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MOODY'S ASSIGNS Aa1 UNDERLYING AND Aaa ENHANCED RATINGS TO LUBBOCK INDEPENDENT SCHOOL DISTRICT'S (TX) $45 MILLION UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011; Aaa ENHANCED RATING BASED ON TEXAS PSF GUARANTEE

31 Jan 2011

Aa1 UNDERLYING RATING AFFECTS $154.7 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT SALE

Primary & Secondary Education
TX

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

Unlimited Tax School Building Bonds, Series 2011

Aa1

Aaa

  Sale Amount

$45,000,000

  Expected Sale Date

02/01/11

  Rating Description

Texas PSF Guarantee/General Obligation Unlimited Tax

 

Opinion

NEW YORK, Jan 31, 2011 -- Moody's Investors Service has assigned a Aa1 underlying rating to Lubbock Independent School District's (TX) $45 million Unlimited Tax School Building Bonds, Series 2011. Concurrently, we have affirmed the Aa1 underlying rating on the district's $109.7 million in outstanding parity debt. In addition to the underlying rating, we have assigned a Aaa enhanced rating to the current sale based on the guarantee of the Texas Permanent School Fund (PSF). Proceeds from the current sale will finance renovations and expansions to existing district facilities as well as technology upgrades.

RATINGS RATIONALE - UNDERLYING

The bonds are secured by a continuing and direct annual ad valorem tax, levied against all taxable property in the district, without legal limitation as to rate or amount. The Aa1 rating reflects the district's sizeable tax base enhanced with significant institutional presence, historically stable financial operations, and manageable debt profile.

RATINGS RATIONALE - ENHANCED

The Aaa rating reflects our assessment of the PSF's ability to make payments on the guarantee relative to the substantial value of the fund corpus. Additional credit considerations include: the PSF's constitutionally protected corpus, the general obligation credit quality of the Texas school district guaranteed by the fund, an investment portfolio that provides satisfactory coverage and liquidity given our estimated probability of calls on the guarantee, and strong legal mechanics that facilitate timely reimbursement to the PSF should guarantee payments occur. The enhanced rating also reflects an expected increase in PSF leverage to no more than 3.5 times PSF cost value. For additional information on the PSF program, please see Moody's High Profile Ratings Update "Texas Permanent School Fund (PSF)" dated April 2010.

STRENGTHS

*Economic stability and expected growth provided by institutional presence of Texas Tech University (Aa2/stable outlook)

*Healthy financial reserves

CHALLENGES

*Below average socioeconomic indices

*Need for substantial additional borrowing to update and replace aging facilities

DETAILED CREDIT DISCUSSION

ECONOMIC HUB OF WEST TEXAS

Lubbock ISD encompasses 87 square miles in Lubbock County (Aa1 general obligation rating), including 90% of the City of Lubbock (Aa2). The district is home to Texas Tech University (TTU), which enrolls approximately 31,000 students (approximately 15% of the region's population). We acknowledge the presence of these students skews the district's socioeconomic indicators. As such, per capita income (PCI) is lower than typical Aa-rated credits as reflected by PCI at only 89.2% and 81.1% of the state and national levels, respectively. However, TTU provides the district economic stability as indicated by the October 2010 unemployment rate of 5.8%, significantly lower than the state (7.9%) and the U.S. (9.0%) for the same time period. Ongoing campus expansion continues, as it is TTU's goal to enroll 40,000 students by 2020. As such, the district benefits from tax base expansion related to student growth, including two apartment complexes currently under construction expected to add over $50 million in taxable value at completion. The district's tax base has grown at a moderate 4.3% average annual rate over the past five years, reaching $8.7 billion in fiscal 2011. We believe the district will continue to experience tax base expansion over the medium term, although growth rates may trend below historical levels due to braoder economic conditions.

