Fitch Rates Aledo ISD, TX's ULT Bonds 'AAA' PSF/'AA' Underlying; Outlook Stable

  Fitch Rates Aledo ISD, TX's ULT Bonds 'AAA' PSF/'AA' Underlying; Outlook
  Stable

Business Wire

AUSTIN, Texas -- April 4, 2013

Fitch Ratings has assigned an 'AAA' rating to the following Aledo Independent
School District, Texas' (the district) unlimited tax (ULT) bonds:

--$8.9 million in ULT refunding bonds, series 2013-A;
--$16.9 million in ULT refunding bonds, series 2013-B.

The 'AAA' long-term rating on the bonds is based on a guaranty provided by the
Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA'
by Fitch.

The bonds are scheduled for negotiated sale the week of April 8. Proceeds will
be used to refund a portion of the district's outstanding ULT debt for
interest savings.

Fitch also assigns an 'AA' underlying rating to the bonds and affirms the 'AA'
underlying rating on the district's $114.7 million in outstanding ULT bonds.

In addition, the sale of the Aledo ISD ULT refunding bonds series 2005-C was
delayed. The bonds were sold as series 2006 (see the Oct. 7, 2005 rating
commentary 'Fitch Rates Aledo ISD, Texas, ULT Bonds 'AAA' PSF/'A-'
Underlying'). The correct rating history is now reflected on Fitch's web site
at www.fitchratings.com.

The Rating Outlook is Stable.

SECURITY:

An unlimited ad valorem tax levied against all taxable property within the
district's boundaries. The bonds are also secured by a guaranty of the Texas
PSF.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: A string of operating surpluses after transfers has
preserved strong reserve and liquidity levels. The district has successfully
managed pressure from state budget cuts, in part through a tax rate
restructuring.

GOOD SOCIO-ECONOMIC PROFILE: The district benefits from its proximity to the
broad employment base of Fort Worth. Area employment indicators are positive
and wealth metrics are above average.

TAX BASE CONCENTRATION & VOLATILITY: Top taxpayers are heavily concentrated in
the oil and gas industry due to the district's location over workable portions
of the Barnett Shale natural gas play. Taxable assessed valuation (TAV)
remains soft due to declining oil/gas valuations.

WEAK DEBT PROFILE: Overall debt ratios and annual debt carrying costs are high
as a result of the capital pressures from a previously rapid pace of
enrollment growth. Amortization is slow, in part due to the use of capital
appreciation bonds (CABs).

LIMITED PENSION & OPEB LIABILITIES: Employee pensions and other
post-employment benefits (OPEB) are primarily a burden of the state, resulting
in very low annual retiree costs for the district.

RATING SENSITIVITIES:

MATERIAL DECLINE IN FISCAL CUSHION: With regard to the 'AA' underlying rating,
Fitch views the district's strong level of operating reserves as a key offset
to the high debt levels and artificially low debt service tax rate.

WORSENING DEBT PROFILE: Sustained TAV weakness and/or further debt issuance
without corresponding TAV growth could also pressure the underlying rating.

CREDIT PROFILE:

Aledo Independent School District (ISD) is located primarily in Parker County
and includes the city of Aledo, a small, historically agricultural center.
Aledo is located 19 miles west of Fort Worth (GOs rated 'AA+' by Fitch) near
Interstate Highway 20.

AFFLUENT RESOURCE BASE LOCATED NEAR BROAD AND STABLE FORT WORTH MSA

Aledo continues to transition from an agriculture-based economy to an affluent
bedroom community of Fort Worth. Numerous high-end residential developments
have been completed in recent years. As a result, market value per capita is
above average at $154,000 in fiscal 2013. Residents are well-educated and
affluent; the median household income in Parker County is 125% of state and
120% of U.S. income, respectively.

Residents benefit from proximity to the broad employment base and stable
economy of Fort Worth, and area employment and wealth levels are a credit
positive. Employment growth in Parker County continues, expanding 2.7% for the
12-month period ending December 2012 and improving the unemployment rate to a
relatively low 5.4% from 6.3%. The county's unemployment rate is lower than
MSA, state, and national figures.

TAX BASE AFFECTED BY MINERAL VALUATIONS & RESIDENTIAL DEVELOPMENT

The district's tax base is primarily residential with some oil and gas
exposure due to its location over parts of the Barnett Shale natural gas
field. Recent declines in TAV have been due to weakness in oil/gas values,
which made up 19% of fiscal 2011 TAV but fell to 10% of fiscal 2013 TAV due to
decreased drilling activity and weak natural gas prices. The impact to net TAV
was a 6% decline in fiscal 2012 and marginal 0.6% contraction in fiscal 2013.

Officials expect a stable-to-positive TAV trend in the next few years, with
further oil/gas contraction expected to be offset by gains in residential
values. District residential valuations have remained positive and area home
prices according to Zillow indicate a 6.7% year-over-year gain for Aledo in
February 2013. Over the near term, TAV growth may accelerate as construction
of a very large residential subdivision (Walsh Tarlton) commences.

