Fitch Rates South San Antonio ISD, Texas GOs 'AAA' PSF/'A' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to $40.5 million South San Antonio Independent School District (the district), TX unlimited tax school building bonds, series 2005. The rating is based on a guarantee provided by the Texas Permanent School Fund, whose insurer financial strength is rated 'AAA' by Fitch. Additionally, Fitch assigns an underlying rating of 'A' to the new issue and affirms the 'A' rating on the district's $81.1 million outstanding general obligation (GO) bonds. The bonds are scheduled to sell on Aug. 2 via negotiation through a syndicate led by JP Morgan. 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 to fund new roofs, HVAC, science labs, and technology infrastructure and to pay costs of issuance.

The 'A' underlying rating reflects the district's experienced management, historically healthy general fund reserve levels, growing taxable values, substantial state support for operations and debt service, and the stabilization of its enrollment base. Offsetting risks include the above-average direct debt as a percentage of taxable assessed valuation (TAV), moderate tax base concentration, below-average principal payout rate, and lack of operating tax margin. Fiscal 2005 is the district's third consecutive year at the $1.50 per $100 of TAV state cap for operations. The district strategically adopted the maximum tax rate for operations in fiscal 2003 to maximize state aid and add to its already solid financial reserves. Ongoing residential and commercial development should aid enrollment and property tax base growth. The district expects to see general fund reserves decline by about $3.5 million for fiscal 2005 (unaudited) and is budgeting further drawdowns for fiscal 2006. Preserving adequate financial reserves in subsequent fiscal years is key to maintaining credit quality.

The district's financial performance stabilized after resolving a structural imbalance that led to substantial operating deficits in fiscal years 1999 and 2000. A subsequent review of districtwide staffing patterns, consolidation of department and campus level positions, and enrollment increases led to general fund operating surpluses in the following three fiscal periods. Fiscal 2004 posted a $1.8 million general fund surplus resulting in undesignated reserves of over $18 million, or about 28% of spending, in excess of the district's management goal of 25%. However, unaudited fiscal 2005 results point to a $3.5 million drawdown of general fund reserves to a still healthy 28.6% of spending, due to a modest decline in enrollment and the intentional drawdown of the cafeteria subfund. The fiscal 2006 budget indicates an additional operating deficit of more than $5 million. District officials are taking proactive measures to reduce the budgeted drawdown, including requiring campuses to create formalized attendance plans for maximizing the average daily attendance, freezing purchase orders after a certain date, and closely monitoring student-teacher ratios. The fiscal 2006 budget is conservatively based on average daily attendance figures below those which could be achieved. Continued depletion of reserve levels could have negative rating implications.

Located in Bexar County, the district is a residential area encompassing 21 square miles in southwestern San Antonio. Due to its proximity to the former Kelly and Lackland Air Force bases, many district residents are employed by the military, as well as by manufacturing concerns. Total district population is estimated at around 64,000. Due to shifting migration patterns to the northern sectors of Bexar County, enrollment had experienced modest declines since 1990, but ongoing residential development has stabilized its enrollment base at around 10,000. The district's first major residential development in 40 years, Lago Vista, will total 1,000 homes upon completion. Two other residential projects will add another 620 homes and are expected to draw additional retail activity beyond the district's main commercial corridor. In addition, the new Toyota plant and the proposed 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 rate of over 7% since fiscal 1999, including a 10% increase in fiscal 2005. Its tax base is characterized by moderate concentration, with the district's top 10 taxpayers accounting for almost one-quarter of total TAV, led by a shopping mall with almost 6% of TAV. Other top 10 taxpayers include a diverse mix of retail, health care, and manufacturing. A growing number of high-tech jobs within the district are the result of aerospace and aviation companies locating to the site of the former Kelly Air Force Base.

The current issue represents the entirety of the GO bonding authorization approved by district voters in June 2004 for new roofs, HVAC, science labs, and technology infrastructure. In addition, two voter-approved bond authorizations for $35 million in 1999 and 2002 have been issued in their entirety, tripling the district's debt since 1998. As a result, the district's overall debt as a percentage of TAV has risen to the high level of 10% (after adjusting for state support), but remains more modest on a per capita basis at $1,219. Approximately 77% of the district's outstanding debt is supported by the state due to the district's low property wealth per student. The principal payout rate remains well below average at about 30% 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.

Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com'. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.