Fitch Rates Hays CISD, Texas' $87MM Bonds 'AAA' PSF/'A+' Underlying; Upgrades Outstanding

Business Wire, July 8, 2008

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to the Hays Consolidated Independent School District, Texas (the district) $86.7 million unlimited tax school building bonds, series 2008. The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose insurer financial strength (IFS) is rated 'AAA' by Fitch. In addition, Fitch assigns an underlying 'A+' rating to the series 2008 bonds and upgrades the underlying rating to 'A+' on the district's approximately $244 million unlimited tax school bonds outstanding. The Rating Outlook is Stable.

The bonds are scheduled to sell as early as this week via negotiation. The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2008 bonds are further secured by the Texas Permanent School Fund guarantee. Bond proceeds will be used for construction of two new elementary schools, one middle school, renovations of existing district wide facilities, land acquisition, equipment, buses, and to pay issuance costs.

The upgrade to 'A+' reflects the district's steadily growing fund balance reserves despite rapid enrollment growth pressures and continued expansion of its tax base with prospects for sustained growth resulting from accelerating commercial development projects and availability of affordable land. The rating also reflects the district's conservative fiscal management, high debt burden, and slow amortization. Although Fitch believes debt levels will remain high for the foreseeable future due to the district's growing capital needs and slow principal amortization, expected tax base growth mitigates some debt burden concerns. As planned commercial development is completed and included in the tax base, the debt to TAV should stabilize and even moderate over time.

The district's service area comprises 245 square miles located in Hays County along the IH-35 corridor between Austin and San Antonio, a region populated by more than two million people and the state's third largest region of economic activity. As one of the fastest growing school districts in the state, Hays CISD has seen enrollment grow rapidly at an average annual rate of 8% since 1996. A total of 12,992 students attended the district's 17 schools during fiscal 2008 (nearly double the enrollment level of fiscal 2000). The district projects enrollment will reach 20,000 by fiscal 2013.

The composition of the county tax base is being quickly transformed from rural to urban. Residential construction has increased rapidly in recent years, coupled with additional commercial and retail franchises, as housing pressures in Austin have expanded development southward, and growth in San Marcos has expanded development northward. Recent major developments within the district boundaries include: Wal-Mart Supercenter, Home Depot, Cabela's, and the formation of a tax increment financing district in the city of Kyle. Development plans recently unveiled within the district boundaries include a one million square foot shopping center, Kyle Crossing, which will be anchored by Target, Kohl's and a City Lights Movie Theater. This project is in addition to the Seton complex (already under construction) which will include a 210 bed hospital, medical offices, three hotels, a multifamily apartment complex and about one million square feet of retail space.

Despite the population and enrollment pressures within the district, tax base growth is now outpacing enrollment growth, evidence of increasing commercial construction activity in the district. Recording double digit growth in each of the last five fiscal years and averaging nearly 15% annually over the same period, taxable assessed valuation (TAV) is solid at $3 billion for fiscal 2008. For fiscal 2009, preliminary valuations point to another 13% increase to nearly $3.5 billion primarily attributable to new construction.

District financial operations are sound. The district reported an operating surplus in three of the last five fiscal years. Ending fiscal 2007 with a $1.5 million net surplus, the district reported an unrestricted general fund balance of $14.3 million, or 17.2% of expenditures. Operating results for fiscal 2007 were even better with a $6.5 million operating surplus. The district transferred about $4 million for capital projects and technology improvements during the year and recorded a $1 million prior period adjustment for overstated state revenue in fiscal 2006.

The fiscal 2008 budget was adopted with a modest use of fund balance, but the district typically budgets conservatively and currently anticipates adding a modest $800,000 to general fund reserves. Although early in the budgeting process, major budget considerations for fiscal 2009 will include the opening of two new elementary schools, an average of 2.5% salary increase for district employees, and increased transportation budget to account for rising fuel costs. The district's fund balance goal is to maintain an unreserved and undesignated general fund balance level greater than 10% of expenditures and transfers out.