OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following Edinburg Consolidated Independent School District, Texas (the district) unlimited tax (ULT) bonds:

--$89.6 million ULT refunding bonds, series 2016.

The 'AAA' rating reflects the guarantee provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch. Fitch also assigns an 'AA' underlying rating to the bonds.

The series 2016 bonds will sell via negotiation as early as the week of March 28. Proceeds of the bonds will be used to refund a portion of the district's outstanding debt for interest cost savings.

In addition, Fitch affirms the following ratings for the district:

--Approximately $149 million unlimited tax (ULT) bonds at 'AA' (underlying);
--Approximately $10.8 million maintenance tax bonds at 'AA-'.

The Rating Outlook is Stable.

On Sept. 10, 2015, Fitch published an exposure draft of revised state and local government tax-supported criteria. Fitch expects that final criteria will be approved and published by the beginning of the second quarter of 2016, at which time Fitch will assign Issuer Default Ratings (IDRs) to all state and local government tax-supported issuers. The IDR will equal the current unlimited tax general obligation (ULTGO) debt rating. With the assignment of IDRs, Fitch will no longer make a rating distinction between unlimited tax and limited tax general obligation pledges. For the small number of issuers with a current rating distinction between the liens, including Edinburg CISD, the LTGO rating will rise to the ULTGO level. Edinburg CISD's underlying ULTGO rating is 'AA' with a Stable Outlook.

SECURITY

The ULT bonds are payable from an unlimited annual property tax levy. The bonds are additionally backed by the Texas PSF guarantee.

The maintenance tax limited tax (LT) bonds are payable from the district's operations and maintenance (O&M) tax levy, limited to $1.17 per $100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The district's financial position remains solid, supported by conservative budgeting practices that have yielded annual operating surpluses and increases in reserves.

BELOW AVERAGE ECONOMIC INDICATORS: Edinburg has seen ongoing improvement in income and wealth indicators. However, these indicators remain below average. The local unemployment rate has been declining, but is still above average.

VOLATILE TAV: The district's TAV remains sound as it rebounds from moderate recessionary losses due to reduced oil and gas activity. Oil and gas have declined to a modest portion of total AV.

MODERATE DEBT PROFILE: District debt levels are moderate, even without consideration of state support for the district's outstanding debt. Average principal amortization and a lack of near-term borrowing plans should result in continued moderation in debt ratios.

RATING DIFFERENTIAL FOR LIMITED TAX BONDS: The one-notch rating differential for the maintenance tax bonds reflects the limited flexibility in the district's O&M tax rate, currently at the state-mandated cap of $1.17 per $100 TAV.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability.

CREDIT PROFILE

Serving an estimated 160,000 residents, the district is located in fast-growing Hidalgo County, adjacent to the U.S.-Mexico border and near the southern tip of Texas. The district's service area includes primarily the City of Edinburg (LT bonds rated 'AA-', Stable Outlook by Fitch), a small portion of the City of McAllen (LT bonds rated 'AA+', Stable Outlook) and unincorporated areas of Hidalgo County (LT bonds rated 'AA-'; Stable Outlook).

The district's average daily attendance (ADA) is about 32,200 currently. Average annual ADA growth since 2012 has been modest at less than 1%. The district projects flat to modest growth in the near term, and has historically underestimated growth to provide a budgetary cushion.

SOLID FINANCIAL PERFORMANCE

The district's financial position remains solid. Conservative fiscal practices have yielded operating surpluses and healthy, increasing reserves, even as the district addressed recent growth--related needs and state funding uncertainties. The district's unreserved/unrestricted general fund balances have exceeded 17% of spending for the last six fiscal years, close to its 20% goal. The fiscal 2015 audit posted a $2.7 million (0.7% of spending) net general fund surplus after transfers, increasing the unrestricted fund balance to $67.3 million or 18.3% of expenditures and transfers out.

The amended fiscal 2016 budget includes a $10 million draw on fund balance for one-time capital outlays. The budget also funds a 3% pay hike for all staff. The district's practice to budget an ADA decline of 500 (1.6%), use a low 92% property tax collection rate (versus actual 94%), and place a freeze on spending in the spring should allow the district to again outperform its projections.

SWITCH OF OPERATING AND DEBT SERVICE TAX RATES

The district's total tax rate ($1.2398 per $100 TAV) has remained unchanged since fiscal 2011. The O&M tax rate was increased from $1.04 per $100 TAV to the maximum rate of $1.17 for fiscal 2014 following voter approval; the I&S rate was decreased by the same amount. The swap provides the district with approximately $8 to $12 million in additional annual net revenue derived from increased state aid for operations. Fitch views the use of this tax rate swap cautiously. However, Fitch notes the I&S rate could be increased without voter authorization to repay the bonds and the swap could be reversed if needed.
BELOW AVERAGE ECONOMIC INDICATORS

The district economy is anchored by the distribution of agricultural products and goods shipped from Mexico, as well as oil and gas exploration. Currently at about $5.5 billion, the district's TAV saw strong annual growth from FYs 2006 to 2010, but experienced volatility in recent years due to reductions in mineral values. TAV declined by a total of 10.9% from fiscal 2011 to fiscal 2013 but has been slowly recovering. TAV grew by 5.1% in fiscal 2016 following two years of modest growth. The mineral/ oil and gas sector now accounts for a modest 4.4% of the district's TAV. The single largest taxpayer, Oxy USA Inc. (a subsidiary of Occidental Petroleum Corporation), represents 3.7% of TAV. The district expects modest TAV growth in the near term as volatility in the oil and gas sector is moderated by growth in other sectors.

Further economic expansion is expected in the near term related to $150 million in projects underway at the newly designated University of Texas - Rio Grande Valley, including the region's first medical school, and a recent $200 million expansion of the local hospital. Other planned projects include an upscale retail, entertainment, and hotel complex adjacent to the $60 million multi-purpose arena currently under construction. The arena will be the home of the local basketball team of the National Basketball Association Development League.

Local unemployment rates have seen improvement in recent years, although they remain above average. The Hidalgo County unemployment rate of 7.8% as of December 2015 is well above state (4.2%) and national (4.8%) rates. The comparable city rate is lower at 4.7%, which closely tracks the state and national averages. County per capita personal income and median household income lag far behind those of the state and nation, though both have seen good growth in recent years. However, the county's 2014 poverty rate of 33.5% remained considerably higher than state (17.2%) and national (14.8%) norms.

MODERATE DEBT PROFILE

The district's debt ratios are midrange at $1,822 per capita and 3.7% of market value. These ratios do not reflect state support of about 25% of annual debt service. Including this support, debt service as a percentage of governmental spending was low at about 4.5% in fiscal year 2015. Amortization is average, with about 49% of principal maturing in ten years.
The district has no remaining authorization to issue additional bonds, and there are no near-term plans to return to voters to approve additional issuance. The district will soon pursue the development of a facilities needs assessment in order to determine its medium term capital plans.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple-employer defined benefit pension plan. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using Fitch's more conservative 7% rate of return assumption. Contributions are determined by state statute, rather than actuarially, and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.

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 fiscal year 2015.

The district's proportionate share of the system's net pension liability represents a very small less than 1% of fiscal 2016 market value and the district's contributions are limited to $6.8 million. Carrying costs for the district (debt service, pension, and OPEB costs, net of state pension and debt service support) totaled a relatively low 8.2% of governmental fund spending in fiscal 2015.

TEXAS SCHOOL FUNDING 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.