Fitch Downgrades Uvalde CISD, Texas' ULT Bonds to 'A'; Outlook Stable.

AUSTIN, Texas -- In the course of routine surveillance, Fitch Ratings downgrades to 'A' from 'A+' the rating on Uvalde Consolidated Independent School District, (the district) Texas' approximately $29 million in outstanding unlimited tax bonds. The Rating Outlook is Stable.

The downgrade to 'A' reflects the significant deterioration in the district's financial position and loss of financial flexibility that has occurred due to annual drawdowns on reserves for deferred capital needs since fiscal 2007, an ongoing trend of greater than budgeted average daily attendance (ADA) declines, and a reduced operating tax rate. The rating also incorporates the area's limited economy and low wealth levels, slowed tax base growth, recent failure of a ballot initiative to increase the tax rate, and the district's modest debt levels. While management projects maintaining its current financial position, continued deterioration in the district's financial profile over the near term would further weaken credit quality and potentially warrant additional negative rating action by Fitch.

After peaking in fiscal 2006, consecutive drawdowns on general fund reserves since fiscal 2007 for deferred capital needs have significantly weakened the district's financial position. The district reported a total general fund balance of $3.2 million or 8.6% of spending in fiscal 2008 compared to $6.6 million or 21% of spending in fiscal 2006; district officials currently anticipate another drawdown by the close of fiscal 2009 that will conservatively bring reserves down to about $2 million or 6% of spending. In addition to maintenance demands, district officials have been challenged to manage revenue constraints associated with the ongoing trend of greater than budgeted ADA declines (ADA levels form the basis for state funding).

The fiscal 2010 general fund budget of approximately $34 million was adopted as balanced and is reportedly comparable to the prior year, although the district has not incorporated any capital spending in order to maintain current reserve levels. While most of the district's operating revenues come from state funding sources, the district is further constrained in fiscal 2010 with a reduced operating tax rate of $0.96 per $100 taxable assessed valuation due to state-mandated property tax rate compression. District officials plan to continue managing near-term budget pressures through tighter expenditure controls and improved ADA budgeting practices. The district may return to approach voters for additional operating tax rate increases sometime in 2011 as the last tax rate election was soundly defeated by a 2:1 margin with minimal voter turnout in September 2008.

Located approximately 80 miles west of San Antonio, the district serves primarily Uvalde County and encompasses about 1,100 predominately rural square miles. Despite previously growing at a modest rate, the district's tax base remains small at about $786 million. The tax base has more recently weakened with the loss and/or downsizing of three of the larger district taxpayers and area employers. County unemployment levels have risen to 8.9% in September 2009 and remain slightly above the state (comparable to historical trends) but below those of the U.S. Direct debt levels, assisted by substantial state support and the lack of additional borrowing since 2005. District officials report no future debt plans. Amortization is now above-average at approximately 71% within 10 years.

While Fitch considered the following parity bonds in its analysis and affirmed all outstanding ULT bonds in its previous commentaries, the bonds listed below did not have an explicit rating assignment. Therefore, Fitch explicitly assigns an 'A' underlying rating to the ensuing bonds as follows:

--ULT school building bonds, series 1998.

In addition, Fitch assigns an 'AAA' rating to the series 1998 bonds based on a guaranty provided by the Texas Permanent School Fund, whose Insurer Financial Strength is rated 'AAA' by Fitch. The full rating history is now available on Fitch's web site at 'www.fitchratings.com'. The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

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