OREANDA-NEWS. Fitch Ratings has affirmed the ratings on San Angelo Independent School District, TX (the district) bonds as follows:

--Issuer Default Rating (IDR) at 'AA';

--$107 million outstanding unlimited tax general obligation (ULT) bonds 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 and diverse economic resource base and sound overall financial profile. The district's strong operating profile is supported by considerable expenditure flexibility, expectations for solid revenue growth, and strong gap-closing capacity. Stable enrollment performance is expected to require limited capital spending beyond projects currently underway. As a result, the district's very low long-term liability burden is expected to remain favorable.

Economic Resource Base

The district encompasses approximately 200 square miles in Tom Green County, serving a 2015 population of approximately 100,000 residents. Enrollment of approximately 14,500 students has grown modestly in recent years. Taxable assessed value (TAV) has exhibited moderate growth that is likely to continue, given the stable and fairly diverse regional economy.

Revenue Framework: 'a' factor assessment

A combination of local property taxes and state aid supports district operations. Revenue growth is expected to continue, given historical performance and modest enrollment growth forecasts. The district's legal ability to raise revenues is limited.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to remain in line with or modestly above that of revenues, given manageable near-term capital needs and current enrollment trends. The district's low carrying costs reflect state support for debt service and retiree benefits, bolstering spending flexibility.

Long-Term Liability Burden: 'aaa' factor assessment

The combined burden of long-term debt and pension liabilities absorbs a very small share of local personal income. Fitch expects debt levels to remain affordable, given the district's use of current resources to fund capital needs. Retiree benefit obligations do not represent a significant burden on the district.

Operating Performance: 'aaa' factor assessment

The 'aaa' operating performance assessment reflects the district's strong reserve funding levels relative to Fitch's expectations of revenue sensitivity, and a significant level of spending flexibility in the event of revenue declines.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's currently strong expenditure flexibility and sound reserve levels, which Fitch expects it to maintain through a typical economic cycle. Draws on reserves beyond those currently expected could result in downward rating pressure.

CREDIT PROFILE

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 57% of district operating revenues come from state aid, with the remainder generated by local property tax revenues. The substantial level of state support is a function of the district's modest property wealth levels. Enrollment, which is a key component of state funding, has registered some volatility over the last decade, but has remained stable in recent years. Expectations for future revenue growth will hinge largely on enrollment trends, as the district's tax rate for operations cannot be increased without voter approval.

District revenues have grown at a compounded annual growth rate of 2.4% over the last decade, performing modestly above national CPI and below GDP growth. Fitch expects the natural pace of district revenue growth in future years to mirror historical performance, given the expectations for future enrollment performance.

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 $0.20 per $100 TAV, less than one-half the statutory cap of $0.50 per $100 TAV that cannot be exceeded for new debt issuances.

Expenditure Framework

The district spends most of its operating budget on instruction, while also funding some annual capital outlay from general fund resources for maintenance and repairs on facilities.

Fitch expects the natural pace of spending growth to remain commensurate with revenues absent policy action, given generally stable enrollment and manageable capital needs.

The district's significant expenditure flexibility reflects substantial control over workforce costs, and very low carrying costs for debt service, pension and other post-employment benefits (OPEB) of 6.7% of fiscal 2015 governmental spending. Carrying costs benefit from state support for both debt service and the vast majority of school district pension and OPEB costs.

Long-Term Liability Burden

The district's long-term liability burden is very modest at 4.5% of total personal income, and is made up almost entirely by the district's slow-amortizing outstanding debt load. The district's limited capital needs indicate that debt levels will likely remain low for the foreseeable future.

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 demonstrated a strong commitment to maintaining financial flexibility. Budgeting is conservative, and management has been proactive in maintaining operational balance throughout economic cycles. The district is using general fund resources to fund capital projects and anticipates reducing fund balance to approximately $30 million, or a still strong 28% of fiscal 2015 spending, in the next few fiscal years. Fitch expects that reserves at planned levels would still provide the district with a solid financial cushion to weather future revenue declines.