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

AUSTIN, Texas -- Fitch assigns its 'AA' rating to Austin Independent School District, Texas' (AISD, or the district) approximately $15.0 million unlimited tax refunding bonds, series 2006B. In addition, Fitch affirms the 'AA' underlying rating on the district's $464.4 million of outstanding unlimited tax bonds (net of refunding). The district has applied for, and expects approval of, the bonds to be guaranteed by the Permanent School Fund of Texas, whose claims-paying ability is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The bonds are scheduled to price on a negotiated basis through Estrada Hinojosa & Company, Inc. the week of Nov. 13, 2006. Bond proceeds will be used to refund a portion of AISD's outstanding unlimited tax bonds with a target present value savings of 3.5%.

The 'AA' rating reflects AISD's moderate debt levels and capital needs, rapid amortization, sound financial status, and sizable economy. The Austin area experienced deep recessionary pressures during the latest national downturn, which translated into declining taxable assessed valuation (TAV) for AISD. As a result, the district's operating performance declined in recent years. However, economic activity in the area has started to accelerate and prospects for a return to historical reserve levels should occur more quickly than anticipated.

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, despite declining levels in fiscals 2004 and 2005. For fiscal 2006, the district continued with teacher pay enhancements and certain academic incentives, but revenues were higher than expected, allowing the district to achieve a $9 million surplus and stabilize reserve levels. For fiscal 2007, financial prospects are even more favorable. The district's TAV posted a 14% increase over the prior year and budgeted expenditure growth is a moderate 5%. In addition, the district is levying an optional $0.04 per $100 TAV, which is expected to generate around $17 million in revenue. Altogether, AISD expects to generate a surplus of nearly $21 million, effectively boosting the undesignated general fund reserve to 13%, the approximate level prior to the local recession.

Debt levels are moderate and capital needs are manageable. Given the low enrollment growth of around 1% annually, capital demands are geared towards renovations and additions to existing facilities. With this issuance, overall debt levels remain virtually unchanged from the district's August 2006 issuance at 4.0% of TAV and around $2,500 per capita. Subsequent to these bonds, remaining authorization totals $398 million and is expected to have limited impact on debt ratios given the district's sizeable tax base and rapid amortization of existing debt, of which over 80% will be retired in ten 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 4.2% for August 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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