Fitch Rates New Braunfels ISD, TX GO Bonds 'A+' Underlying; Outlook to Positive.

AUSTIN, Texas -- Fitch Ratings assigns an 'A+' underlying rating to New Braunfels Independent School District, Texas' (the district) $25 million unlimited tax school building bonds, series 2006, and affirms the underlying 'A+' rating on the district's approximately $80.1 million in outstanding unlimited tax bonds. The district has applied for a guaranty from the Texas Permanent School Fund (PSF). Upon their approval, the 'AAA' rating will be assigned to the current offering based on the financial strength of the PSF, which is rated 'AAA' by Fitch. The Rating Outlook is revised to Positive from Stable. The series 2006 bonds are tentatively scheduled for a negotiated sale the week of July 10 via a syndicate led by First Southwest Company.

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. Proceeds will be used to finance various capital improvements and pay costs of issuance.

The underlying 'A+' rating reflects the district's positive operating results, solid reserves, and continued taxable assessed valuation (TAV) growth. Offsetting risks include a high but manageable direct debt burden, above-average debt service carrying charges, and ongoing operating and capital pressures associated with an accelerated growth rate. The Positive Outlook reflects the continued expansion of the district's reserve levels. Continued favorable financial stewardship under the state's new school funding legislation, along with manageable future capital needs, are key to future positive credit considerations.

Unlike many growing districts in the state, TAV gains in New Braunfels ISD generally have outpaced enrollment growth in recent years, benefiting financial operations. The district has reported operating surpluses for each of the past five fiscal years. These positive margins have enabled the district to restore its financial reserves to healthy levels after they had narrowed somewhat in the late 1990s. Fiscal 2005 audited results include an unreserved, undesignated general fund balance of $14 million, equal to a sizable 42% of expenditures and transfers out. This amount exceeds comfortably the district's adopted goal of an 18% operating reserve. District officials anticipate that operating results for the current fiscal year will end in a $3.4 million drawdown on fund balance for capital improvement projects. Despite this reduction, the district will still keep a comfortable unreserved, undesignated general fund balance equal to 32% of expenditures and transfers out.

Liquidity levels are favorable. General fund cash and investments totaled $14.4 million at fiscal year-end 2005, which is an increase from last year, and represents more than four months of operating expenditures. Generally steady TAV growth in prior years caused a shift in the district's revenue composition. The share of operating revenues from local sources increased from 52.9% in fiscal 1999 to nearly 72% in fiscal 2005. The greater dependence on local funds was a primary reason behind the administration's move to increase its fund balance goal to 18% in November 2003.

The Texas Legislature recently passed property tax relief measures that were subsequently signed by the governor. The legislation provides 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 New Braunfels ISD, so that the measures are expected to be revenue neutral. While the district's 2007 tax rate is not yet finalized, the adopted fiscal 2007 budget assumes a $1.30 O&M tax rate. The district can also add four more pennies of tax effort without voter approval. The district's combined fiscal 2006 tax rate of $1.82 is above average for the region; this is due partly to the predominantly residential composition of its tax base, which totals about 70% of district appraised value.

Adjusting for approximately 14% state support on outstanding general obligation bonds, the district's direct debt burden is still above average at $2,672 per capita and 4.6% of TAV. However, overall debt levels are moderate, mitigated by relatively low overlapping debt. Overall ratios are $3,421 per capita and 5.9% of TAV. Like many Texas school districts, the pace of debt retirement is below average, at roughly 36% in 10 years. In addition, debt service carrying charges have increased substantially, from 9.7% of general fund and debt service expenditures in fiscal 1999 to nearly 18% in fiscal 2005.

The district is closely monitoring ongoing residential development plans, which are expected to accelerate the need for additional schools and long-term debt. With a reported 4,200 platted lots at present and 400 housing starts in May 2006 alone, the district intends to seek voter approval for additional borrowing authority every 36 to 48 months in the future. The current offering represents the first installment of a $42 million authorization that was approved by a 4:1 margin in May 2006. The remaining authorization, totaling $17 million, will be issued in Spring 2007.

The district is located 30 miles north of San Antonio and serves primarily the City of New Braunfels. The local economy centers on tourism, manufacturing, distribution, and retail trade. The city's location along Interstate 35, which extends from the Texas-Mexico border to Canada, continues to spur commercial development. New Braunfels is also home to several tourist attractions, including Schlitterbahn Waterpark, which employs 1,800 seasonal workers. Other major employers include McKenna Memorial Hospital, with more than 900 employees, and several large highway contracting companies. The city also is home to a number of manufacturing and retail concerns. There is no tax base concentration, however, with the top 10 taxpayers representing 4.3% of fiscal 2005 TAV. Proximity to the extensive employment base of the San Antonio metropolitan area provides additional job opportunities. Given the availability of ample land within the district and the northern expansion of development in San Antonio, prospects for continued growth appear favorable. City employment rates historically have outperformed those of the state and nation, and recent monthly statistics continue that trend. The city's April 2006 unemployment rate of 3.5% bettered the state and national averages of 4.8% for the month. Local wealth indicators are just below state and national averages, but continue to move toward closing that gap.

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