SATISFACTORY FINANCIAL OPERATIONS

We believe the district's financial position will remain stable given management's target to maintain reserves equivalent to two months of operating expenditures. The district drew $1.8 million from General Fund reserves in fiscal 2008 to purchases charter buses, which officials report resulted in long-term savings. The General Fund balance at FYE 2008 (August 31) was $29.2 million, or 15.5% of revenues. Favorable budget variance resulted in an operating surplus in fiscal 2009, boosting the General Fund balance to $29.6 million (15.9% of revenues). Unaudited fiscal 2010 results reflect a $4.4 million surplus and an estimated General Fund balance of $34.1 million (18.2% of revenues). Officials attribute the substantial surplus to long-standing conservative budgeting practices, better-than-anticipated enrollment growth, and utility and fuel cost savings. The fiscal 2011 budget is balanced and assumes a 5% reduction in revenues.

General Fund revenues are largely derived from state program revenues (49%) and property taxes (50%). The district currently levies a maintenance and operating (M&O) tax rate of $10.40 per $1,000 of assessed valuation, the maximum allowable rate without voter approval. Officials report the likelihood of asking voters for additional M&O taxing capacity is dependent on the legislative decision in 2011; if there are substantial cuts in state revenues, the district may hold a tax ratification election.

DEBT BURDENS EXPECTED TO INCREASE

The district's debt burdens are moderate at 1.8% direct and 3.3% overall, both expressed as a percentage of fiscal 2011 assessed valuation. Amortization is average with 49.9% of principal retired in ten years. The current sale represents the first installment of a $198 million bond election approved by voters in November 2010 to renovate and replace aging facilities. According to officials, the district plans to issue the remaining authorization through annual sales over the next five years. We expect the district to prudently manage future debt issuance in line with tax base expansion to maintain a manageable debt profile.

VARIABLE RATE & SWAP EXPOSURE

The district's debt management plan includes the use of variable rate debt and interest rate swaps. Variable rate debt (Series 2005A and Series 2006) currently comprises 27% of the district's debt portfolio. All variable rate debt is supported by external liquidity through Standby Bond Purchase Agreements with Bank of America, N.A. (Aa3/Negative). Although the current SBPAs are set to expire March 16, 2011, amended and restated SBPAs with Bank of America including three-year expirations are expected to close in mid-February. The Series 2005A bonds are currently in weekly mode and unhedged.

In connection with the Series 2006 bonds, the district has entered into an interest rate swap agreement with JPMorgan Chase (Aa3/NEG). The swap lasts for the life of the bonds, creating a synthetic fixed-rate instrument. Under the swap agreement, the district pays a fixed rate of 3.539% in exchange for a variable rate equal to 60.05% of the ISDA Swap Rate. The aggregate mark-to-market value of the swap was a negative $1.2 million as of January 27, 2011.

WHAT COULD CHANGE THE RATING-UP:

*Substantial tax base expansion coupled with strengthened socioeconomic profile

*Trend of operating surpluses, significantly bolstering financial reserves

WHAT COULD CHANGE THE RATING-DOWN:

*Trend of tax base contraction

*Deterioration of financial reserves

*Stress to financial operations due to VRDO/swap exposure

KEY STATISTICS

2010-2011 Enrollment: 28,808

FY 2011 Full Value: $8.7 billion

Full Value per Capita: $51,378

Per Capita Income (2000 U.S. Census): $17,507 (89.2% of state; 81.1% of U.S.)

Unemployment Rate (October 2010): 5.8% (as compared to the state at 7.9% and the U.S. at 9.0%)

Direct Debt Burden: 1.8%

Overall Debt Burden: 3.3%

Payout of Principal (10 years): 49.9%

FY 2009 General Fund Balance: $29.6 million (15.9% of General Fund revenues)

FY 2010 (unaudited) General Fund Balance: $34.1 million (18.2% of revenues)

Post-sale Parity Debt Outstanding: $154.7 million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Leslie Lukens
Analyst
Public Finance Group
Moody's Investors Service

Adebola Kushimo
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S ASSIGNS Aa1 UNDERLYING AND Aaa ENHANCED RATINGS TO LUBBOCK INDEPENDENT SCHOOL DISTRICT'S (TX) $45 MILLION UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011; Aaa ENHANCED RATING BASED ON TEXAS PSF GUARANTEE
No Related Data.
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