Top taxpayer and industry concentration is a concern. The top 10 taxpayers
comprised an above-average 14.7% of fiscal 2013 TAV, and nearly all of the top
10 are oil and gas related companies. However, the large residential component
of the tax base, stable home valuations, and prospects for continuing
residential development help mitigate the concern of concentration risk.

Historical enrollment gains averaged just over 4% annually from 2005-2009 but
slowed to less than 1% in recent years as housing construction stalled.
Management expects this lower level of growth to continue before picking back
up in 2015 as the housing market strengthens; the district retains ample room
for development.

POSITIVE OPERATING MARGINS BOOSTED BY CHANGE IN TAX RATE STRUCTURE

The district has generated operating surpluses in five of the last six fiscal
years. Given the relatively high property tax wealth per student, local
property taxes are the main source of general fund revenues. The district
swapped a portion of its operating and debt service tax rates in fiscal 2011
($0.13 or 9% of the total tax rate) with voter-approval, increasing the
operating tax rate and decreasing the debt service tax rate by an equivalent
amount to yield enhanced state and local revenues for operations, but an
annual debt service fund shortfall of just under $3 million. To date, this
shortfall has been made whole by use of debt service fund balance.

Fitch views the use of this tax rate structure with concern but notes the debt
service tax rate can be raised as needed (without voter approval) - thereby
easing pressure on the general fund - and the tax rate swap could be reversed,
if necessary.

STRONG FISCAL CUSHION MAINTAINED DESPITE STATE FUNDING CUTS

Net fiscal 2012 results across the general and debt service funds were
essentially break-even, with the $2.8 million general fund surplus after
transfers equal to the $2.8 million deficit in the debt service fund.
Management absorbed a $2.2 million state funding cut (6% of general fund
revenues) through spending reductions and use of one-time federal aid totaling
about $700,000. The fiscal 2012 unrestricted fund balance equaled $19.7
million or nearly 57% of operating expenditures and year-end cash/investment
balances improved to 17 times coverage of current liabilities.

The fiscal 2013 $36.5 million operating budget forecasts a $1.8 million
operating deficit after transfers (equal to 5% of spending) due to additional
state funding cuts, increased staffing needs, and cessation of one-time
federal aid. However Fitch notes that past budgets have been quite
conservative and believes year-end results will be better than forecast. The
deficit includes a $1 million transfer out for debt service, which, together
with $1.8 million of debt service fund balance and $6 million of debt service
property taxes, will be used to meet the $8.8 million debt service payment in
fiscal 2013. The year-end cash balances in the debt service fund would fall to
about $500,000, which is the district's informal fund balance floor for this
fund.

Going forward, the district plans to incrementally raise the tax rate and use
some general fund balance for debt service over the next few years; the use of
general fund balance will be driven by the magnitude of the tax rate increase
the board determines in fiscal 2014. The district does not have a formal fund
balance target, but Fitch views the presence of a significant fiscal cushion
as a key credit offset to the high debt and concentrated taxpayer-base risk
factors.

TEXAS SCHOOL DISTRICT LITIGATION

In February a district judge ruled that the state's school finance system is
unconstitutional. The ruling, which was in response to a consolidation of six
lawsuits representing 75% of Texas school children, found the system
'inefficient, inequitable, and unsuitable and arbitrarily funds districts at
different levels...' The judge also cited inadequate funding as a
constitutional flaw in the current system.

Fitch will monitor the appeal process of the suit, which may go directly to
the state supreme court. If the supreme court upholds the lower court ruling,
the state legislature will be directed to make changes to the system to
restore its constitutionality. Fitch would consider any changes that include
additional funding for schools a positive credit consideration.

DEBT PROFILE A CREDIT WEAKNESS, BUT NEAR-TERM DEBT PLANS LIMITED

Overall debt levels are very high, particularly on a per capita basis, at
$9,878. This debt calculation includes the accreted interest of CABs. The
annual debt burden on the budget is also high at 18% of fiscal 2012
governmental fund spending and rises to 20% of spending in fiscal 2013. Annual
debt service is level but the pace of amortization is slow, which also
reflects use of CABs to minimize the tax rate impact on current taxpayers.

The district has approximately $6 million in remaining but unissued
authorization from a 2008 bond election, but has no definite plans to issue
the bonds. The recent slowdown in enrollment has provided the district a
reprieve from building pressures, which Fitch believes will prevent increases
to key debt ratios over the near term. The district's current debt service tax
rate of roughly $0.25 per $100 of TAV is well below the $0.50 statutory cap
for new issuance approval, due in large part to the recent tax rate swap.

Pension liabilities are not a credit pressure. The district contributes to the
state's Teacher Retirement System (TRS), a cost-sharing multiple-employer
plan, and also provides other post-employment benefits (OPEB) through TRS.
Combined pension and OPEB spending by the district was less than 1% of fiscal
2012 governmental fund spending.

Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price
Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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