Fitch Rates South San Antonio ISD, Texas $37.2MM ULT Bonds 'AAA' PSF / 'A' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns its 'AAA' rating to $37.2 million of South San Antonio Independent School District (the district), TX' Unlimited Tax School Building Bonds, series 2007, scheduled to price on July 31, 2007 via negotiation to a syndicate led by Merrill Lynch. The 'AAA' rating is based on the guaranty by the Texas Permanent School Fund, whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch assigns an underlying rating of 'A' to the series 2007 bonds and affirms the district's $111 million in outstanding unlimited tax bonds at 'A'. The Rating Outlook is Stable.

The bonds are direct obligations of the district and are payable from an 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 the repair and renovation of existing facilities, construction of community, support and athletic facilities, site acquisitions, and to pay costs of issuance.

The 'A' underlying rating reflects the district's historically healthy general fund reserve levels, growing taxable values, and substantial state support for operations and debt service. Offsetting risks include high debt levels as a percentage of taxable assessed valuation (TAV), moderate tax base concentration, and slow principal payout rate. Although its enrollment base remains stagnant, the district's conservative assumption of future modest enrollment declines is a credit positive insuring against state aid overpayments. However, competitive pressure to increase teacher salaries may result in a modest structural imbalance in fiscal 2008. Furthermore, voter approval will be required to implement the district's fiscal 2009 plan to increase its maintenance and operations (M&O) tax rate to avoid additional operating deficits. Large existing reserve levels, exceeding three months of operations, mitigate some of these credit concerns. Additionally, favorable prospects for residential and commercial development will aid its enrollment and property tax base, adding to the district's financial flexibility.

Located in Bexar County, the district is a residential area encompassing 21 square miles in southwestern San Antonio, TX. Because of its proximity to the former Kelly and Lackland Air Force bases, many district residents are employed by the military, as well as manufacturing concerns. Total district population is estimated at about 64,000 in 2007. As a result of shifting migration patterns to the northern sectors of Bexar County, enrollment has stagnated at fewer than 10,000 students, but ongoing residential development may lead to modest annual increases. In addition, the recently opened Toyota plant and the planned Texas A&M University campus in adjoining districts may generate additional development within the district.

The district's tax base continues to grow solidly by a compound annual average of more than 9% since fiscal 2001, including a nearly 11% increase in fiscal 2007. Preliminary fiscal 2008 TAV points to a 12% increase. The tax base is characterized by moderate concentration, with the top ten taxpayers accounting for almost 19% of total TAV, led by a shopping mall with almost 6% of TAV. Other top ten taxpayers include a diverse mix of retail, health care, and manufacturing. A growing number of high-technology jobs within the district are the result of aerospace and aviation companies locating to the site of the former Kelly Air Force Base, now operated as the Port of San Antonio.

The district's financial performance has been favorable as evidenced by general fund operating surpluses in five out of the last six fiscal years. Fiscal 2006 operations further added to fund balance reserves, increasing the undesignated fund balance to a strong $20 million or 30.4% of spending. Fiscal 2007 projections point to break-even results, aided by the district's adoption of the optional M&O levy of $0.04 per $100 TAV. The fiscal 2008 budget will use $2 million-$2.5 million of general fund reserves to partially fund pay hikes that will increase starting teacher annual salaries to $43,000. Subsequently, the district plans to seek a roll-back election in fiscal 2009 to authorize an M&O tax rate increase in order to avoid any further fund balance draw downs. Fitch will monitor these future developments and their associated impact on restoring structural balance to the district's finances.

The current issue represents the entirety of the general obligation bond authorization approved by a high 72% of district voters in May 2007 for school repair and renovations plus new support and athletic facilities. Although 72% of the district's debt is supported by state aid, the district's debt burden is high as a percentage of TAV, totaling 4.3%. Likewise, overall debt levels are high at 7.2% of TAV. The principal payout rate remains well below average at 29% in 10 years due to the use of 30-year maturities. Credit concern over the slow payout is mitigated by the concurrent substantial state support for the life of the bonds. In addition, over the next twelve months, the district plans to refund outstanding debt for interest cost savings by restructuring with shortened maturities. Plans for the next bond authorization aren't expected for two to three years.

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