[January 30, 2013]

Fitch Affirms South San Antonio ISD, TX's ULT Bonds at 'AA-' Underlying; Outlook Negative

Fitch Ratings takes the following rating action on South San Antonio Independent School District, Texas' (the district) unlimited tax (ULT) bonds:

--$117.5 million ULT bonds affirmed at 'AA-'.

The Rating Outlook remains Negative.

SECURITY

The bonds are direct obligations of the district, secured by an unlimited tax pledge levied against all taxable property within its boundaries.

SENSITIVITY/RATING DRIVERS

NEGATIVE OUTLOOK: Operating reserves have declined due to recurring general fund deficits. Management restored current-year budget balance through spending cuts, and adequate fiscal cushion remains, but Fitch is concerned about the district's ability and political willingness to eliminate out-year deficits that are presently forecast.

STRONG REGIONAL ECONOMY: The district's central location in the diverse economy and broad employment base of the San Antonio metropolitan area is a credit strength. The district's taxable assessed value (TAV) trend is positive and long-term economic prospects are favorable.

LIMITED LOCAL RESOURCE BASE: Residents' income levels are below average and poverty rates are elevated. The local tax base is concentrated and has a low per-capita valuation.

WEAK DEBT PROFILE: The debt to market value (MV) ratio is high, reflecting the limited tax base. Debt levels will likely remain elevated given the slow debt amortization and future capital needs.

WHAT COULD TRIGGER A RATING ACTION:

FUND BALANCE DECLINE: Fitch expects to resolve the Outlook within the next 12 months and views the district's ability to maintain balanced operations in the short term and make structural adjustments to eliminate projected out-year deficits as key to rating stability.

CREDIT PROFILE:

This primarily residential district comprises 21 square miles in the southwest part of San Antonio (GO bonds rated 'AAA' with a Stable Outlook by Fitch). Annual enrollment has fluctuated slightly in recent years and 2013 enrollment is up 1% from last year to 9,840.

STRONG RESERVES HAVE DECLINED BUT REMAIN SOLID

Recurring operating deficits from fiscal years 2009-2012 resulted from structural budget imbalance that was caused primarily by increases to staffing levels in prior years that outpaced enrollment growth. The annual deficits (2%-3% of spending) have typically been lower than the originally budgeted deficits, but they have produced a cumulative 23% decline in operating reserves during this four-year period.

In recognition of the negative fiscal trend, management commissioned an external staffing study and local cost-savings committee and began implementing the respective recommendations in fiscal 2011 to curb spending. Budget savings have included a reduced FTE count (6%) through attrition and a hiring freeze, as well as discretionary reductions to department and administrative budgets, summer-school, overtime, and substitute usage.

Significant under-spending of the 2012 budget offset lost revenue from state budget cuts and narrowed the operating deficit to $2.4 million (from $4.8 million budgeted). The unrestricted general fund balance declined to $18.3 million or a sound 24% of expenditures, just below the district's working fund balance target of 25% of spending.

2013 BUDGET IS BALANCED; OUT-YEAR DEFICITS FORECAST

The district accelerated spending reductions for fiscal 2013 to adopt a balanced budget, reducing appropriations by 3.3% ($2.6 million) from the prior-year budget. Officials offered an early resignation stipend that yielded additional personnel savings and were able to provide a non-recurring stipend for employees. Interim results were not yet availale but attendance is up 1%.

Fitch views positively the return to current-year budget balance, particularly amid lower state funding levels, but remains concerned about the baseline financial forecasts for continuing deficits (1%-2% of expenditures) through fiscal 2016. The district does retain some budget flexibility, but Fitch believes that some of the budget mechanisms on the table, including furlough days, layoffs, and a voter-approved tax rate increase, will be politically difficult to implement or altogether unlikely to occur.

The district's solid fund balances have historically been the key mitigant to credit pressures from the below-average resource base and high debt levels. Further budget imbalance and declines in reserves would likely cause a rating downgrade.

LIMITED LOCAL RESOURCE BASE; SUBPAR SOCIO-ECONOMIC INDICES

District wealth indicators are well below average, with per capita income at 46% of the national average, per-capita market value at a low $33,000, and a poverty rate (20%) that exceeds the national average (14%). The district's tax base is also concentrated, with the top 10 payers comprising an above-average 21% of fiscal 2013 TAV. The top payer is Boeing (News - Alert) Aerospace (long-term Issuer Default Rating of 'A' with Stable Outlook) which alone comprises 6% of TAV.

The district's recent TAV trend has been positive, with stabilized housing prices, positive re-appraisals, and development activity producing a nearly 12% cumulative TAV gain since fiscal 2010. Prospects for further gains are favorable given anticipated development adjacent to a Texas A&M University satellite campus and regional growth prospects.

LOCATION IN STRONG SAN ANTONIO ECONOMY

The district's location in the broad and diverse San Antonio economy is also a credit positive. San Antonio is the second largest city in the state and eighth largest in the nation, with an estimated population of 1.8 million. Prominent sectors include military and government, domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

The San Antonio market shed jobs in 2010 as a result of the national recession but has since recovered most of the job losses. Considerable growth in the hospitality and energy sectors, the latter being driven by drilling activity in the expansive Eagle Ford shale gas formation south of the city, improved the unemployment rate to 5.9% from 7.2% for the 12-month period ending October 2012.

HIGH DEBT BURDEN MAY RISE FURTHER

Overall district debt is high at 8.5% of market value even after adjusting for annual state debt service aid of about 60% of debt, reflecting the district's low property wealth. The overall debt calculation includes the currently accreted interest of outstanding capital appreciation bonds. Debt per capita is moderate and the annual carrying cost is affordable at 5% of governmental spending (excluding capital projects fund spending).

Debt levels will likely remain elevated due to slow principal amortization (34% retired in 10 years) and future capital needs. Officials plan to seek debt authorization from voters in the range of $30 million-$50 million as early as November 2013. The proposed bond program would fund construction of a new elementary school and major renovations to aging facilities. Management notes that the debt issuance would be done in conjunction with approval of state debt service aid. The current tax rate of $0.42 provides adequate capacity below the state's $0.50 statutory tax ceiling for new debt issuance, but continued growth in the tax base will be critical to supporting debt plans and mitigating any impact to the tax rate.

PENSION AND OPEB LIABILITIES NOT A CREDIT PRESSURE

Pension and other post-employment benefits (OPEB) for retiree healthcare are provided through the state's Teacher Retirement System, a cost-sharing multiple employer plan. State subsidies pay the bulk of the required contributions on behalf of school districts for both pension and OPEBs, resulting in an affordable $1.1 million annual required contribution for the district in fiscal 2012 that equaled 1.1% of governmental spending. Combined debt service, pension, and OPEB costs totaled an affordable 6.1% of governmental spending for the year.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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