Fitch Rates Laredo ISD, TX $57MM GO Bonds 'AAA' PSF/ 'A' Underlying.

AUSTIN, Texas -- Fitch rates Laredo Independent School District, TX's $57 million unlimited tax school building bonds, series 2006 'AAA' based on a guarantee provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch Ratings. In addition, Fitch assigns an 'A' underlying rating to the series 2006 bonds and affirms the 'A' rating on the district's outstanding approximately $181.4 million in unlimited tax bonds. The Rating Outlook is Stable.

The bonds are direct obligations of the district and are payable from ad valorem taxes levied without legal limitation as to rate or amount, against all taxable property located within the district and further secured by the PSF guarantee. Bond proceeds will be used for the construction, acquisition, and equipping of school buildings; to purchase necessary school sites; and to pay costs of issuance.

The 'A' rating reflects the district's adequate but narrowed financial position, substantial state support for operations and capital construction, and recent notable property tax base growth. The district's financial reserves have thinned as a result of planned capital outlays as well as past large salary increases and personnel additions for police and security functions, leading to the Rating Outlook revision to Stable from Positive on July 7, 2006. It is Fitch's expectation that district trustees will adopt the administration's proposed balanced budget plan for fiscal 2007 as an initial step toward returning its general fund balance to compliance with its policy requiring reserves equal to two month's expenditures. The district's high direct debt burden as a ratio of taxable assessed valuation (TAV), even after adjusting for state support, is a credit concern, although sustained voter support is notable.

Strong growth returned to the district's tax base in recent fiscal periods, most notably in fiscal 2005, when TAV increased by 18% due to the purchase of the city's nonprofit hospital by a private company, making it a taxable entity. Preliminary fiscal 2007 estimates point to growth of over 8% due to equal parts new construction and reappraisal. Ongoing downtown development should spur additional TAV growth in the future. The district's top 10 taxpayers account for a moderate 14% of total TAV, led by the privately acquired hospital at over 5%. Current property tax collection rates are below average and typical for the border region, but adequate on a total collections basis.

The district's financial position had shown dramatic improvement in recent years but narrowed beginning in fiscal 2005 due to a combination of one-time and recurring costs. As a result of planned capital outlays, the creation of a district police department, and large $2,000 teacher pay raises, fiscal 2005 posted a $6.4 million general fund operating deficit, decreasing the undesignated fund balance to $12.2 million or 6.8% of spending. Program expansions and capital outlays continued in fiscal 2006, resulting in a projected drawdown of $13.6 million, although the undesignated portion of its reserves is projected to decline by less than $5 million, leading to available reserves of $7.5 million or 4.4% of spending. Under the new school funding formula, the administration's proposed fiscal 2007 budget is balanced with the aid of the optional four-cent levy allowed by the new state law for general purposes. The proposed budget conservatively assumes a slight decline in average daily attendance (ADA) as well as year-round full employment with no savings due to turnover or vacancies. Of long-term concern to Fitch is the district's ability to return to structural balance in the face of increasing payroll costs and reduced local control under the new school funding formula.

The Texas legislature recently passed property tax relief measures that were subsequently signed by the governor. The legislation provides for mandatory reductions in the local operations and maintenance (O&M) property tax rate of 11% for fiscal 2007 and a cumulative 33% for 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 Laredo ISD, so that the measures are expected to be revenue-neutral.

Due to the district's very low property wealth per student, the state currently supports 80% of the district's debt service for its unlimited tax bonds, including this issue, and lease revenue bonds. Adjusting for this substantial state support, direct debt as a percentage of TAV is still high at 5.5%, due to its district-wide capital plan. Direct debt on a per capita basis is moderate at under $900. Overall debt to TAV is high at 8.1%, reflecting issuances by the city of Laredo (GO debt rated 'A+' by Fitch), Webb County (GO debt rated 'A+' by Fitch), and Laredo Community College District (GO debt rated 'A+' by Fitch. Overall debt per capita is more moderate at just over $1,300. Principal payout for all debt is slightly below average at 41% in 10 years. Given the recent award for state support on the series 2006 bonds, the debt service tax impact for the 2006 bonds is projected to be about $0.05 initially, and is expected to decline slightly thereafter upon receipt of Existing Debt Allotment funds for prior issuances. In addition, because of declining cash reserves as well as the large amount of grant funds awarded to the district, a tax anticipation note borrowing of approximately $12 million is planned for later this month.

Located on the Rio Grande, the border city of Laredo serves as the principal port of entry into Mexico and the largest inland port in the U.S. Over the past decade, Laredo has experienced substantial growth in population. However, the district's enrollment of approximately 23,000 has experienced only modest growth due to central Laredo's nearly complete development. Laredo's proximity to Mexico and an economic base focused on trade and transportation closely link its economic health to that of its southern neighbor. Trickle-down effects of fluctuations in the value of the peso and dependence on international policies can create some economic uncertainty for the area. Recent integration of the U.S. and Mexican economies through free trade agreements and Laredo's essential transportation network have added stability.

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