Fitch Rates Galena Park ISD, Texas' $67.9MM GOs 'AAA' PSF/ 'AA' Underlying; Outlook to Stable.

AUSTIN, Texas -- Fitch Ratings assigns its 'AAA' rating to the $67.9 million Galena Park Independent School District (the district), Texas unlimited tax school building and refunding bonds, series 2007. The 'AAA' is based on a guarantee provided by the Texas Permanent School Fund (PSF) whose financial strength is rated 'AAA' by Fitch. The bonds are scheduled to sell via negotiation to a syndicate led by Coastal Securities on Feb. 6, 2007. Fitch also assigns an 'AA' underlying rating to the series 2007 bonds and affirms the 'AA' underlying rating on the district's $204.9 million in outstanding unlimited tax bonds. Fitch revises its Rating Outlook to Stable from Negative.

The bonds are payable from an unlimited ad valorem tax pledge on all taxable property within the district and a guaranty provided by the PSF. Proceeds will be used to construct, renovate, and equip school facilities, refund a portion of the district's outstanding debt for interest cost savings, and pay costs of issuance.

The underlying rating of 'AA' reflects the district's historically favorable financial performance and growing tax base. Also incorporated into the rating is the district's above average debt position, even after discounting state support, and below average amortization schedule. The Outlook revision to Stable from Negative reflects the recent stabilization in the district's financial position which had deteriorated in fiscal-years (FYs) 2004 and 2005. The district's ability to maintain its unique operating and maintenance (O&M) taxing margin (authorized by special statute and approved by voters in 1964) appears to remain intact under the recent public school finance reforms by the Texas Legislature. Also unique among Texas school districts, the district maintains a 20% local option homestead exemption.

The district's financial position narrowed considerably after it posted a $7.6 million general fund operating deficit in fiscal 2005, almost double the mid-year projection, reducing its unreserved fund balance to $17.1 million or 12.4%, down from past averages of about 20%. The drawdown resulted mostly from sluggish taxable assessed valuation (TAV) growth of under 2%, coupled with use of a $3 million reserve for staffing and salary increases; and an advance of $1.6 million for capital improvements included in the 2005 bond program.

Prior to the large drawdown in FY2005, general fund reserve levels stood at a healthy $25.5 million in FY2004, representing over 19% of general fund expenditures and transfers out, exceeding the district's minimum fund balance policy of 12%. Undesignated reserves in FY2004 totaled $18 million or almost 14% but additional contingency reserves of almost $7 million increased available reserves to nearly 20%.

In response to the fiscal 2005 operating deficit, district officials developed an austere two-year financial stabilization plan starting in FY2006. The district's adopted FY2006 budget projected a $3.7 million drawdown (net of the $1.6 million reimbursement for capital projects) despite a 3 cents increase in the O&M tax rate and $1 million in staffing and budget cuts. Officials report that the district was hesitant to make further reductions until a new state funding formula had been adopted by the legislature. However, unaudited results now point to a modest operating surplus due to greater than budgeted TAV growth, unbudgeted funding for Hurricane Katrina and Rita related expenses, and various administrative and non-campus budget reductions. Additionally, reimbursement for the general fund's $1.6 million advance to the capital projects fund increases the net surplus to $1.9 million. If audited results are not materially different, the FY2006 total fund balance will equal nearly $20 million or 14% of spending, above the district's minimum 12% fund balance policy.

Larger budget reductions, totaling $4.3 million, were approved by the board of trustees in FY2007 to enable balanced operations. The savings were mostly comprised of campus staff reductions, including the elimination of 40 teaching positions through attrition. Current projections now point to a $3.5 million general fund operating surplus. The district's low student to teacher ratio provides some financial flexibility.

In the past, Fitch has cited the district's greater than average tax rate limitation as a credit strength. A 1964 voter override established a maximum combined O&M and debt service tax rate of $1.95 per $100 TAV, including a $1.00 debt service tax levy cap for limited tax bonds. As a result, the district was not subject to the state-wide $1.50 O&M tax limit. The maximum O&M tax rate is equal to the difference between $1.95 and the current debt service tax rate. As a result, under the new state funding formula (which will reduce district's O&M tax levy by one-third by FY2008), the district's resulting O&M levy will remain above the statewide average, allowing additional revenue generating capability. Also, the district is one of only a few in Texas that still provides a 20% local option homestead exemption, which equates to about $0.10 on the property tax rate. Reduction or elimination of this exemption requires only board approval, although implementation may prove to be politically challenging.

Located in southeastern Harris County and surrounded by Houston, the district serves six communities, including Galena Park, Jacinto City, and a portion of Houston, with an estimated 2007 total population of over 105,000. The district's current total enrollment for the 2006-07 school year is about 21,000 with average annual growth totaling just over 1% since 2003. The district is approaching build out with demographic trends pointing to modest enrollment growth of 1% annually, with enrollment expected to reach 25,000 by 2019.

Property valuation has experienced steady growth, averaging almost 7% annually since FY2001, including a notable 11% jump in the current year. Due to its below-median wealth per student, the district received nearly 55% of its general fund revenues from the state in FY2005.

This offering represents the third installment of an $85 million bond package approved by nearly 63% of district voters in October of 2005. An updated needs assessment and demographic study necessitated acceleration in borrowing. The next tranche of this bond package is expected to be issued in February 2008 in the amount of $16 million. Debt ratios, which are above average, are moderated by the significant level of state support for outstanding bonds. Payout is below average at 38% in ten years. Pending enrollment growth, no additional bond authorization is expected until 2010.

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