Fitch Rates Mesquite ISD, Texas $118.5MM ULT School Bldg. Bonds 'AAA'/'AA' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to $118.5 million of Mesquite Independent School District (the district), Texas, unlimited tax refunding and school building bonds, series 2005-A, scheduled to sell via negotiation to a syndicate led by Bear, Stearns & Co. Inc. on Aug. 15. The 'AAA' rating is based on the guaranty by the Texas Permanent School Fund, whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns an 'AA' underlying rating to the series 2005 bonds and affirms the 'AA' unenhanced rating on the district's $376.2 million in outstanding unlimited tax bonds. The Rating Outlook is Stable.

The bonds are direct obligations of the district and are payable from unlimited ad valorem tax levied, without legal limitation as to rate or amount, on all taxable property located within the district. Bond proceeds will be used for site acquisitions, facility construction, and to refund a portion of the district's outstanding debt.

The district's underlying 'AA' general obligation rating is based on very strong financial management, sizable cash reserves, and the healthy, moderately diversified economic base of the cities of Mesquite (the city) and Balch Springs, located 15 minutes east of Dallas. An additional rating consideration is the district's shrinking operations taxing margin, adversely affected by fiscal 2005's slowdown in tax base growth, although certified values indicate this year's values will grow moderately. The district maintains a favorable debt profile, due largely to significant state support for annual debt service payments. Additional borrowing over the next two fiscal years to support the current capital plan is expected to generate only modest upward pressure on the district's debt service tax rate.

The district encompasses approximately 60 square miles in eastern Dallas County. Enrollment, currently at around 35,000 students, has grown steadily over the past decade and is projected to increase at a rate of roughly 2% annually for the next several years. Ongoing and planned residential construction of 5,800 units over the next 10-15 years will add about 4,500 students to the district's enrollment base.

The district's sound fiscal condition is a key credit consideration. The fiscal 2004 unreserved general fund balance of over $34 million represents nearly 18% of expenditures and transfers out, which complies with the district's goal of two months' operating expenditures. Liquidity is substantial with fiscal 2004 general fund cash and investments totaling over $23 million. Fiscal 2005 preliminary results point to level or better results and the fiscal 2006 budget is expected to require a very modest operations and maintenance tax rate based on the return of moderate taxable growth to the district.

The modest taxable assessed value (TAV) increases in fiscal 2004 (5.6%) and fiscal 2005 (0.9%) reflected the recessionary climate in the Dallas-Fort Worth metropolitan area. In contrast, district TAV growth had averaged 8% annually for the previous five fiscal years. The fiscal 2005 TAV totals $5.9 billion. Given the breadth and diversity of the regional economy, Fitch anticipates that district TAV growth likely will resume a growth pattern more consistent with historical gains. The top 10 taxpayers account for less than 7% of a diversified tax roll, with residential property accounting for roughly 65% of the district's TAV and commercial property for approximately 25%.

The current offering comprises $59 million in refunding bonds and $60 million in new money. The new money offering represents the third installment of the district's $150 million authorization approved by 81% of voters in March 2003 for new facilities, capital outlays, and technology. The remaining $30 million in bond authorization will be issued in 2007. As promised voters, the total tax rate will not exceed $0.35 per $100 TAV. The district may seek another $150 million authorization in spring 2007.

Local wealth indicators, as measured by median household buying income and per capita personal income, comfortably exceed both state and national averages. The city's jobless rate, while high by historical standards, is still below state and national averages.

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