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

--$20.995 million ULT school building and refunding bonds, series 2016.

The bonds are expected to price via negotiation the week of Jan. 18, 2016. Proceeds will be used to construct, acquire, and equip school building improvements and to refund outstanding obligations for debt service savings.

Fitch also affirms $34.9 million (pre-refunded basis) of outstanding district ULT bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district, without limitation as to rate or amount and are further secured by the PSF bond guarantee 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

SOUND FISCAL PROFILE: The district's solid financial performance is reflected in ample general fund balances. The district typically outperforms its structurally balanced budget.

STABLE ECONOMY: The largely rural economy continues to transition into a residential community, driving steady tax base growth. Mabank is also a popular recreational destination drawing weekend visitors from nearby Dallas-Fort Worth.

MODERATE DEBT: Fitch anticipates debt to remain moderate and affordable based on the lack of additional issuance plans. Low carrying costs (debt service payments, pension and other post-employment benefit (OPEB)) reflect slow principal amortization and significant state funding of pension contributions.

RATING SENSITIVITIES

SOUND FINANCES: The current rating anticipates that the district will maintain a solid financial profile characterized by structural balance and healthy reserves.

DETERIORATION OF DEBT PROFILE: A deterioration of the district's debt profile, due to a sharp increase in debt burden or further material reduction in principal payout, would not be consistent with the current rating.

CREDIT PROFILE
Mabank ISD is located in a historically agricultural and oil producing area approximately 50 miles southeast of Dallas serving a population of about 25,000; boundaries include portions of Kaufman, Henderson and Van Zandt Counties.

AGRICULTURAL-BASED ECONOMY IN TRANSITION

The three principal communities in the district are Mabank, Gun Barrel City and Seven Points. Nearby Cedar Creek Reservoir is a major tourism attraction, and improved highway access to the area from Dallas over the past decade has generated both residential and commercial development. The Kaufman County unemployment rate improved to 4% as of November 2015 (from 4.4% in Nov. 2014), below the 4.5% Texas rate for the same period. The improvement reflects steady growth of the employment base.

The district's market value has realized steady 1.5% average growth over the past four years. A modest 2.2% dip in fiscal 2016 taxable assessed value (TAV) to $1.13 billion reflects an increased state homestead exemption. The modest revenue loss due to this increase will be replaced by the state through the K-12 funding formula.

The district also attributes a portion of TAV growth to development surrounding Cedar Creek Reservoir, the fourth largest lake in Texas. The reservoir is 18 miles long and provides 320 miles of shoreline, most of which has been built out. The short commute to Dallas benefits the community, with reported summer weekend populations increasing 10-20 times that of year-round residents.

The district anticipates modest near-term tax base growth as farmland continues to be converted to residential property usage, especially in northern Kaufman County. New commercial and retail development supplement the additions to the residential property base.

The district's full value per capita is below average for the 'AA' median at $64,000 for fiscal 2016; the tax base is without concentration. With a total tax rate of $1.365 per $100 of TAV, including a maintenance and operations (M&O) tax rate at the statutory cap of $1.04, the tax burden is moderate. The district does not have plans to approach voters to seek an M&O tax rate increase.

STRONG FINANCIAL PERFORMANCE

State funding provides about half of the district's general fund revenues. Officials have managed finances prudently in an environment of relatively flat enrollment and state-wide funding cuts over the past several years. Solid fiscal 2015 unrestricted reserves of $7.5 million (27.4% of spending) are up from $4.6 million (20.1% of spending) in fiscal 2011. The improvement reflects cost cutting during the state-wide funding cuts in fiscal 2012-2013, and the benefit of increased state funding in subsequent years as recessionary effects diminished. The district expects to end fiscal 2016 with comparable reserves.

MANAGEABLE DEBT

Fitch anticipates the district's debt burden, at 3.3% of market value, to remain moderate based on the absence of additional issuance plans beyond this offering. The series 2016 bonds include $10.2 million of new money bonds to fund a variety of improvements and $12.4 million in refunding bonds to refund series 2006 bonds for savings. Principal amortization is below average at 39% within 10 years.

The district's fiscal 2016 interest and sinking fund (I&S) tax rate of $.325 per $100 of TAV is well below the $0.50 statutory cap for new debt issuance, and officials expect the rate to remain relatively flat for the foreseeable future.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $2.9 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 2/10ths of 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB are low at 10.6% of fiscal year 2015 governmental spending.

TEXAS SCHOOL DISTRICT LITIGATION

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 and was the second such ruling in the past two years, 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.

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 consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.