OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Tyler Independent School District, Texas (ISD; the district) unlimited tax bonds (ULTs):

--\$76.8 million ULT refunding bonds, series 2015.

The 'AAA' long-term rating is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. (For more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).

In addition, Fitch assigns an 'AA+' underlying rating to the series 2015 bonds and affirms the 'AA+' rating on the district's \$292.5 million of ULT debt outstanding (pre-refunding; excludes ULT refunding bonds series 2014 not rated by Fitch).

The bonds are expected to price via negotiation the week of April 6, 2015, subject to market conditions. Proceeds will be used to refund a portion of the district's outstanding ULT debt for interest savings.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy of the district, and also carry the Texas PSF bond guaranty.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The district's conservative financial management practices have helped maintain healthy operating reserves despite recent reductions in state funding.

STABLE LOCAL ECONOMY: The district is located in the Tyler metropolitan statistical area (MSA), an east Texas regional commercial hub with notable health care and higher education sectors. The local economy and tax base continue to realize moderate growth and Fitch expects this trend to continue.

CURRENTLY MANAGEABLE DEBT LOAD: District debt levels and carrying costs remain affordable despite a large capital program that is winding down. Future facility needs likely would involve additional borrowing, but taxing capacity is adequate. The payout rate is below average.

RATING SENSITIVITIES

ADEQUATE FINANICAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics including the district's track record of sound operating performance and reserve levels.

CREDIT PROFILE
Tyler ISD is located in Smith County in east Texas, along Interstate 20 between the cities of Dallas, TX and Shreveport, LA. The district serves a population of about 120,000.

SOLID FINANCIAL POSITION
Prudent fiscal management has enabled the district to maintain financial flexibility despite recent challenges of flat enrollment and state funding cuts. The majority of 2012-13 state funding cuts have been restored, enabling the district to boost instructional spending and address various minor capital needs.

Fiscal 2013 results bettered original projections and included a manageable \$2.8 million operating deficit after transfers, the result primarily of an increase in capital expenditures and one-time pay stipend to employees in lieu of raises. Fiscal 2014 operations were essentially balanced, but reserves dipped by \$5.5 million as a result of a transfer from the general fund of maintenance reserves into a newly created special revenue fund. The maintenance reserve benefits the district by reducing borrowing needs and serving as an additional source of operational support if needed.

Reserves remain healthy despite the recent drawdowns and in excess of the district's two months of spending fund balance target. The fiscal 2014 unrestricted general fund balance totaled \$32.9 million or a solid 23% of operating expenditures and transfers out, in excess of the district's target minimum of two months of spending.

The fiscal 2015 budget is balanced and includes a pay increase for hourly workers that is expected to have a minimal impact on the nearly \$139 million spending total. State operational funding totals \$46.7 million (one-third of total general fund revenues), and staff reports between 60%-70% of the \$10 million in fiscal 2012-2013 funding cuts have been restored. Management currently projects a modest operating surplus at fiscal 2015 year-end.

Looking ahead, spending pressures will likely mount with the scheduled opening this fall of three new replacement middle schools and a career/technology center. Likewise, the district will begin contributing 1.5% of required pension contributions (est. \$1.4 million) in fiscal 2016 pursuant to a statutory change. Management anticipates a reduction in some administrative positions (through attrition) will help accommodate the additional outlays. Any increase in the operations tax rate from the current \$1.04 per \$100 of taxable assessed valuation (TAV) would require voter approval, so revenue raising flexibility is very limited.

MODERATE DEBT, LOW PENSION COSTS
Overall debt is midrange at about \$2,750 per capita or 3.7% of market value. The manageable debt levels reflect to a degree the district's ongoing practice of funding vehicles, technology and routine infrastructure costs from available resources.

Voters overwhelmingly approved \$160.5 million of ULT bonds in May 2013 which financed the facilities slated to open this fall. The additional debt did not result in an increase in the district's debt service tax rate, but did slow the pace of amortization to a below-average 39% in 10 years.

The district's pension liabilities are limited to its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS), a cost-sharing multiple-employer plan. The district's annual contribution to TRS is determined by state law. Pension cost represented less than 1% of governmental fund expenditures in fiscal 2014, as plan contribution amounts are principally paid by the state and district employees.

Fitch will continue to monitor the level of state support for school district pension payments, noting the required 1.5% local contributions that have recently been imposed by the state. The district's carrying costs (combined debt, pension and OPEB payments) were affordable at 10.5% of governmental fund spending for fiscal 2014, although that amount will be climbing with the additional district pension contributions.

EAST TEXAS COMMERCIAL/INDUSTRIAL HUB
The district's TAV grew by a compound average rate of 1.6% over the past five years. A small dip in fiscal 2011 has been followed by four years of moderately accelerating growth. Management anticipates near term annual TAV gains of 3% to 5%, which appears reasonable based on recent gains and reported economic activity. The tax base is not overly concentrated, with the top taxpayer comprising 3.7% of the fiscal 2015 total and the 10 largest comprising 10.2% of the total.

Wealth levels approximate those of the state and trend moderately below national averages. The city of Tyler's unemployment rate of 4.4% as of January 2015 is comparable to the state (4.6%) and favorable to the U.S. average (6.1%) for the same period. Largest employers are represented by a mixture of medical, educational, commercial and industrial concerns.

TEXAS SCHOOL FUNDING LITIGATION
For the second time in the past two years a Texas district judge ruled in August 2014 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. The Texas attorney general has appealed the judge's 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.