Fitch Rates Leander ISD, TX GO Bonds 'AAA' PSF; 'A+' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to Leander Independent School District, Texas' (the district) $159.4 million unlimited tax school building and refunding bonds, series 2006, based on a guaranty provided by the Texas Permanent School Fund, whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns an 'A+' underlying rating to the series 2006 bonds and affirms the underlying 'A+' rating on the district's approximately $473.6 million (net of refunded bonds) in outstanding unlimited tax bonds. The series 2006 bonds are scheduled for a negotiated sale during the week of June 19th via a syndicate led by First Southwest Company. 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 Texas Permanent School Fund guaranty. Proceeds will be used to finance various capital improvements, refund a portion of outstanding debt and pay costs of issuance.

The 'A+' rating of the district's unlimited tax bonds reflects its history of solid financial performance while contending with pressures associated with rapid enrollment growth. This success has been the product of sound management and planning practices and a conservative budgeting philosophy. Although the district's tax base growth slowed in fiscal 2004 and 2005, ongoing and planned residential development produced double-digit gains in 2006 that are also projected for fiscal 2007. The district continues to attract new students at a fairly rapid pace. Enrollment, which is over 22,000 students, has grown by more than 9% annually for the past five years.

Despite increased spending pressures associated with higher enrollment, the district continues to add to its healthy reserve levels. However, growth-generated issuances keep debt ratios at very high levels. In addition, efforts to minimize the debt service tax rate and meet the Texas Attorney General's $0.50 interest and sinking (I&S) fund tax rate threshold test have resulted in a 40-year maturity schedule and a slow overall amortization rate for the current offering. While Fitch recognizes the district's structuring restrictions, continued declines in amortization coupled with the anticipation of additional sizeable capital demands may put pressure on the rating in the future.

Financial results continue to be impressive, reflecting the conservative nature of the budgeting and planning practices of the district. The district has recorded operating surpluses annually over the past eight years; another operating surplus is projected for fiscal 2006. For the close of fiscal 2005, the general fund balance stood at $45.6 million, which represents more than 37% of expenditures, transfers out, and other uses. The unreserved, undesignated portion was nearly 30% of spending, demonstrating the extent of the district's financial flexibility. In addition, the district recently revised its undesignated general fund balance target upwards to 22% from 17%.

District debt levels, as measured on a per capita basis and as a percentage of taxable assessed valuation (TAV), are very high. Direct debt is approaching $8,000 per capita and 7.8% of TAV; overall debt ratios are also very high. Debt ratios will likely remain high for some time, given the district's additional borrowing needs to meet facility demands. Reflecting the rapid enrollment growth and the use of capital appreciation bonds (CABs) to minimize tax rate impacts by shifting the debt burden to future taxpayers, amortization is slow.

Approximately $150 million of this issuance represents the initial installment of a $286.11 million authorization approved by 59% of the voters in May 2006. This offering also includes a small refunding portion, which is expected to result in a modest net present value savings. The district expects to issue the remaining installments of this authorization over the next few years. Based on reasonable tax base assumptions, the I&S tax rate is projected to climb by approximately $0.17 by 2009, with the tax rate declining thereafter. Given the anticipated enrollment growth, officials plan to return to the voters as early as 2009 for an additional bond authorization.

Largely residential in character, the district serves a nearly 200-square mile area in southwestern Williamson County and western Travis County. The district's TAV growth rate slowed in fiscal years 2004 and 2005; however, spurred by strong residential construction, TAV jumped over 20% in fiscal 2006, with preliminary fiscal 2007 assessments pointing to another 20% gain. The availability of affordable housing continues to attract buyers from all parts of central Texas. Officials project student enrollment will double to about 44,000 by fiscal 2016.

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 the district, so that the measures are expected to be revenue-neutral.

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