Fitch Rates Hays CISD, Texas School Bldg Bonds 'AAA' PSF/'A' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to the $38.0 million unlimited tax school building bonds, series 2005-A, of Hays Consolidated Independent School District, Texas (the district). The rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns an underlying 'A' rating to the current offering, while affirming the 'A' underlying rating for the district's outstanding $175.3 million in unlimited tax school bonds. The 2005-A bonds are scheduled to sell via negotiation to a syndicate led by Southwest Securities on June 23. The Rating Outlook is Stable.

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district and the Texas PSF guarantee. Bond proceeds will be used to construct and equip school buildings and pay costs of issuance.

The 'A' rating reflects the district's continued healthy financial position despite growth pressures, a substantial operations and maintenance tax rate margin, and diversifying tax base and robust tax base growth buoyed by the district's proximity to the large and diverse Austin-San Marcos area economy. The urbanization trend south of Austin along Interstate Highway 35 (IH-35) continues to accelerate, and new housing remains available and affordable and is still projected to remain so through the near term. The district's rating also reflects high debt levels and slow principal amortization; however, demonstrated and anticipated growth mitigate some debt burden concerns.

The district is centrally located in Hays County along the IH-35 corridor between Austin and San Antonio, a region populated by more than two million people and the state's third largest region of economic activity. As one of the fastest growing school districts in the state, Hays CISD has seen enrollment grow steadily. Since 1996, enrollment has increased an average of nearly 8% annually, and current district projections anticipate student enrollment totaling more than 20,000 by 2013. Currently, more than 9,900 students attend the district's 14 campuses.

The composition of the county tax base is rapidly changing from rural to urban. Residential construction has increased rapidly in recent years, coupled with additional commercial and retail franchises, as housing pressures in Austin have expanded development southward, and growth in San Marcos has expanded development northward. One of the largest factory outlet malls in the nation is located in San Marcos and generates several million dollars annually in sales tax revenues for nearby communities, and tourism has been one of Hays County's most productive industries. Within district boundaries, four major developments, including Home Depot, one of the largest grocery store in the state, Cabela's, and the City of Kyle Tax Increment Financing District, have been announced within the past 12 months, with at least one project to be essentially completed and scheduled to open this summer. The four major commercial developments recently announced in the district are projected to add almost $93 million in taxable assessed valuation (TAV) by fiscal 2006.

Overall, population in the district has increased as rapidly as enrollment, averaging 7% annually since 1995. However, the district's tax base has expanded well above its population growth, recording five consecutive years of double-digit growth and averaging nearly 17% annually over the same period, nearing $2 billion for fiscal 2005. Preliminary indications for fiscal 2006 point to TAV growth of about 14%. Debt ratios are high and are reflective of enrollment growth pressures that necessitate construction of new facilities. Including receipt of state funding, overall debt totals a high about $4,500 per capita, or nearly 9% of TAV. Direct debt is also high at $3,800 per capita and 7.7% of TAV. The district's amortization is below average. In September 2004, district voters approved a bond package totaling nearly $87 million. The debt service tax rate impact of the entire authorization is estimated to be $0.09 per $100 of TAV in three separate increases, assuming no additional state support for debt service and conservative tax base growth. The sale of this issue, originally tentatively scheduled for the spring of 2006, was accelerated to capture state funding recently made available for issues with first maturities prior to Aug. 31, 2005 and to take advantage of additional PSF capacity. District officials anticipate the need for additional voter authorization, possibly within 12 months to build additional elementary schools.

District financial operations are sound. While the district reported a slight operating deficit of about $800,000 in fiscal 2003, the total general fund balance remained acceptable at almost 9% of expenditures and transfers out. Fiscal 2004 ended with a slight operating deficit of approximately $500,000, which officials attribute primarily to a change in the method of revenue accrual, although fiscal 2004 total general fund balance still increased by about $2 million. Expected fiscal 2005 results include an increase in fund balance to meet the board's commitment to a general fund balance level greater than 10% of expenditures and transfers out. Debt service as a percentage of expenditures and transfers out represents an above average 16%, which is not unusual for fast growing districts.

Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com'. Published ratings, criteria and methodologies, and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.