OREANDA-NEWS. Fitch Ratings has affirmed the rating on the following Azle Independent School District, Texas' (the district) unlimited tax (ULT) bonds at 'AA-':

--$38.23 million in outstanding ULT bonds (fully accreted basis).

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited ad valorem property tax pledge. The bonds additionally carry a guarantee from 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 Aug. 5, 2015).

KEY RATING DRIVERS

GOOD FINANCIAL FLEXIBILITY: The district's sound financial position is characterized by solid operating reserves and liquidity that have supported pay-as-you-go spending on facility repairs and renovations.

STABLE TAV; GROWTH PROSPECTS: The tax base is stable overall despite recent erosion of mineral values, which now make up 6.8% of fiscal 2015 taxable assessed valuation (TAV). Fitch expects increased home prices and substantial new construction to stabilize the tax base in the near term despite ongoing exposure to gas price volatility.

STABLE ECONOMY: The district's income trends moderately above state and national averages. Fitch views the district's mid- to long-term prospects favorably given its proximity to the healthy Dallas-Fort Worth area economy.

MODERATE DEBT BURDEN: Fitch expects the district's debt to remain manageable based on current levels and proposed issuance plans.

RATING SENSITIVITIES

SOUND FINANCES; MODERATE DEBT: Deterioration of the district's sound financial management practices and moderate debt profile, although unexpected, would pressure the current rating.

CREDIT PROFILE

Azle Independent School District (ISD) is located primarily in Tarrant County, about 17 miles northwest of downtown Fort Worth with a 2014 population of 38,870.

FORT WORTH AREA COMMUNITY

The largely rural district has transitioned into a bedroom community of Fort Worth (rated 'AA+'/Outlook Stable) over the past decade. Enrollment increases have been comparatively modest due to population growth from retirees. District officials conservatively forecast flat enrollment for budgeting purposes, despite a district demographic study predicting future growth.

Manufacturing and commerce anchor the regional economy. Employment figures are not available at the local level, although Tarrant County continues to register solid job growth. The November 2015 unemployment rate for Tarrant County improved to 4.1% from 4.4% one year prior, which compares favorably to the state-wide (4.5%) and national (4.8%) rates for the same period.

HISTORICALLY STRONG TAX BASE RETURNS TO GROWTH

Fiscal 2015 TAV had growth for the second consecutive year. Mineral value declines of 65% from fiscal 2011 to fiscal 2014 accounted for previous TAV erosion. Mineral values grew 23% in fiscal 2015. The district's top 10 taxpayers make up a moderate 10.6% of fiscal 2015 TAV. The largest single taxpayer, XTO Energy Inc. accounts for 3.5% of TAV.

Budget exposure to TAV changes is mitigated by the state's target revenue funding system that adjusts state aid for variations in local revenues.

SOUND FINANCIAL POSITION

After five years of flat to declining revenues, the district has seen consecutive years of revenue growth in the last two fiscal years. Responding to the challenges of relatively flat enrollment and state funding cuts, the district had reduced its costs through attrition, a salary freeze and discretionary spending cuts. Enrollment trends have been mixed in recent years, but a district demographic study forecasts more than 2% annual growth for the next five years. Faculty and staff recently were given a raise to bring compensation more in line with regional averages.

The fiscal 2015 unrestricted general fund balance of $15 million represents a strong 33.6% of spending and transfers out despite consecutive years of fund balance use, mainly for one-time purposes. The district achieved a $378,000 surplus in fiscal 2015.

Fiscal 2016 performance is trending favorably to the original budget. Officials now project higher than budgeted enrollment and breakeven or modestly positive results.

MANAGEABLE DEBT PROFILE

Azle ISD's debt profile is a credit positive. The district's overall debt is a low 2.2% of market value and amortization is moderate at 45.6% in 10 years. Annual debt service represents a 6% of fiscal 2015 governmental spending. The district plans to hold a roughly $60 million bond election in November for school construction and expansion projects. This proposed issuance would bring the district's overall debt burden to a still moderate 4.4% of fiscal 2015 market value if issued at once.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal 2015. Legislative changes in 2013 increased the state's annual contributions.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $5 million, with fiduciary assets covering 83.25% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on Fitch's more conservative 7% investment rate assumption). The NPL represents 0.2% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions and OPEB are low at 7.5% of fiscal 2015 governmental spending.

TEXAS SCHOOL DISTRICT LITIGATION

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 and was the second such ruling in the past two years, 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.

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 would likely follow with changes intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.