Fitch Rates Valley View ISD, Texas ULT Rfdg GOs 'AAA' PSF/'A-' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to Valley View Independent School District's (VVISD) approximately $8.2 million unlimited tax refunding bonds, series 2006 based on a guarantee by the Texas Permanent School Fund (PSF) whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch assigns an 'A-' underlying rating to the bonds and affirms the 'A-' underlying rating for VVISD's $31.1 million in outstanding unlimited tax bonds (post refunding). The bonds are scheduled to sell the week of Nov. 27 via negotiation to Estrada Hinojosa & Company Inc. The Rating Outlook is Stable.

The bonds are direct obligations of VVISD, payable from a continuing ad valorem tax levied by VVISD without legal limit as to rate or amount on all the taxable property within VVISD. The bonds are also secured by a guaranty from the PSF. Proceeds will refund a portion of VVISD's outstanding unlimited tax debt for annual interest savings and pay costs of issuance.

The underlying 'A-' rating reflects VVISD's strong financial performance, rapid gains in taxable assessed values (TAV), and significant state support for both debt service and operations. Credit concerns include slow debt amortization, weak tax collections, and debt levels that are expected to climb as a result of increased capacity needs. Located along the Mexican border in the Lower Rio Grande Valley, VVISD has been experiencing dramatic enrollment increases. Despite this pressure, VVISD has managed operations well, maintaining sizeable reserves and operating flexibility.

VVISD is situated in the fast-growing Hidalgo County and primarily serves the city of Pharr. Traditionally an agricultural area, VVISD's close proximity to McAllen and nearby maquiladores or 'twin plants' have led to increased residential development in recent years, which has in turn fueled rapid enrollment expansion approximating 10% annually since fiscal 2001. Student increases are expected to continue at or near this level through at least fiscal 2011, which will require ongoing expansion of district facilities.

Debt ratios are affordable presently, aided by a substantial amount of state support for debt service assistance; these levels likely will rise in the future with additional voted bond authorization. After this offering, VVISD's remaining $3.5 million in authorization is expected to be issued by fiscal 2008. While there are currently no plans to go back to the voters, facility needs may require additional authorization within the next several years. Including state support of approximately 82% of debt service, VVISD's combined direct and overlapping debt levels are 1.8% of TAV and less than $400 per capita; ratios excluding state support are prohibitively higher. Amortization is relatively slow with only 31% of principal maturing in ten years. However, the modest payout is somewhat understandable, given VVISD seeks to limit the tax rate impact and the state does not reduce assistance for extended maturities.

From fiscals 2002-2007 residential development more than doubled within VVISD, helping to push TAV levels upwards at a clip of nearly 15% annually. With several hundred residential lots reportedly either platted or in the development stage, continued healthy TAV gains appear probable in the near-term. As is typical with most border entities, district current tax collections are weak at less than 90%. However, VVISD typically budgets collections of around 85%, and because total collections approximate 100% and state support accounts for the majority (around 80%) of district operating revenues, this concern is somewhat mitigated.

Financial reserves are healthy and operations have typically yielded annual surpluses. From fiscals 2001-2004 VVISD posted net income of at least $1.2 million each year before experiencing an operating deficit of $2.5 million in fiscal 2005. Despite the drawdown, reserves remained strong at the end of the 2005 reporting period, with the unreserved and undesignated general fund portion at nearly 33% of expenditures and transfers out. Also, during fiscals 2004 and 2005, VVISD used general fund monies to make site acquisitions totaling $2.8 million for two new facilities. Preliminary results for fiscal 2006 suggest a further sizeable increase in operating reserves. The fiscal 2007 budget calls for a balanced performance, which should allow VVISD to remain comfortably above its three-month general fund reserve policy.

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