Correction-Fitch Rates Northside ISD, Texas $131MM GOs 'AAA' PSF / 'AA-' Underlying.

AUSTIN, Texas -- This is a correction for a press release issued February 28, 2007. It corrects the dollar amount in the headline and the per capita amounts in the fifth paragraph.

Fitch has assigned a 'AAA' to Northside Independent School District (ISD), TX's $131.2 million unlimited tax school building and refunding bonds, series 2007, based on a guarantee provided by the Permanent School Fund (PSF) of Texas, whose financial strength is rated 'AAA' by Fitch. The 2007 bonds are scheduled to sell on March 8 via negotiation through a syndicate led by JP Morgan Securities Inc. In addition, Fitch assigns its 'AA-' underlying rating on the series 2007 bonds and affirms its 'AA-' rating on the district's $937.9 million outstanding unlimited tax school building bonds. The Rating Outlook is Stable.

The 'AA-' underlying rating reflects the district's strong financial management and performance within a rapid enrollment growth environment, steady taxable assessed valuation (TAV) growth, and the service area's large and diverse employment base. Offsetting risks include slow principal amortization and a rising debt burden due to very large and ongoing capital needs, although voters have consistently supported the district's bond programs. Serving the rapidly growing northwest portion of Bexar County and surrounding areas, the district continues to record sizeable gains in TAV, growing by a compound average annual rate of almost 10% since fiscal 2001. To accommodate its accelerating enrollment base growth, voters will face the largest bond election in district history for $693 million in May 2007. Although projected debt burden levels will be above average but manageable, Fitch will monitor the election's voter support and near term tax base growth to gauge the impact to the district's debt profile.

Annual enrollment growth has averaged almost 5% over the last five years, including a record increase of 5.5% or 4,000 students in fiscal year 2006. The district's fiscal 2007 enrollment is projected to grow by over 3,700 for a total enrollment base of almost 82,000 students, making it the state's fifth largest district. The high-growth mode of the district has led voters to approve $1.1 billion in bond authorizations since 1998. Most recently, voters approved $439 million in general obligation bonds in Feb. 2004 for growth-related needs that include the construction of eleven new schools and the renovation and improvement of existing schools.

The current offering is comprised of $69 million from the 2004 authorization and $62 million in refunding bonds for interest cost savings. Variable rate debt comprises about 22% of total debt. Conservative tax base growth projections have led to an anticipated maximum debt service tax rate of $0.275 per $100 TAV for the entire 2004 authorization, down from the $0.374 promised to voters.

The district's current direct debt burden has risen substantially from past levels and now totals almost $1,700 per capita and just over 3.0% of TAV after accounting for state support for about 30% of outstanding debt. Overall debt ratios are also above average at over $2,400 per capita and 4.5% of TAV. The district's overall principal amortization rate is slow at 29% in ten years which is not unusual for rapidly growing districts. The proposed May 2007 bond authorization will finance the construction of nine elementary schools, two middle schools, and one high school plus classroom additions, campus renovations, science labs, and technology and transportation needs. If approved by voters, the authorization will be issued over a four year period and increase the district's debt service tax rate by $0.12 per $100 TAV, however, the total tax rate will still decline due to additional operations and maintenance (O&M) tax rate compression in fiscal 2008, as required by last year's public school finance legislation.

Despite pressures associated with consistent enrollment growth, financial performance has been good 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. For fiscal 2006, the district posted a large $38 million general fund operating surplus due to actual enrollment exceeding budgeted projections by 1,000 students, improved tax collections, and some carry forward appropriations from fiscal 2005. The district's growing financial cushion is impressive, comprised of a $51 million undesignated fund balance and $46 million in additional reserves, totaling $97 million or 21% of spending in fiscal 2006. Notably, the district has set aside additional reserves of $41 million for the opening of new schools, furniture, equipment, and pre-design costs which it will draw down over the next three years.

With four new schools opening this current period, the amended fiscal 2007 budget includes $25 million in new growth funding to accommodate a projected enrollment increase of over 3,700 students and 5% teacher pay raises above the state-funded pay hikes. Aided by year-end budget sweeps and the use of new school designations, the district projects it will maintain strong year end reserves of almost 18%-25% through fiscal 2011. Notably, its five-year financial forecast does not include adoption of the optional 4 cents O&M tax levy, equivalent to $20 million in combined state and local revenue, preserving an important financial contingency.

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