Fitch Affirms Frisco ISD, Texas ULT Bonds at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the following outstanding bonds for Frisco Independent School District, Texas (the district):

--$687 million unlimited tax (ULT) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax pledge against all taxable property within the district, with certain series further secured by the PSF bond guarantee program. For more information on the Texas PSF see Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable, dated Sept. 4, 2014 and available at www.fitchratings.com.

KEY RATING DRIVERS

WELL-MANAGED FINANCES: The district's financial profile is characterized by conservative budgeting, solid financial performance, and ample reserves.

RAPID ENROLLMENT GROWTH: The district has seen significant enrollment growth, about 200% since 2005, as residential growth expanded northward from Dallas, making the district one of the fastest growing in Texas.

HIGH DEBT LEVELS: District debt levels are high and expected to remain so given ongoing enrollment-driven facility requirements. Carrying costs, including annual debt service, pension and other post-employment benefits (OPEB), are manageable.

GOOD ECONOMIC INDICATORS: Local unemployment has been declining, and remains below state and national rates. Wealth and income levels are well above comparable state and national averages. The district's taxable assessed value has experienced good annual growth in recent years, with continued growth expected in the near term.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCES WHILE ADDRESSING GROWTH-RELATED NEEDS: The rating is sensitive to shifts in the district's management of finances as it addresses capital and operational needs associated with continued strong enrollment growth. The current rating assumes maintenance of a good financial profile, including continued ability to affordably address capital needs without material diminishment of reserves.

CREDIT PROFILE

The district encompasses 75 square miles in Collin and Denton Counties, about 20 miles north of Dallas, and includes the city of Frisco as well as portions of McKinney, Little Elm, Hackberry, and Plano. Population and enrollment growth have been very strong. Enrollment, about 46,000 in fiscal 2014, is estimated by the district's demographers to grow to 65,000 by 2020, eventually reaching 80,000 over the next several years.

GOOD ECONOMIC INDICATORS

The district's location and major transportation corridors provide access to Dallas and nearby Plano employment markets. Extensive residential development drove strong tax base gains averaging over 15% annually in the five years leading up to fiscal 2011. TAV declined by 1.8% in fiscal 2011 before recovering with 3.7% and 5.2% gains in fiscal years 2012 and 2013, respectively. Stronger growth was experienced in fiscal years 2014 (9.0%) and 2015 (14.6%).

The district expects continued TAV growth, which Fitch views as reasonable given ongoing development activities. These include continued residential construction at the Phillips Creek Ranch and Lawler Park developments, a planned new Toyota headquarters, a new Dallas Cowboys headquarters under construction, and continued commercial development near the North Dallas Toll Way. The district's tax base is diverse, without taxpayer or sector concentration.

Area unemployment is below average. The city of Frisco's unemployment rate declined to 3.7% as of November 2014, vs. 4.4% a year prior, and remains below comparable state (4.6%) and national (5.5%) rates. Income and wealth indicators are well above average. District per capita money income is 153% of the state level and 141% of the national level.

SOLID FINANCIAL PERFORMANCE

District financial performance in recent years has been positive, with operating surpluses that built up reserves to solid levels. The fiscal 2014 general fund unrestricted balance was $84.9 million or a sound 25% of expenditures and transfers out. This represented an increase from $72.5 million or 22.5% in fiscal 2013. Officials anticipate a modest fiscal 2015 surplus of about $4 million which would further increase reserve levels.

The fiscal 2015 budget reflects a maintenance and operation (M&O) tax rate unchanged from the prior year ($1.04 per $100 of TAV). Officials do not anticipate seeking additional M&O rate adjustments through a tax ratification election in the immediate future.

HIGH DEBT LEVELS; MANAGEABLE CARRYING COSTS

The district's overall debt levels remain high, reflecting capital needs associated with strong enrollment growth. Fiscal 2014 debt was about $11,733 per capita and 9.4% of market value. Debt service costs as a percentage of governmental spending in fiscal 2014 were 14.2%. Amortization is below average at 25% in 10 years.

Fitch expects debt levels to remain high as additional debt issuance is planned. District voters approved a bond proposal totalling $775 million in May 2014 to fund improvements and facility needs. Initial issuance under the authorization ($170 million) occurred in November 2014. Additional issuance under the authorization is planned at about $150 million per year. The district has used a moderate amount of capital appreciation bonds (CABs). Fitch would view negatively an increase in the proportion of CABs to total debt. The district does not plan on issuing additional CABs under the current authorization.

The district's fiscal 2015 interest and sinking (I&S) fund tax rate of $.42 per $100 of TAV provides modest capacity in relation to the statutory cap of $.50 for new debt issuance and has benefited from TAV growth and use of debt service fund and other available revenues to maintain the current rate. The district does not expect the I&S tax rate to reach the statutory cap for at least two years, assuming continued solid TAV growth. Fitch will monitor the district's debt and tax rate position for any additional stress. The district's ability to adequately address classroom capacity needs with shrinking debt flexibility while maintaining a stable debt and financial profile will be a key credit consideration.

The district contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing, multiple employer defined benefit pension plan. Other-post employment benefits (OPEB) are also provided through TRS. Combined pension and OPEB contributions, which are set by state law, totaled $6.4 million in fiscal 2014, or a low 1% of governmental spending. Offsetting the low level of these costs is the high level of debt service, despite slow amortization. On a combined basis, overall fiscal 2014 carrying costs including pension, OPEB and debt service as a percentage of governmental spending are manageable at about 15.2%.

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. Fitch expects the state will appeal the latest ruling to the state supreme court. If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would view positively any changes that include additional funding for schools and more local discretion over tax rates.

Additional information is available at 'www.fitchratings.com.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978594

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