Fitch Rates Coppell ISD, TX ULTs 'AAA'/ 'AA+' Underlying; Outlook Stable

Fitch Ratings has assigned a 'AAA' rating based on the Texas Permanent School Fund (PSF) enhancement to series A, B, and C, and a 'AA+' underlying rating to the following Coppell Independent School District, Texas unlimited tax bonds (ULTs):

--$6.905 million ULT school building bonds, series 2016A;

--$83.395 million ULT school building bonds, series 2016B;

--$22.872 million ULT refunding bonds, series 2016C;

--$24.315 million ULT refunding bonds, series 2016D.

The bonds are scheduled for a negotiated sale the week of July 7. Bond proceeds will be used for construction, acquisition, and equipment of school buildings in the district and to refund outstanding obligations for debt service savings.

In addition, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AA+';

--$212.4 million (pre-refunding) in outstanding ULTs at 'AA+'.

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 'AA+' IDR and ULT rating are based on the district's strong operating performance, solid expenditure flexibility and moderate long-term liabilities.

Economic Resource Base

The city of Coppell is located approximately 18 miles northwest of downtown Dallas. The district serves the city of Coppell and small portions of the cities of Dallas and Irving in northwest Dallas County. The district's 2016 population is estimated at about 49,000 and per capita market value is a high $226,000. The district's current enrollment (11,881) reflects five-year compound average annual growth of 3%, mirroring growth in taxable assessed valuation (TAV) during the same period. Fitch anticipates ongoing growth in the district's enrollment associated with residential development planned and underway. The district's location in the Dallas-Fort Worth (DFW) metropolitan area provides its residents with easy access to a large and diverse labor market.

Revenue Framework: 'a' factor assessment

Fitch anticipates the district to realize solid revenue growth going forward, consistent with trends of the past five years. The district's independent ability to raise revenues is limited by state law.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending is expected to align with revenue growth. Solid expenditure flexibility incorporates management's control over headcount and salaries within the annual budget cycle and moderate carrying costs.

Long-Term Liability Burden: 'aa' factor assessment

Currently 13% of personal income, Fitch expects the district's long-term liability burden to remain moderate based on debt issuance plans, an average amortization rate and the potential for moderate growth in overlapping debt.

Operating Performance: 'aaa' factor assessment

Fitch expects the district's finances to remain strong through an economic downturn based on sizable reserves and sound expenditure flexibility. Disciplined budget management practices support the district's history of consistently favorable operating performance.

RATING SENSITIVITIES

Financial Flexibility: The IDR and GO ratings are sensitive to the district's maintenance of strong financial flexibility and expectations for solid economic growth.

CREDIT PROFILE

The city serves as a retail base to nearby Lake Grapevine and continues to expand its commercial/ industrial presence. Benefitting from proximity to the DFW airport, I-35 and other major highways, the district continues to attract distributors, big-box warehousing, and corporate headquarter operations. The tax base is diverse with top 10 taxpayers accounting for 6% of fiscal 2016 TAV. The district's projected fiscal 2017 TAV growth (7%) is conservative in relation to the appraisal district estimates and average annual growth during fiscal 2015 and 2016 (about 9%).

Revenue Framework

The district is considered property wealthy and relies almost entirely on local property taxes to support operations.

Fitch expects Coppell ISD's revenue growth to approximate the pace of U.S. GDP based on development plans underway and consistent with the district's recent enrollment and TAV growth.

Coppell ISD's maintenance and operations (M&O) tax rate of $1.17 per $100 of taxable assessed valuation (TAV) is at the statutory cap, resulting in no ability to raise revenues through its tax rate.

Expenditure Framework

Similarly to other school districts, instructional costs account for a sizable 55% of spending. Additionally, as a property rich district under Chapter 41 of the Texas Education Code, a portion of Coppell ISD's operation and maintenance (O&M) levy is recaptured by the state for distribution to less wealthy school districts. These payments totaled $21.5 million in fiscal 2015, representing 20% of spending.

Fitch expects the district's spending to grow in line with revenues. The magnitude of Chapter 41 payments coincides with TAV, meaning that the trend of those payments will mirror revenue trends.

The district maintains control over spending, including labor and related costs, through its annual budget process. The district's moderate carrying costs, 15% of spending, reflect the state's payment of state-wide school district pension contributions . Fitch expects the district's carrying costs to remain moderate considering planned issuances over the next several years.

Long-Term Liability Burden

Fitch expects the district's long-term liability burden, 15% of personal income, to remain moderate based on the district's planned completion of its $249 million bond program. The majority of the 2016 bond program ($146 million) will fund student growth, including a new middle school and elementary school. Additional projects include technology ($35 million), renovations ($33 million), district-wide improvements ($32 million) and safety and security ($3 million). The district currently has about $298 million in debt outstanding, as well as about $234 million in overlapping debt and a modest $20 million in unfunded pension liabilities attributed to the district.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple-employer pension system. Under GASB 67 and 68, TRS's 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, Coppell 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 fiscal 2015. The district's pension contributions are determined by state statute, rather than actuarially, and similarly to 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 less than 0.5% of fiscal 2015 market value. Coppell 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 $2 million in fiscal 2015).

Operating Performance

Fitch expects the district to retain a high level of financial flexibility during an economic downturn given its sound expenditure flexibility and healthy reserves. Financial performance and reserve levels are very strong despite the large recapture payments associated with the state funding formula. The district posted a $1.4 million (1.3% of spending) net surplus in fiscal 2015, completing the year with $51.2 million of unrestricted reserves (46.7% of spending). Fitch anticipates the district's reserves to remain well above its minimum two-month policy floor.

Conservative budgeting and diligent cost management have contributed to a history of favorable operating performance. The district rebuilds reserves during economic expansion and does not defer spending needs.

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/creditdesk/reports/report_frame.cfm?rpt_id=879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007994

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