OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF)guarantee and an 'AA' underlying rating to the following Bryan Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--\$44 million ULT school building bonds series 2015A;
--\$43.8 million ULT refunding bonds series 2015B.

The bonds are expected to be sold through competitive sale the week of February 23. Proceeds from series 2015A will be used for realigning grades, building new facilities to manage growth, eliminating portable buildings, and addressing other infrastructure repairs and replacement. Proceeds from series 2015B will refund a portion of the district's outstanding debt for interest cost savings.

Fitch also affirms the 'AA' underlying rating on the district's \$125.7 million in outstanding ULT bonds (pre-refunding).

The Rating Outlook is Stable.


The bonds are payable from an unlimited property tax levy and are further secured by the Texas Permanent School Fund (PSF) bond guarantee program (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014, available at www.fitchratings.com).


SOLID FINANCIAL RESERVES: The district maintains a stable financial profile and strong reserve levels, despite some use of operating revenues for one-time expenses.

DIVERSE TAX BASE: The district's tax base is diverse and continued to grow at a moderate pace even through the recession. Mineral values have added some volatility recently, although strong underlying fundamentals mitigate the risk associated with exposure to the oil industry.

MODERATE DEBT BURDEN TO CLIMB: Debt levels will increase with this issuance and with the remaining two-thirds of the \$132 million authorization voters passed in November 2014. Despite the associated increase in debt service, overall carrying costs will remain affordable.


SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the district's healthy financial profile.


Bryan ISD encompasses a large 400 square mile area in the College Station-Bryan metropolitan statistical area (MSA). The city is about 90 miles equidistant from Houston and Austin. The flagship campus of the Texas A&M University System in College Station (50,000 enrollment) drives much of the local economy.

The workforce is dominated by local government jobs. Area unemployment levels (2.9% in December 2014) are typically lower than state (4.1%) and national averages (5.4%). Wealth levels, as measured by median household income, are below average - primarily due to the large university student population. District population and enrollment have shown steady, modest gains since 2008, which district officials expect to continue going forward.


The district's tax base performed well throughout the recession, marking growth from fiscal 2008-2014 that averaged over 5% annually. The district's taxable assessed value (TAV) totaled \$5.6 billion in fiscal 2014, and certified values for fiscal 2015 show an increase of 16% to \$6.4 billion, driven by a 66% increase in mineral values.

The district lies on the eastern boundary of the oil-rich Eagle Ford Shale, which has experienced a recent boom in exploration and production. However, at its likely near-term peak in fiscal 2015, mineral values still made up only 10% of district TAV. The district projects fiscal 2016 mineral values to decline by 30% given the recent plunge in oil prices, yet maintains a positive projection for 2016 TAV of 2.8% growth given activity in other areas of the tax base. Although the top 10 taxpayers make up a moderate 10% of fiscal 2015 TAV, some industry concentration is evident with the top 3 taxpayers in oil exploration and production.

Concern over tax base vulnerability to mineral values is tempered both by the size of the mineral sector exposure and flexibility in the debt service tax rate. Current projections anticipate that the debt service rate will increase to just \$0.31 per \$100 TAV in fiscal 2016 to service the entire \$132 million authorization (from \$0.25 presently). The projected rate is well below the state attorney general's new-money tax rate cap of \$0.50 and provides flexibility in the unlikely event of a precipitous decline in the tax base.


The district continues to maintain its stable financial profile and solid reserves, despite some use of operating revenues for one-time expenses. Conservative budgeting and prudent fiscal monitoring enabled the district to increase reserve levels from fiscals 2010-2013 despite the adoption of deficit budgets.

Fiscal 2014 ended better than the \$4 million budgeted deficit, drawing down fund balance by only \$670,000. The smaller loss was due primarily to larger than expected enrollment and two initiatives that were budgeted but not completed in the fiscal year. At the close of fiscal 2014 (August 31), the district's unrestricted general fund balance was a solid \$35.9 million, or 30% of spending. This total was comfortably above the policy target of an unrestricted general fund balance between 60-90 days (16% to 24%) of spending.

The fiscal 2015 operating budget is balanced and management reports positive year-to-date results, partly driven by \$3.2 million in excess revenues given the large increase in mineral values. Management considers these monies temporary, and they reportedly will be applied to one-time uses such as construction, wireless network upgrades, HVAC and roof repairs and replacement, and other equipment/supply needs. The current state funding formula for Texas K-12 schools' operations also cushions district finances from swings in TAV.


Debt levels climb with this issuance but remain moderate at 4.2% of market value or roughly \$3,250 per capita. The district no longer receives debt service assistance from the state, as the district's relative wealth per student has increased with healthy TAV growth. The pace of debt amortization is average with 57% retired in 10 years and the use of capital appreciation bonds (CABs) is nominal.

Voters passed the \$132 million bond referendum in November 2014 for the rehabilitation and maintenance of existing facilities, as well as grade realignment and expansion at some schools to eliminate the use of portable classrooms. This series of bonds is the first of three equal installments, and the remaining issuances are planned for the spring of 2016 and 2017. All related projects are expected to be complete by May 2018.


The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple-employer plan. The district's annual contribution to TRS is determined by state law, as is the contribution for the state-run post-employment benefit healthcare plan. The district's cost for pension and other post-employment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2014, as plan contribution amounts are principally paid by the state and district employees.

The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of a growing debt burden. Debt service will increase to over \$19 million in fiscal 2016 and stay level for the next 10 years if the authorized debt is issued as planned. Annual debt service at this level represents 13.2% of fiscal 2014 governmental spending, which Fitch considers elevated. However, the district's limited retiree liabilities keep total carrying costs moderate. Combined carrying costs for the district (debt service, pension, and OPEB costs net of state support) consumed a manageable 10% of governmental fund spending in fiscal 2014.

Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015.


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. Fitch expects the state will appeal the latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.