Fitch Rts $2.5MM Canutillo ISD, TX GOs 'AAA'/'A-' Und; Positive Outlook

Business Wire, March 15, 2004

Business Editors

AUSTIN, Texas--(BUSINESS WIRE)--March 15, 2004

Fitch Ratings assigns a 'AAA' rating to $2.5 million of Canutillo Independent School District (the district), Texas' unlimited tax refunding bonds, series 2004. The bonds scheduled to sell via negotiation to Southwest Securities on March 22. The 'AAA' rating is based on the guaranty by the Texas Permanent School Fund whose insurer financial strength is rated 'AAA' by Fitch. The series 2003 bonds have also been assigned an 'A-' underlying rating by Fitch.

Additionally, Fitch has affirmed the underlying 'A-' rating on the district's $43.5 million outstanding unlimited tax bonds and the 'BBB+' rating on the district's public facility corporation debt comprised of $4.6 million lease revenue bonds. The Rating Outlook is Positive.

Dated March 15, the bonds mature August 15, 2005-2008. The bonds are not subject to optional redemption prior to maturity. Payment for the bonds is provided by an ad valorem tax levied, without legal limitation as to rate or amount, against all taxable property within the district. Bond proceeds will be used to refund a portion of the district's outstanding unlimited tax debt, and to pay costs of issuance. First Southwest Company is serving as the district's financial adviser.

The 'A-' underlying rating and positive outlook is based on the district's continued financial improvement, history of pay-as-you-go capital outlays, steady voter support for its bond programs, and growing tax base. Offsetting risks include above average debt levels, loss of additional taxing margin for operations, moderate tax base concentration, and a shift towards greater reliance on local resources for both operations and debt service. Overall, improved financial management has successfully restored the district's financial reserves, which were depleted in fiscal 1996. The district's academic performance and stable and well-regarded board and administration are also positive indicators of continued credit strength.

Located in the northeastern corner of El Paso County, the district covers 67 square miles and includes portions of the City of El Paso and neighboring rural areas. The district benefits from greater El Paso's strategic location and extensive transportation network, serving as a major port of entry linking Mexico, Texas, and New Mexico. At 4,471 in fiscal 2004, the district is experiencing moderate annual enrollment growth averaging 2%. However, district officials anticipate growth to increase to 4% in coming years for the purpose of its facilities planning. Ongoing and planned residential developments are expected to diversify the district's home values, currently very modest, with the addition of new homes ranging from affordable developments to high-end gated communities. A total of 14 residential developments are underway with a total of 900 homes. The district's high academic performance is also helping the district's residential growth.

Taxable values within the district are dominated by the industrial sector, which represent over 31% of appraised value in fiscal 2004. The Hoover Co. is the largest taxpayer, representing 12.8% of appraised value, with the leading 10 taxpayers representing almost 26%. Taxable values have grown by a compound annual average of 8.5% since fiscal 1998 and grew most recently by almost 6% in fiscal 2004. Economic growth is projected to continue, spurred by the completion of the Artcraft Highway -- a six-lane commercial thoroughfare that connects the new port of entry from Mexico and feeds into Interstate-10 through New Mexico. Only 12% developed, the district has ample property available for development, although the water utility, El Paso Public Service Board (PSB), is struggling to keep pace with the area's water delivery needs. As PSB is also the district's largest landowner, the district meets monthly with the utility in order to monitor planned residential development and plan its facilities needs accordingly.

The current offering is comprised of $2.5 million in refunding bonds, projected to produce net present value savings of 3.4% of refunded bonds. Including $4.6 million in public facility corporation lease revenue debt, the district's direct debt ratios are modest on a per capita basis at $888 but high as a percentage of taxable assessed valuation (TAV) at 3.3%, even after adjusting for substantial state support (64%) for outstanding debt. Overall debt ratios are also above average but manageable at $1,533 per capita and 5.7% of TAV. Principal amortization remains slightly below average at 44.3% in ten years. Along with a new high school scheduled to open in December 2005, numerous classroom additions at two elementary schools and one middle school are projected to provide sufficient capacity for about 3-5 years. At that time, the district anticipates seeking voter authorization for $8-10 million for new elementary schools.

The district has steadily grown its financial margins after depleting its general fund reserves in fiscal 1996. After restoring its undesignated reserves to $3.1 million, or 10.9% of expenditures and transfers out, in fiscal 2000, the district recorded moderate operating deficits in fiscal years 2001-2002 due in part to pay-as-you-go capital outlays. However, due to an accounting change required by GASB 34, fiscal 2002 also recorded a large $1.9 million adjustment, increasing its undesignated reserves to $4.1 million or 13%. In an effort to maximize state aid for operations, the district increased its maintenance tax rate to the $1.50 maximum in fiscal 2003, enabling it to post a $1.5 million operating surplus. As a result, the district's undesignated reserves increased to $5.2 million or 16.3%, despite a conservatively projected deficit of about $226,000.