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Fitch Rates Round Rock ISD, TX's $92MM ULTs 'AAA' PSF/'AAA' Underlying; Outlook StableFitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'AAA' underlying rating to the following Round Rock Independent School District, Texas unlimited tax bonds (ULTs): --$92 million unlimited tax school building and refunding bonds series 2016. The bonds are expected to price via negotiation the week of Oct. 3. Proceeds will be used to fund facility improvements, technology and to refund debt for savings. Additionally, Fitch has affirmed the district's $691.4 million in outstanding ULTs and Long-Term Issuer Default Rating (IDR) at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program, rated 'AAA' by Fitch. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015.) KEY RATING DRIVERS The 'AAA' IDR and ULT ratings are based on Round Rock ISD's strong growth prospects and exceptional financial resilience reflected in robust reserves, and enabled by solid expenditure flexibility and disciplined budget management. The rating incorporates the district's moderate long-term liability burden. Strong economic growth in the state bodes well for support of school funding. Economic Resource Base The district is located roughly 20 miles north of Austin, serving portions of Williamson County and the city of Austin ('AAA'/Outlook Stable). Revenue Framework: 'a' factor assessment Revenue growth prospects are strong, consistent with 10-year trends in excess of U.S. GDP. Increases in the district's maintenance and operations (M&O) tax rate require voter approval. Expenditure Framework: 'aaa' factor assessment Given the strong revenue growth and moderating enrollment, the district's expenditures are likely to grow at a pace equal to or less than revenue growth. Solid expenditure flexibility is evidenced by the district's management of workforce costs and is not impeded by its moderate carrying costs. The vast majority of pension and other post-employment benefit employer costs are borne by the state of Texas. Long-Term Liability Burden: 'aa' factor assessment The district's long-term liabilities are 13% of estimated personal income. Fitch expects these to remain moderate because population and personal income are likely to grow at a rate consistent with regional debt needs. The district's net pension liability is negligible. Operating Performance: 'aaa' factor assessment Round Rock ISD's exceptional operating performance dominates its credit profile. Fitch expects the district to demonstrate exceptional financial resilience consistent with its historically strong operating performance and enabled by solid expenditure flexibility. The district's financial profile is characterized by robust reserves and disciplined budgeting practices. RATING SENSITIVITIES Strong Fiscal Health: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong revenue growth, alignment of operating spending with revenues, and affordability of debt as reflected in of the district's carrying costs and long-term liability burden. CREDIT PROFILE Healthy economic growth in Round Rock ISD reflects strong regional development trends benefitting from a stable and diverse employment base and economy. The district's taxable assessed valuation (TAV) realized 4.9% compound average annual growth (CAGR) for the 10 years ending in fiscal 2014, during which time enrollment grew by 2.9% per annum. Tax base growth ramped up, averaging 10.5% gains during fiscal 2014 through 2017 during which time enrollment growth decelerated. Recent TAV growth captures strong home price appreciation and new commercial and residential development. Top 10 taxpayers comprise a low 5.7% of fiscal 2017 TAV. These and other top employers include industrial, technology, real estate, retail and healthcare concerns. Fitch considers the district's estimate for moderate near-term TAV growth reasonable based on current trends and development underway. Revenue Framework Funding for public schools in Texas is provided by a combination of local (property tax), state and federal resources. The state budgets the majority of instructional activity through the Foundation School Program (FSP), which uses a statutory formula to allocate school aid taking into account each district's property taxes, projected enrollment and amounts appropriated by the legislature in the biennial budget process. The vast majority of districts are funded using a target revenue approach whereby the combination of local and state funding for operations meets a predetermined per pupil amount that varies from district to district. State funds contributed 27% of the district's fiscal 2015 revenues. The state of Texas' ('AAA'/Outlook Stable) favorable revenue growth prospects bode well for K-12 funding in the medium term. Round Rock ISD's 4.1% average annual revenue growth exceeded the pace of U.S. GDP over the past 10 years ending in fiscal 2014 and grew by a stronger 8.4% in fiscal 2015. These trends result from the district's ability to capture year-over-year tax base gains due to a one-year lag in state aid adjustments. Revenue growth also reflects enrollment gains and state funding adjustments. Fitch anticipates the continuation of healthy