Fitch Affirms Lubbock-Cooper ISD, TX's $87.4MM ULTs at 'AA'; Outlook Stable

Fitch Ratings affirms the following underlying rating on Lubbock-Cooper Independent School District, Texas (the district):

--$119.7 million unlimited tax (ULT) bonds, series 2006, 2009 and 2010, at 'AA';

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ad valorem taxes levied against all taxable property within the district, without limitation as to rate or amount. In addition, series 2006 and 2010 bonds are secured by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

ELEVATED DEBT LEVELS TO INCREASE: Already high debt ratios are likely to increase further given the very slow repayment of outstanding principal and potential approval of a new money bond authorization this spring.

STRONG FINANCIAL PERFORMANCE: The district has maintained solid reserve levels despite reductions in state aid and cost pressures from enrollment growth.

STATE FUNDING CHALLENGES ABATED: Increases in state aid for fiscals 2014 and 2015 will reverse previous declines in what is a significant source of revenue for the district.

STRONG TAX BASE GROWTH & STABLE AREA ECONOMY: The district's tax base is growing at a steady rate after a period of robust growth, and income metrics are well above state and national averages.

RATING SENSITIVITY

The rating is sensitive to the rate of growth in the tax base, which could affect both financial performance and the debt burden. If tax base growth does not keep pace with growth in enrollment and annual debt service, both financial margins and the debt service tax rate could be pressured.

CREDIT PROFILE

The district has a population of 22,907 and serves the southern portion of the city of Lubbock (GO bonds rated 'AA+' by Fitch; Stable Outlook) and the unincorporated community of Woodrow. The district currently operates seven campuses, two of which opened in 2011 and 2012, and has an average daily attendance of 4,807 students for 2013 - 2014.

STABLE & 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 and national rates and improved to a favorable 4.6% in October 2013 from 4.9% in 2012. Income levels for the district are well above state and national levels.

HIGH DEBT BURDEN

Overall debt ratios are high at $6,128 per capita and 7.2% of full value, and amortization is very low with 12% retired within 10 years. The district currently levies $0.44 per $100 of taxable assessed value (TAV) of the $0.50 statutorily permitted debt service tax rate for new money issuances.

BOND ELECTION TO BE HELD IN MAY 2014

Debt levels will rise pending voter approval of a bond election to be held in May. The district will seek $50-$53 million of bond authorization to fund an addition to the high school and a new elementary school. Prior bond authorizations have received favorable approval rates, and community responsiveness to the current proposition appears encouraging.

Fitch expects the issuance of additional voter approved bonds would require an increase in the tax rate to the new debt issuance statutory cap of $0.50, which subsequently limits flexibility regarding the timing and size of new money borrowings. Even with rapid current enrollment growth trends, management estimates the added capacity at the high school and the additional elementary school will be sufficient over the long-term, although Fitch believes that continued strong enrollment growth would influence future debt needs.

Furthermore, the district's tax base performance is strong and shows signs of continued growth. TAV increased 6.2% and 6.7% in fiscals 2013 and 2014 following many years of robust growth. Fitch believes assumptions for continued yet moderate growth going forward are reasonable, which will improve the district's capacity to incur debt over time.

DRAW ON RESERVES IN FISCAL 2013

Audited results for fiscal 2013 depict a $1.4 million draw on fund balance after transfers. This deficit was due to the staffing and operations of two recently opened campuses, a middle school and an elementary school. Historically the general fund has recorded break-even or positive year-end results, and has added to fund balance despite expenditure pressures from enrollment growth. The fiscal 2013 unrestricted fund balance of $7.8 million equates to a strong 23.3% of spending, although notably down from 30% at the end of fiscal 2012. Fitch believes maintenance of about the level of current reserves is an important credit strength for the district.

State aid declined slightly in fiscals 2012 and 2013 as a result of a legislative reduction in school support at the state level. State aid for the district is projected to increase by $2 million in fiscal 2014 and an additional $0.5 million in fiscal 2015, which equates to a 13.3% and a 3.2% gain in state aid year-over-year, respectively. These additions are due to an increase in school funding at the state level and enrollment gains within the district.

EXPENDITURE REDUCTION IN 2014 BUDGET

Despite the additional state aid in 2014, the district has budgeted an $839,881 deficit due to increasing operating expenditures. Management is addressing this loss through a 10% across-the-board non-payroll cut in expenditures, which should save an estimated $450,000. These cuts, along with a conservative tax collection rate assumption and the receipt of an intergovernmental transfer, should bring the district back to structural balance at year end.

OTHER LONG-TERM LIABILITIES MANAGEABLE

Retiree pension and healthcare benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. TRS is adequately funded at 81.9% as of Aug. 31, 2012, though Fitch estimates the funded position to be lower at 73.8% when a more conservative 7% return assumption is used.

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 2013, 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 high and growing debt burden. Carrying costs for the district (debt service in addition to pension and OPEB costs) remain very manageable, consuming 9.3% of governmental fund spending in fiscal 2013 but this is due largely to the very slow amortization. Fitch will continue to monitor the level of state support for school district pension payments, noting contributions for all districts in the state will increase modestly to 1.5% of the statutory minimum portion of payroll from 0% beginning fiscal 2015.

TEXAS SCHOOL FINANCE LITIGATION

In February 2013 a district judge ruled 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 unsuitable and arbitrarily funds districts at different levels'. The judge also cited inadequate funding as a constitutional flaw in the current system.

The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. A new trial date of January 6, 2014 has been set. 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 consider any changes that include additional funding for schools a positive credit consideration.

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=816340

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