Fitch Rates Austin Independent School District, TX Unlimited Tax Bonds 'AA'.

AUSTIN, Texas -- Fitch Ratings assigns its 'AA' rating to Austin Independent School District, Texas' (AISD, or the district) $90 million unlimited tax refunding bonds, series 2006A. In addition, Fitch assigns an initial underlying rating of 'AA' to the district's $431.3 million of outstanding unlimited tax bonds and an 'AAA' rating to various outstanding issues guaranteed by the Texas Permanent School Fund, whose claims-paying ability is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The bonds are scheduled to sell competitively Aug. 7; Public Financial Management, Inc. serves as financial advisor for the district. Bond proceeds will be used to refund commercial paper issued by the district for the purpose of constructing various facilities.

The 'AA' rating reflects the district's moderate debt levels, rapid amortization, sound financial status, and sizeable economy. The Austin area experienced deep recessionary pressures during the latest national downturn, which translated into declining taxable assessed value (TAV) for AISD. As a result, the district's operating performance has declined in the last couple of years and additional erosion is expected for the current fiscal year. However, as economic activity within Austin has recently increased, the district posted strong TAV growth for the upcoming fiscal year, which should enable a return to positive operations. If, as expected, the favorable economic climate continues, AISD's financial performance should improve steadily.

The district serves the City of Austin (whose general obligations Fitch rates 'AA+') and has a current student enrollment of over 81,000. While the district is considered property rich under state legislative definitions, AISD faces challenges typical of a large urban school district, with pockets of low-income residents and underperforming schools. Despite these pressures, the district continues to make improvements in standardized test scores and maintains broad community support, as evidenced by the 78% passage rate of its most recent bond election.

General fund reserves are good, but have declined over the last two fiscal years as the district has faced increased program expenditures and sizeable state-mandated wealth transfer payments coupled with a softening in the TAV. Similarly, the district expects a further reduction in reserves for fiscal 2006. Reversing this trend, however, the fiscal 2007 TAV posted a 14% gain, which will allow the district to increase payroll expenditures while maintaining a balanced budget for the upcoming year. In addition, district officials expect to levy the state-maximum $0.04 in additional operating taxes for enrichment purposes, which purportedly will be used for replenishing reserves. Thereafter, as improving economic conditions continue to translate into higher TAV, the district should have greater flexibility to manage operations and enhance reserves further.

Debt levels are moderate and capital needs are manageable. Given the low enrollment growth of around 1% annually, capital demands are geared toward renovations and additions to existing facilities. With this issuance, overall debt levels are 4.0% of TAV and $2,513 per capita. Subsequent to these bonds, remaining authorization totals $398 million, and will have limited impact on debt ratios given the district's sizeable tax base and rapid amortization of existing debt, of which 79% will be retired in 10 years.

The largely government and higher education Austin area economy diversified over the last decade to include a sizeable high tech sector. While the technology presence fueled the latest round of commercial and residential growth in the area, the burst of the tech bubble led to mass layoffs and declining wealth levels. Unemployment reached its highest levels in June 2003 but has since shown steady improvement; the city's current unemployment rate of 4.0% for May 2006 is below that of the state and nation. Moreover, the area is experiencing strong economic growth in virtually every sector and prospects for continued improvement in the near term are favorable.

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