Fitch Rates Frisco ISD, Texas $96.5MM GOs 'AAA' PSF; 'A' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to Frisco Independent School District, Texas' (the district) $96.5 million unlimited tax school building and refunding bonds, series 2007, based on the guarantee provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch assigns an underlying rating of 'A' to the series 2007 bonds, which are expected to price on Feb. 8 via negotiation to a syndicate led by RBC Capital Markets. Fitch also affirms the underlying 'A' rating to the district's approximately $745 million unlimited tax school building bonds outstanding. The Rating Outlook is Stable.

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2007 bonds are further secured by the PSF guarantee. Proceeds will be used to fund various school improvements and to refund a portion of the district's outstanding obligations.

The underlying 'A' rating reflects the district's satisfactory financial profile, historically conservative and stable financial management, impressive tax assessed valuation (TAV) growth, and the strength and diversity of the regional economy. The district is consistently the fastest growing in the state, and operating and capital needs continue to pressure finances and keep debt ratios high. General fund reserve levels have declined recently but remain satisfactory for the current rating category. The latest available audited results show better than anticipated results, with the fiscal 2007 budget expected to add to reserve levels.

Located approximately 20 miles north of Dallas, area transportation improvements and housing affordability have led to accelerated population and enrollment growth over the past decade. The district's estimated population increased from approximately 6,700 in 1990 to 95,000 in 2006. The district reportedly has been the fastest growing district in the state for the past nine consecutive years. Enrollment growth for fiscal 2007 is up over 17% from the prior year, growing at a compound average annual rate of nearly 21% in the past five years. District projections call for a student count of almost 39,000 by 2010, up from its current enrollment of 23,800.

The district recorded huge annual increases in TAV of 40%-50% between fiscal years 2000 and 2002. TAV growth slowed somewhat between fiscal years 2003 and 2007 but still reflects significant gains, averaging over 20% annually. For fiscal 2007, the district's TAV grew by more than $2 billion, or 21%, over the prior year's level. The trend of strong TAV growth will likely continue given ongoing and planned developments, as well as the availability of undeveloped land. The district is only 60% developed.

Given the rapid tax base expansion, the wealth per student ratio exceeds the wealth transfer threshold, which requires the redistribution of a portion of local tax revenues. In fiscal 2003, intergovernmental payments tripled from $6 million the prior year and continued to escalate reaching $29 million by fiscal 2006. Historically, financial performance has been sound despite rapid enrollment growth and wealth transfer payments, with TAV increases and solid budget execution generally producing strong revenue gains and favorable year-end results. However, fiscal 2005 results showed a $2.4 million drawdown, reportedly due to an overestimation of students (which determines the level of state support), as well as the accrual of summer payroll (the school year begins in August but the fiscal year starts on Sept. 1).

Fiscal 2006 results were better than previously projected, ending the year with a $1 million surplus. In relation to the district's operating needs, reserves remain somewhat low at just under one month or 7.2% of operating expenses and transfers out. For comparison purposes, as recent as year-end fiscal 2002, the general fund balance represented as much as 21% of operating expenses and transfers out. In response to the decline in reserve levels, the district informally adopted a 15% general fund balance target to be achieved over the next several years, with approximately $5 million expected to be added to fund balance for the close of fiscal 2007. However, the district is planning to change its reporting period to a June 30 fiscal year to better coincide with the school year. The change may take place as early as June 30, 2008 and the district could immediately achieve its fund balance goal.

Fiscal 2007 will be the first year for Texas school districts to operate under the new state school finance structure. To comply with the new funding program, Frisco ISD will compress its operations and maintenance (O&M) tax rate from its 2006 tax rate of $1.32 per $100 TAV to $1.17 and will levy an additional $0.04 for operations allowable under the new funding formula for a total O&M tax rate of $1.21.

Fitch believes that economic and enrollment growth in the district will continue to parallel each other. In the past, conservative fiscal management practices, combined with strong TAV growth, have enabled the district to maintain favorable reserve levels, all while opening new schools. Six new schools opened in the fall of 2006, with another four anticipated to be ready for the 2007-2008 school year. Given these operating pressures, the maintenance of adequate reserve levels remains an important credit consideration.

As is the case with other fast-growing Texas school districts, direct and overall debt levels are high, and principal amortization is slow. Debt ratios will likely remain significant given the May 2006 voter support for a $798 million bond measure, among the largest bond measures ever approved in the state. The district has consistently received strong community support for growth-related capital programs, which is a credit strength. The 2006 authorization will fund the construction of 19 schools, support facilities, site acquisition, and technology and equipment purchases.

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