Fitch Rates Northside ISD, TX's $85.4MM ULT Bonds 'AA'; Outlook Stable

AUSTIN, Texas — Fitch Ratings assigns an 'AA' rating to the following series of Northside Independent School District, Texas' (the district) unlimited tax bonds:

--$13,625,000 unlimited tax school building bonds, series 2009A;

--$28,325,000 unlimited tax school building bonds, taxable series 2009 (Direct Subsidy-Build America Bonds);

--$15,419,999 unlimited tax refunding bonds, series 2009;

--$28,000,000 unlimited tax qualified school construction bonds, series 2009 (Tax Credit Bonds).

In addition, Fitch affirms its 'AA' rating on the district's $1.5 billion in outstanding parity debt. The Rating Outlook is Stable.

Scheduled to sell as early as Nov. 9 via negotiation, the bonds are direct obligations of the district, payable from an unlimited property tax levied on all taxable property located within the district. Bond proceeds will be used to finance various school facility projects, refund a portion of the district's outstanding debt, and pay issuance costs. Also, it is anticipated that the entirety of the tax credit associated with taxable series 2009 (Direct Subsidy-Build America Bonds) will be available solely to offset the scheduled debt service payment of taxable bonds.

The 'AA' rating reflects the district's consistently strong financial management and performance within a rapid enrollment growth environment, its large and diverse employment base, balanced by tax base growth that has slowed from strong historical levels and the district's above average debt levels. The district's rising debt burden is due to very large growth related capital needs, with voters consistently supporting the district's bond programs. Over the long term, Fitch believes prospects for continued, albeit more moderate, tax base growth are favorable and in addition to the strong voter support of its capital program, helps to moderate the credit impact of the district's debt profile.

The district benefits from its location in the larger San Antonio metro area and serves the rapidly growing northwest portion of Bexar County and surrounding areas. While the district has historically experienced strong levels of tax base growth, fiscal 2010 taxable assessed value (TAV) grew at a much more modest pace of not quite 4% from the prior year, reflecting a weakened housing market. As a result of area development, enrollment that currently totals almost 92,000 students has grown rapidly, increasing at an average annual pace of nearly 5% between fiscal years 2003 and 2008. With the economic slowdown, annual enrollment growth trends declined in 2009 to not quite 3%, but have more recently started trending upwards in fiscal 2010, closer to prior years' levels.

To accommodate its rapid enrollment growth, an impressive 70% of voters approved the largest bond election in district history for $693 million in May 2007, and the current offering represents the sixth installment of this authorization. Comparable to earlier projections, district management anticipates that the remaining $200 million authorization will last the district through fiscal 2011. Preliminary plans are reportedly underway for consideration of another bond authorization that will be presented to voters next year.

The district's direct debt burden has risen substantially and now approximates $3,100 per capita and 4.9% of TAV, due in part to the elimination of state support due to increased property wealth for outstanding debt. Overall debt ratios are also above average at nearly $5,100 per capita and 8% of TAV. Fitch notes the district's variable-rate debt is high at 18% of total debt, although the risks associated with variable-rate exposure are somewhat mitigated by the district's use of annual term modes and their past practice of converting much of it to fixed-rate in the near to medium term. The district's principal amortization rate is slow at 29% in 10 years, but not unusual for rapidly growing districts. It is still projected that the May 2007 bond authorization will increase the district's debt service tax rate to no more than a moderate $0.38 per $100 TAV by fiscal 2012.

Despite pressures associated with consistent enrollment growth, financial performance has been solid as evidenced by undesignated fund balances of 10% or better of expenditures since fiscal 1995, which exceed management's goal of one month of expenditures. The district's financial cushion is impressive, comprised of a $41.6 million unreserved fund balance and $56 million in additional reserves, totaling $97.7 million or 16.4% of spending in fiscal 2008. Unaudited fiscal 2009 results point to a slightly stronger cushion of $104 million, net of an $8 million draw down of designated reserves for new school openings. The fiscal 2010 budget currently projects a modest $5 million surplus based on conservative enrollment assumptions that have already been exceeded and $23 million in new growth expenditures for the opening of four new schools. Notably, for fiscal 2010, the district will have approximately $15 million in reserves for costs associated with the opening of new schools, which it projects will be draw down over the next three fiscal years. The district has no immediate plans to approach voters for additional operating tax rate increases.

Fitch Ratings withdraws its 'AA' long-term underlying rating for the following bonds because they have been prerefunded:

--Northside Independent School District (TX) limited maintenance tax notes, series 2002;

--Northside Independent School District (TX) limited maintenance tax notes, series 2002A;

--Northside Independent School District (TX) public property finance contractual obligations series 2000;

--Northside Independent School District (TX) public property finance contractual obligations series 2001.

Fitch Ratings withdraws its 'AA' long-term underlying rating on certain maturities for the following bonds because they have been prerefunded:

--Northside Independent School District (TX) unlimited tax school building & refunding bonds series 2001;

--Northside Independent School District (TX) variable-rate unlimited tax school building bonds series 2001A.

Additional information is available at www.fitchratings.com.

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