OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Northwest Independent School District, Texas' unlimited tax (ULT) bonds:

--$46.5 million ULT school refunding bonds, series 2016.

The 'AAA' long-term rating for 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 Feb. 22nd. Proceeds will be used to redeem portions of the district's outstanding debt for interest savings.

Fitch has also assigned an 'AA' underlying rating to the bonds and affirmed the 'AA' underlying rating on the following outstanding bonds (pre-refunding):

--$751.1 million ULT bonds.

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 guarantee (for more information on the Texas PSF see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Sept. 4, 2014).

KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: General fund reserves and liquidity remain solid, maximizing the district's financial flexibility. Management's sound and proactive fiscal practices have historically enabled annual operating surpluses despite a trend of rapid enrollment growth.

GROWING ECONOMY NEAR DALLAS-FORT WORTH: The district benefits from its proximity to the employment base of the Dallas-Fort Worth (DFW) metro area, as well as its location near the Barnett Shale natural gas field. Wealth and employment indices exceed state and national averages.

TAV RESTORED: Residential and commercial development has returned taxable assessed valuation (TAV) to peak levels after modest losses in previous years from low natural gas prices. The district's growth prospects are positive given the availability and affordability of land.

HIGH DEBT BURDEN: Capital needs from rapidly growing enrollment will keep debt levels high over the near- to mid-term. The fixed cost burden is tempered in part by the district's overall financial flexibility, some remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new debt, and limited pension and other post-employment benefit (OPEB) liabilities.

RATING SENSITIVITIES
DETERIORATION OF FINANCIAL CUSHION: The district's rating is sensitive to a material deterioration of solid reserve levels that provide ample financial flexibility in a high growth environment.

CREDIT PROFILE
The district is located in the northwest part of the DFW metropolitan area and encompasses a large 232 square miles that include 16 rural communities in Denton, Tarrant, and Wise counties. Population and enrollment growth have been rapid since 2000 spurred by the availability of affordable land and location within the broad DFW metro. Median household income is well in excess of regional, state, and national averages, and the county unemployment rate has fallen to a low 3.2% as of December 2015 compared to the state (4.2%) and nation (5%).

The district typically adds between 1,000-1,500 new students per year, bringing total enrollment for the current academic year to almost 21,000. Annual enrollment gains have been in line with demographic studies that project steady increases, and the district anticipates 5% growth through fiscal 2021.

FINANCIAL PROFILE A CREDIT POSITIVE
Financial performance has been strong historically, characterized by operating surpluses, solid reserves, and ample liquidity. Sound management has helped to navigate the operating pressures associated with rapid enrollment growth, changes in the state funding formula, and cuts to state funding.

Audited fiscal 2015 results were better than the budgeted $1.8 million deficit, ending the year instead with a $1.8 million operating surplus after transfers. Unrestricted general fund reserves at fiscal 2015 year-end rose to a high $73.4 million or 45.7% of spending, well above the district's informal target of 33%. General fund liquidity also remained solid at nearly $100.2 million, or about seven months of spending.

Management reports enrollment slightly exceeding budgeted figures for fiscal 2016, providing the district with additional state program revenues. The revenue will likely exceed the instructional cost of the additional students, lowering the budgeted deficit of $7.5 million to $6 million, or 3.4% of general fund spending.

UNCERTAINTY SURROUNDING STATE FUNDING
The district's current financial forecast projects annual operating gaps that grow to a substantial $21.3 million (11% of projected revenue) in fiscal 2020 due to the expiration of a state tax relief program. While the forecasted imbalance is material, the district has also built up very high reserves in anticipation of this funding uncertainty. Given management's history of conservative budgeting practices and prudent financial management, Fitch believes the district will make necessary expenditure adjustments in order to preserve its strong financial position in the long term.

STRONG RESIDENTIAL AND COMMERICAL GROWTH
The district's tax base has become less concentrated in mineral values, which comprised just 7.9% of fiscal 2016 TAV compared to a much higher 22% in fiscal 2011. Diversification in the tax base is a result of strong residential and commercial growth that mitigated losses in TAV caused by several years of low natural gas prices. Modest annual average TAV declines of just 2% over fiscals 2011-2014 were more than restored in fiscal 2015 with 13% growth and another 7% in fiscal 2016. The district projects similar growth of 7.5% annually through fiscal 2021. Fitch views the near-term growth assumptions as optimistic but believes continued residential and commercial development will add to TAV in coming years.

Top 10 taxpayer concentration is down slightly but remains elevated at 17.7% in fiscal 2016, led by Devon Energy Corp. at 6% (Issuer Default Rating 'BBB+'/Outlook Stable). Devon Energy has held the place of top taxpayer since 2002, and the Barnett Shale accounts for approximately a third of the firm's overall production from a geographic perspective. While TAV losses pose minimal operational risk given the current school funding formula, TAV declines could apply pressure to the district's already high debt profile and capital plans.

HIGH DEBT LEVELS
Debt levels have come down in recent years but remain high at $8,742 per capita and 6.2% of market value. Inclusive of this refunding, the last in a series of four, management has reduced total debt service by $62 million. Principal amortization is slow with about 37% retired in 10 years.

The district's debt profile is primarily comprised of fixed-rate debt with some use of capital appreciation bonds and a low amount (2% of outstanding principal) of variable rate bonds. While the high debt burden is a credit concern, Fitch notes that the fixed cost burden is tempered in part by the district's overall financial flexibility, some remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new debt, and limited pension and OPEB liabilities.

The district has $100 million in unissued but authorized debt from the 2008 and 2012 referendum, and management reports it is undergoing a comprehensive internal review of capital needs and respective funding sources. Management has made a commitment to voters to maintain the debt service tax rate at the current $0.4125 throughout the issuance of the authorized debt, which was raised from $0.335 in fiscal 2014. Fitch will continue to monitor the district's ability to address capital pressures in relation to its tax base and budgetary flexibility as it implements its growth-related capital plan.

LIMITED PENSION/OPEB OBLIGATIONS
The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using Fitch's more conservative 7% return assumption. Contributions are determined by state statute, rather than actuarially, and historically have fallen short of the actuarial level. Recent reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time.

The state assumes the majority of TRS' employer contributions and net pension liability on behalf of school districts, except for small amounts which state statute requires districts to assume. Like all Texas school districts, the district is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts -- as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015.

The district's proportionate share of the system's net pension liability represents a manageable .2% of fiscal 2015 market value, and the district's contributions were limited to $506,000 in fiscal 2015. Carrying costs for debt service, pensions and OPEB are moderate at 15.5% of fiscal year 2015 governmental spending.

TEXAS SCHOOL FUNDING 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.