Fitch Rates Ysleta ISD (Texas) $103MM GOs 'AAA' PSF / 'A+' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns a rating of 'AAA' to Ysleta Independent School District, TX (the district) $103 million unlimited tax school building bonds, series 2006, based on a guaranty by the Texas Permanent School Fund (PSF), whose insurer financial strength (IFS) is rated 'AAA' by Fitch. Additionally, Fitch assigns an underlying 'A+' rating on the series 2006 bonds and affirms the 'A+' rating on the district's $171.5 million in outstanding unlimited tax bonds. The Rating Outlook is Stable.

The bonds are scheduled to sell via negotiation to a syndicate led by Bear, Stearns & Co. Inc. on August 23. 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 fund facility improvements and site acquisitions.

The district's rating of 'A+' is based on its adequate financial reserves, diverse tax base, and strong voter support associated with the improved governance by the district's board of trustees. Offsetting risks include declining reserves with the last two years operating with moderate deficits, increasing debt ratios with a large capital improvement plan resulting from accumulated deferred maintenance needs, a stagnant enrollment base and modest tax assessed valuation growth. However, additional state support for debt issued last year will reduce the capital plan's impact on district residents. Officials are projecting balanced operations for the close of fiscal 2006, and budgeting an improvement in reserve levels for fiscal 2007 through the use of one-time revenues. Achieving structural balance and maintaining appropriate balance levels remains an important consideration to the current rating level.

Located in El Paso County, the district is actually split into two separate areas -- one along the Texas-New Mexico border and another along the U.S.-Mexico border in the central portion of the county. Covering 66 square miles, the district's enrollment totals over 46,000 students, making it one of the state's largest urban school districts. Although portions of the district are growing in enrollment, others are declining, causing total enrollment to remain flat in recent years. Nearly built out, there is no residential development in the southern half of the district, although the sparsely populated northern half may benefit modestly from the large infusion of troops to Ft. Bliss as a result of military base realignment.

The district posted moderate deficits due to one time capital outlays in each of the last two fiscal years, drawing down unreserved, undesignated fund balance reserve levels from nearly $50 million in fiscal 2003 to almost $35 million in fiscal 2005, one day shy of management's goal of 45 days operating expenditures. Due to its modestly declining enrollment base (which drives state aid allocations), the district has embarked on a cost containment strategy cutting over 85 positions mostly through attrition expecting to end the current fiscal year with level results. However rather than raising the O&M tax rate above the compression rate allowable under the new state funding formula, the board has chosen to utilize one-time revenues from its self-funded worker's comp and health insurance reserve funds to increase the fund balance. Achieving structural balance based on recurring revenues remains a key rating consideration.

The proposed fiscal 2007 budget is expected to generate a $5 million surplus to restore a $40 million unreserved, undesignated fund balance. The proposed budget was prepared based on level enrollment, a compressed rate of $1.33 per $100 TAV, continued cost containment targets and includes one-time transfers from the district's health and workers compensation fund reserves.

The Texas Legislature recently passed property tax relief measures for school districts. The legislation provides for mandatory reductions in the local operations tax rates of 11% for fiscal 2007 and a cumulative reduction of 33% by fiscal 2008. To offset the revenue loss, the state will increase its share of funding to local school districts, including Ysleta ISD, so that the measures will be revenue-neutral.

Due to problematic governance, an administrative master was assigned by the Texas Education Agency in August 2000 to oversee the operations of the district. A near complete change in board members has resulted in a unified body of trustees and improved financial reserve levels. After the district's last general obligation bond authorization in 1982, the district used substantial amounts of its current resources to fund its capital needs, including the construction of several new schools. However, after reaching its O&M tax rate cap in fiscal 2000, this program was scaled down, resulting in substantial deferred maintenance needs. A total of $500 million in capital needs was identified by a recent facility needs study, leading the board to call the district's first bond election in over 20 years. In January 2004, district voters approved a $250 million bond program, most of which will fund the construction and refurbishment of schools. The current offering represents the final installment of the bond package. Following the successful implementation of the bond program, the district may request additional voter authorization to complete the capital needs identified by the study.

Even with state support for 70% of outstanding general obligation and lease revenue debt, direct debt levels total an above-average 3.4% of taxable assessed valuation (TAV), although the burden on a per capita basis is more moderate at $789. Principal amortization, including lease revenue debt and maintenance tax notes, has declined to a below average 38% in ten years. Although a large increase of 29 cents per $100 TAV was proposed to the voters in 2004, the entire bond program is projected to be implemented with a significantly lower impact of only a $0.04 cent increase in levy assuming no additional state funding for this issuance.

The district's tax base growth has been moderate, increasing by a compound annual average of 4.1% since fiscal 2001. Tax base concentration is modest as the district's top 10 taxpayers comprise less than 5% of TAV. Taxable values per capita, totaling about $23,000, are expectedly low for a district classified as property-poor, enabling it to receive substantial state aid for both, operations and debt service.

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