Fitch Rates Mesquite ISD, Texas ULT Ref. Bonds 'AAA'/'AA' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns the 'AAA' rating to $40.3 million (est.) of Mesquite Independent School District, Texas (the district) unlimited tax refunding bonds, series 2005, scheduled to sell via negotiation to a syndicate led by Bear, Stearns & Co. Inc. the week of Dec. 13. The rating is based on the guarantee provided by the Texas Permanent School Fund, whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns the 'AA' underlying rating to the series 2005 bonds and affirms the 'AA' rating on the district's $354.4 million in outstanding unlimited tax bonds. The underlying Rating Outlook is Stable.

The bonds are payable from the proceeds of an unlimited ad valorem tax levied against all taxable property within the district. Bond proceeds will be used to refund a portion of the district's outstanding debt and pay costs of issuance.

The district's long-term unenhanced 'AA' rating is based on very strong financial management, sizeable cash reserves, and the healthy, moderately diversified residential and commercial 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, which is being affected by a recent slowdown in tax base growth. The district maintains a favorable debt profile, due largely to significant state support for annual debt service payments.

The district's financial condition is sound. The fiscal 2003 unreserved general fund balance of nearly $32 million represents 17% of expenditures and transfers out, which complies with the district's goal of two months of operating expenditures. Liquidity is substantial, with fiscal 2003 general fund cash and investments totaling almost $39 million. Fiscal 2004 preliminary results include a modest drawdown of operating reserves of about $500,000, which is below original budget projections. The fiscal 2005 budget features a larger than anticipated seven cent increase in the operations and maintenance (O&M) tax rate to $1.44 per $100 taxable assessed valuation (TAV). This increase, which puts the O&M levy just six cents below the state-mandated $1.50 ceiling, is due primarily to a meager increase in TAV of less than 1% for fiscal 2005.

The modest 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 will likely resume a growth pattern more consistent with historical gains. Top taxpayer concentration is minimal, with the 10 largest taxpayers accounting for less than 7% of a diversified tax roll; residential property comprises roughly 65% of the district's TAV and commercial property accounts for approximately 25%.

The district has roughly $90 million remaining from an authorization approved by more than 80% of voters in March 2003 for new facilities, capital outlays, and technology. The next debt offering is scheduled for spring 2005 and will finance a new middle school and high school additions. Principal retirement is average at slightly more than 50% in 10 years, and state support for debt service currently accounts for more than 50% of the district's total annual debt service payments. The current authorization is expected to be sufficient to meet district facility needs for the next four to seven years and is projected to require an additional four cent increase in the debt service tax rate during that time. The district's direct debt burden is moderate at $1,179 per capita and 3.2% of current TAV.

The district encompasses approximately 60 square miles in eastern Dallas County. Enrollment, currently at around 35,000 students, has grown steadily over the last decade and is projected to increase at a rate of roughly 2% annually for the next several years. A maturing middle-class suburb, the city, and Balch Springs benefit economically from the three interstate highways that traverse the district. The city's economic base includes retail, telecommunications, manufacturing, warehousing, and distribution enterprises. Development activity is strongest in the southern portion of the district, where residential building remains active. 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 October 2004 jobless rate of 4.7%, while high by historical standards, was still below state and national averages.