Fitch Rates Edcouch-Elsa ISD, TX GO Bonds 'AAA' PSF/'BBB+' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an initial 'AAA' rating to Edcouch-Elsa Independent School District, Texas' (the district) $21.2 million unlimited tax school building bonds, series 2006, based on a guaranty provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns a 'BBB+' underlying rating to the series 2006 bonds and to the district's approximately $27.6 million in outstanding unlimited tax bonds. The series 2006 bonds are scheduled for a negotiated sale the week of Sept. 11, 2006. At this point, underwriters are yet to be determined. The Rating Outlook is Stable.

The bonds are direct obligations of the district, payable from and secured by an unlimited ad valorem tax levied against all taxable property within the district. The bonds are further secured by the PSF guaranty. Proceeds will be used to finance various capital improvements and pay costs of issuance.

The underlying 'BBB+' rating reflects the district's low debt ratios, limited capital needs, improved general fund reserve levels and enhanced liquidity. Offsetting credit concerns include a limited tax base, weak tax collections, and previous cash flow issues. Significant state support of the district's debt service and operations due to low property wealth in the area, along with manageable student enrollment growth, suggests the district will be able to maintain their financial profile satisfactorily over the near term.

The current offering is the entire issuance of a $21.2 million authorization approved by approximately 65% of the voters in May 2006. These funds will be used for a new ninth grade campus and additions/renovations to existing facilities. The district expects this authorization will meet their capital needs for the next 10-15 years. Roughly 91% of annual debt service on the current offering and outstanding district debt is supported by the state due to the district's low property wealth. Consequently, the direct debt burden is low, with net direct debt at 2.2% of fiscal 2007 taxable assessed valuation (TAV) and $238 per capita. The overall debt burden is also low at almost 4% of TAV and $427 per capita.

Financial reserves have improved over the past three fiscal years. For fiscal 2005, the district reported an operating surplus of almost $3.5 million. The unreserved, undesignated general fund balance for fiscal 2005 was $7.9 million or roughly 22% of expenditures and transfers out, which is a marked improvement from the fiscal 2002 results of little more than 2% and a $1.1 million unreserved, undesignated general fund balance. Liquidity levels have improved in the past fiscal year as well; cash and investments in the general fund for fiscal 2005 totaled $3.6 million, which was a $2.3 million increase from fiscal 2004.

The Texas Legislature recently passed property tax relief measures that were subsequently signed by the governor. The legislation provides mandatory reductions in the local operations and maintenance (O&M) property tax rate of 11% for fiscal 2007 and a cumulative 33% by fiscal 2008, based on the fiscal 2006 O&M tax rate. To offset the loss of local revenue, the state will increase its share of funding to local school districts, including Edcouch-Elsa ISD, so that the measures are expected to be revenue-neutral. The district's proposed fiscal 2007 budget includes the optional $0.04 per $100 TAV levy for operations.

Edcouch-Elsa ISD, with a 2006 enrollment of almost 5,550 students, is located in north-central Hidalgo County. Tourism, agriculture, and trade with Mexico are leading sectors of commerce in Hidalgo County. The district includes the cities of Edcouch and Elsa and encompasses 28 square miles, with an estimated 2006 population of slightly less than 18,500. Enrollment growth rate has remained steady at an annual average of 2.5% over the past five years, and district officials project a manageable 2% annual growth rate over the next five years.

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