aaa' assessment. Fitch believes the district would use a combination of solid expenditure flexibility, conservative budgeting, and strong reserves to maintain a satisfactory reserve safety margin in a moderate economic decline scenario.

Fiscal 2016 projections include a modest operating deficit and a $1.2 million decline in general fund reserves to $47.7 million or a sound 26.7% of spending.

The fiscal 2017 proposed operating budget totals approximately $172 million. The budget features a $16.7 million deficit (including $5 million for renovation and construction projects), but Fitch expects the district's history of outperforming budget projections to materially shrink the deficit by year-end.