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

Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) guarantee and an 'AA' underlying rating to the following Lubbock-Cooper Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--$78.1 million ULT refunding bonds series 2015.

The bonds are expected to be sold via negotiation the week of March 2. Proceeds from the bonds will refund a portion of the district's outstanding debt for interest cost savings.

Fitch also affirms the 'AA' underlying rating on the district's $87.4 million in outstanding ULT bonds (pre-refunding):

--$845,000 in ULT tax school building and refunding bonds series 2006;

--$79.5 million in ULT tax school building bonds series 2009 and 2010;

--$7 million in ULT refunding bonds series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and series 2006, 2010, and 2015 are further secured by the Texas 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).

KEY RATING DRIVERS

HIGH DEBT BURDEN: Already high debt ratios have increased subsequent to a new money issuance last year for the construction and equipment of school buildings. Amortization is very slow and the district's ability to issue additional debt is dependent upon tax base growth given their current I&S rate of $0.50.

GROWTH PRESSURING OPERATIONS: The district has maintained adequate reserve levels despite recent net operating deficits driven by cost pressures from enrollment growth and additional district campuses.

FAVORABLE ECONOMIC CONDITIONS: The district benefits from its proximity to the larger Lubbock economy and employment base, which fared well during the recession. Tax base and enrollment have shown strong growth in recent years and continued tax base expansion is expected in the near term given residential development underway. Income metrics are well above state and national averages.

RATING SENSITIVITIES

DEBT CAPACITY: The district is sensitive to a contraction in the tax base which would further pressure the district's ability to address capital needs through debt issuance. The Stable Outlook assumes no further bond-funded capital needs beyond the current authorization.

RETURN TO STRUCTURAL BALANCE: Failure to regain structural balance and maintain adequate financial reserves in the current high growth environment could put negative pressure on the rating.

CREDIT PROFILE

The district has a population of 23,193 and serves the southern portion of the city of Lubbock (GO bonds rated 'AA+', Stable Outlook by Fitch,) and the unincorporated community of Woodrow. The district currently operates seven campuses, two of which opened in 2011 and 2012, and enrollment is 5,358 students. Enrollment has grown almost 60% since 2009 due to the district's residential development.

STABLE AND DIVERSE AREA ECONOMY

The district benefits from its location near Lubbock, where health care, education, and government comprise the area's largest non-agricultural employment sectors. Largest employers include Texas Tech University (TTU), Covenant Health System, and TTU Health Sciences Center. The area unemployment rate has remained consistently lower than the state (4.1%) and national (5.4%) rates and improved to a favorable 3% in December 2014. Income levels for the district are well above state and national levels.

WEAK DEBT PROFILE

Debt ratios have increased to a high $7,852 per capita and 8% of market value after the district issued $47 million of a $55 million bond election voters approved in May 2014. The series 2014 bond proceeds are funding additions to the high school and two elementary schools, and officials project that the immediate facility additions will provide adequate capacity for the foreseeable future. Bond amortization has decelerated to an extremely slow 10% retired within 10 years. Fitch will continue to monitor the impact of enrollment on the district's ongoing capacity needs given strong regional growth trends.

TAX RATE AT NEW MONEY CAP

The district has increased the debt service tax rate to the new debt issuance statutory cap of $0.50 in fiscal 2015 to service the recently issued debt, which limits flexibility regarding the timing and size of future new money borrowings. The series 2015 refunding bonds will repay a portion of the 2009 bonds, which should provide the district with a $0.03 margin below the cap due to interest cost savings.

STRONG TAV GROWTH

The district's tax base performance is strong and shows signs of continued growth. After a period of vigorous double-digit expansion, TAV has grown more moderately in recent years, but remains at a healthy 8% average in the last five years. Certified values for fiscal 2015 showed a strong 10.7% increase as a result of residential development, and management projects a conservative 5% for 2016. Fitch believes current assumptions for continued yet moderate growth going forward are reasonable given the residential development in the district, which will improve the district's capacity to incur debt over time.

EXPENDITURE PRESSURE FROM GROWTH ENVIRONMENT

The district has budgeted and realized net operating deficits during the past two fiscal years due to expenditure pressures from two recently opened campuses. Audited results for fiscal 2014 marked a $2.3 million draw on fund balance, bringing unrestricted fund balance to a still adequate 15% of expenditures. The draw was driven primarily by payroll, in addition to a shortfall in program revenues and a transfer to the food service fund.

Management reports the structural imbalance has been addressed for the current fiscal year through conservative budgeting of revenues and a restriction on hiring for new positions. Given greater than expected enrollment, the district projects that fiscal 2015 results will be modestly positive. Fitch believes that maintaining more or less the current level of reserves is an important credit mitigant to a weakened debt profile and state funding uncertainties.

OTHER LONG-TERM LIABILITIES MANAGEABLE

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, as is the contribution for the state-run post-employment benefit healthcare plan. The district's cost for pension and other post-employment benefits (OPEB) represented less than 1% of governmental fund expenditures in fiscal 2014, as plan contribution amounts are principally paid by the state and district employees.

The state's payment of district pension costs is an important credit strength, as it keeps overall carrying costs manageable in the face of a growing debt burden. Debt service increased to over $10 million in fiscal 2015 and will stay level for the next 30 years. Annual debt service at this level represents a high 18.7% of fiscal 2014 governmental spending. However, the district's limited retiree liabilities kept overall carrying costs for debt service, pension, and OPEB (net of state support) at a manageable 14.5% of governmental fund spending in fiscal 2014.

Fitch will continue to monitor the level of state support for school district pension payments, noting district pension contributions statewide increased modestly to 1.5% on the statutory minimum portion of payroll from 0% in fiscal 2015.

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.

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, and the 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=980492

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Fitch Ratings
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