Fitch Upgrades Texas State Univ System Revenue Bonds to 'AA-'.

Business Editors

AUSTIN, Texas--(BUSINESS WIRE)--Nov. 6, 2003

The rating on approximately $127.5 million in outstanding Board of Regents, Texas State University System (TSUS or the system) revenue financing system (RFS) revenue bonds, series 1998, 1998A, and 1998B is upgraded to 'AA-' from 'A+.' The Rating Outlook is Stable.

The rating upgrade reflects consistently favorable financial performance and liquidity levels, increasing enrollment, and a multi-campus system serving students throughout the state. Debt load is above average, although the state has historically provided support on a significant portion of debt service. While TSUS will face pressures from the combination of less state funding and increased student demand, comfort is provided by the system's conservative and tenured management, positive operating results, and strong anticipated growth in the number of high school students in Texas over the next decade.

Financial performance has been solid, with operating margins ranging from 7.5% to over 11% between fiscal years 1999-01. Break-even operations are typical for public institutions. In addition, liquidity position is good, with available funds covering just over six-months of operations in fiscal 2001.

A change in accounting reporting requirements (GASB 35) for fiscal 2002 has altered Fitch's calculation of operating margin. The ratio should not be directly compared to prior year results. The operating margin in fiscal 2002 was a favorable 7.9%. Liquidity levels remain strong.

State appropriations account for approximately 45% of system revenues. Similar to other public institutions in the state, general revenue appropriations have been reduced, beginning in fiscal 2003. To offset reduced state support, TSUS has made expenditure cuts, none of which resulted in the elimination of academic programs.

Although state appropriations for the current 2004 and 2005 biennium budget have been reduced, continued enrollment and semester credit hour growth coupled with increases in the designated tuition and other fees is projected to offset legislative funding shortfalls. Recently approved tuition de-regulation is expected to have a minimal impact on revenues, given the price sensitivity of the TSUS student base. However, increasing tuition rates at the other Texas university systems, most notably at the flagship institutions, may benefit TSUS enrollment.

TSUS has recorded nearly a 17% increase in headcount enrollment since fall 1997. Most of the significant annual gains were recorded beginning in fall 2000, partially reflecting the downturn in the Texas economy. Continued enrollment growth is projected, although slower rates are anticipated for the system's west Texas campuses. In addition, demographers project an 11% increase in the number of high school graduates in the state through 2011.

A credit risk is the substantial amount of debt outstanding. As of Sept. 1, 2003, TSUS had $364.1 million in RFS bonds (Fitch was not asked to rate the series 2000, 2001, 2002, and 2003 bonds). Debt ratios are above average. However, the state has historically assumed a significant share of debt service support (57%). In addition to operating support, the state also reduced debt service support. System-wide, this amounted to just over $9.5 million in reduced support for the 2004-05 biennium. Currently, there are no plans for additional borrowing. Fitch believes TSUS debt burden is manageable, given the size of the system, state support for a sizable share of RFS debt, and historical financial performance.

TSUS, created in 1911, is the oldest university system in Texas. The system includes nine component institutions located throughout the state. The largest institution, Texas State University -- San Marcos, accounts for nearly 40% of total system enrollment of 66,000. Approximately 95% of TSUS students hail from Texas.