Fitch Ratings has assigned an 'AAA' rating based on the Texas Permanent School Fund (PSF) and a 'AA' underlying rating to the following El Paso Independent School District, Texas' (the district) obligations:

--$108.375 million unlimited tax refunding (ULT) bonds, series 2015-A.

The bonds are expected to sell via negotiation the week of Feb. 2, 2015. Proceeds will be used to refund outstanding obligations for debt service savings.

Fitch affirms the 'AA' underlying rating on $375.2 million (pre-refunding basis) of outstanding ULT bonds. Additionally, Fitch currently rates the district's $15.3 million outstanding maintenance tax notes 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levy and are further secured by the PSF bond guarantee 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 Sept. 4, 2014.) The maintenance tax notes are payable from all available funds including, but not limited to, the maintenance and operations (M&O) tax levy limited to $1.04 per $100 taxable assessed valuation (TAV) on all taxable property located within the district.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The district has achieved five consecutive years of surplus margins despite modest enrollment declines and state-wide funding cuts. Sound reserves provide an adequate financial cushion.

LARGE AND DIVERSE TAX BASE: The diverse tax base remains relatively stable, without material decline during the recession. Fitch anticipates the inner city tax base to remain flat in the near term, limiting local revenue growth, although the district is considering a tax ratification election (TRE) to seek a modest increase in the M&O tax rate which would provide a measure of revenue flexibility.

MANAGEABLE DEBT PROFILE: High overlapping debt reflects regional growth and contributes to the district's elevated overall debt burden. Low carrying costs - the district's annual debt service, pension and other post-employment benefit (OPEB) contributions -reflect a moderate pace of principal amortization and state support for debt service and pension costs.

RATING SENSITIVITY:

SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's ongoing ability to maintain a sound financial profile and adequate reserves in the midst of flat enrollment and facility improvement needs. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is the tenth largest school district in the state and the largest in the city of El Paso (rated 'AA'). The district is bounded by Mexico on the south, New Mexico on the west and the Canutillo, Socorro and Ysleta independent school districts to the north and east.

DIVERSE REGIONAL ECONOMY STABILIZES TAX BASE

El Paso and Juarez, Mexico comprise the largest Mexican bi-national metroplex, with a combined population of more than 2.5 million. The Fort Bliss army installation and a sizable medical sector, anchored by the downtown Medical Center of the Americas, lend stability to the local economy.

Commercial development and recent military and medical sector expansions have contributed to sound regional growth. However, population increases have largely eluded the inner city, representing the district's primary service territory and leading to modest enrollment declines over the past five years.

El Paso's downtown continues to realize a variety of new commercial development, benefiting most recently from the city's Southwest University downtown baseball park, opened in August 2014. The park is home to the El Paso Chihuahuas, a triple-A team and affiliate of Major League Baseball's San Diego Padres. Fitch expects the strength of the regional economy and ongoing development to contribute to stability of the district's tax base despite modestly declining inner city residential values.

The tax base per capita is a modest $59,000 per capita. Although growing at an above-average rate of 4.1% per annum over the past five years, median household income represents 75.2% of the U.S. average. At 5.8% in November 2014, the city's unemployment rate is also improved but continues to lag state (4.6%) and national averages (5.5%) for the same period.

SOUND FINANCES DESPITE ENROLLMENT CHALLENGES

The district budgets conservatively and generally realizes financial performance favorable to budget. Five years of consecutive surplus margins result from cost controls, including attrition. The district has aligned its spending with relatively flat revenues, reflecting state-wide funding cuts during fiscal 2012 and 2013 and a trend of enrollment declines within the district.

Fiscal 2014 unrestricted reserves of $98.2 million represent a sound 20.6% of spending, favorable to the district's informal 60-day target. Officials estimate closing fiscal 2015 near breakeven, inclusive of a sizable $7.8 million in capital spending budgeted for fiscal 2015.

The district's M&O tax rate is at the maximum $1.04 per $100 of TAV, requiring voter approval for increase. Officials anticipate the potential for a TRE election in fiscal 2016 to seek a modest increase in the M&O tax rate.

MANAGEABLE DEBT PROFILE

Overall debt is elevated at 6.3% of market value due to sizable overlapping debt reflecting regional growth trends. The district's fiscal 2014 debt service burden is a relatively low 6.4% of governmental spending, and an even lower 5.2% considering state debt service support.

Officials anticipate seeking up to $250 million in authorization during fiscal 2016 to improve the aging infrastructure. The district's modest $0.195 per $100 of TAV interest & sinking (I&S) fund tax rate provides ample capacity in relation to the $0.50 cap for new debt issuance.

District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the State of Texas on behalf of the district, thus eliminating any liability for the district. The system also offers post-employment health insurance benefits to retirees. The district's carrying costs are a low 7.8% of fiscal 2014 governmental spending (6.5% considering state debt service support).

TEXAS SCHOOL FUNDING LITIGATION

For the second time in the past 18 months a Texas district judge ruled in August 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 underfunded. The judge also ruled that local school property taxes are effectively a statewide property tax due to lack of local discretion and therefore are unconstitutional.

Following a similar ruling in February 2013, the judge granted a motion to reopen the lawsuit four months later after state legislative action that partially restored state funding levels and made other program changes. The Texas attorney general has appealed the judge's latest ruling to the state supreme court. 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 view positively any changes that include additional funding for schools and more local discretion over tax rates.

RETURN TO NORMALIZED DISTRICT GOVERNANCE

In December 2012 the Texas Education Agency (TEA) appointed a five-member board of managers pursuant to forensic audit findings of fraudulent student testing procedures under the leadership of a previous school administration. According to the TEA commissioner, the board of managers will stay in place until elections are held in May 2015 for three new school board members, transitioning the district back to its normal governance structure. In April, TEA restored the district's accreditation from the probationary status in place since August 2012.

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, CoreLogic/Case-Shiller Home Price Index, IHS Global Insight, 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=978938

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