revenue growth based on expectations for ongoing regional and tax base growth. Similar to 93% of Texas school districts, Round Rock ISD's $1.04 per $100 of TAV M&O tax rate is at the statutory ceiling. While the district has the ability to seek an M&O rate up to a $1.17 through a tax ratification election, no such plans are in place due to the adequacy of revenues provided through growth. The district does retain the independent legal ability to raise its interest and sinking (I&S) tax rate for payment of debt. The district's I&S rate of $0.2925 provides ample capacity below the state's threshold of $0.50 for capital needs. Expenditure Framework Instructional costs account for 62% of fiscal 2015 operating expenditures, which Fitch expects to increase at a pace equal to or below that of the district's healthy revenue growth, along with its other operations costs. The district does not face spending pressure given its maturity (80% built out) and fairly large base of operations, as measured by the size of its average daily attendance (ADA), in the top 2% of the state. The district retains discretion with respect to workforce costs and its moderate carrying costs, 16.3% of fiscal 2015 spending, do not impede expenditure flexibility. Fitch expects carrying costs to remain moderate based on growth in the district's operational spending in rlation to projected debt service and the assumed ongoing state funding for the vast majority of employer pension and OPEB contributions. Round Rock ISD's contributions are currently limited to the 1.5% of salaries and the pension costs for salaries above the statutory maximum (total contribution of $8.5 million in fiscal 2015). The district's 10-year principal amortization is average at 50%. Long-Term Liability Burden Round Rock ISD's $1.76 billion long-term liability burden is moderate at 13% of personal income and consists primarily of debt ($1.716 billion). The new money portion of this issuance ($42.75 million) exhausts the district's authorization. Depending on the outcome of a fall 2016 citizen bond study, the district may seek additional authorization in May 2017 to address infrastructure and growth needs. Fitch expects the district's long-term liability burden to remain moderate because population and income growth are likely to be aligned with additional debt needs. The district's practice of early debt retirement also contributes to moderating its liability burden. Current plans include a fiscal 2017 cash defeasance of $11.2 million in outstanding ULT school building bonds. The district's debt structure includes $73.4 million (9.4% of total district debt) in variable-rate bonds with a current five-year fixed-rate term, a soft put back to bondholders in lieu of liquidity support, and the option to periodically reset the rate to a long-term fixed basis. The risk to the district of a failed remarketing is a manageable maximum interest rate of 6%. Fitch considers the risk of a failed remarketing minimal based on the district's strong credit and resulting ability to refinance as well as the district's strong financial position and capacity to absorb temporarily elevated interest rates. The district participates in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68 reporting, TRS' assets covered 83.3% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 75% using a more conservative 7% return assumption. The state assumes the majority of TRS employer contributions and net pension liability on behalf of school districts, except for small amounts that state statute requires districts to assume. Like all Texas school districts, Round Rock ISD 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 that became effective in fiscal 2015. The district's pension contributions are determined by state statute rather than actuarially and, like other Texas school districts, have historically fallen short of the actuarial level. Recent state reforms have lowered benefits and increased statutory contributions to improve plan sustainability over time. The proportionate share of the system's net pension liability paid by the district is minimal, representing about one-half of 1% of personal income. Operating Performance Fitch expects the district to maintain exceptional financial resilience during an economic downturn, benefiting from its robust reserve position and solid expenditure flexibility. Round Rock ISD's healthy cushion reflects its practice of reserve replenishment during periods of favorable performance and economic expansion. Policy-specified reserve replenishment rates demonstrate the district's commitment to maintain strong financial flexibility to address capital renewal and replacement needs. The district has received national recognition for efficiencies and cost effectiveness of its facility planning and construction processes. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools. Applicable Criteria U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016) https://www.fitchratings.com/site/re/879478 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012468 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012468 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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