Fitch Ratings has assigned an 'AA+' rating to the following Highland Park Independent School District, Texas' (the district) unlimited tax bonds (ULTs):

--$194.4 million unlimited tax school building bonds series 2016.

The bonds are expected to price via competitive sale the week of Feb. 29, 2016. Proceeds will be used to construct and equip school facilities, acquire real property, and pay debt issuance costs.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the district's levy of an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

STRONG, DIVERSE ECONOMY, TAX BASE: District residents participate in the broad Dallas metropolitan statistical area (MSA) employment base and economy. Market value per capita is very high and tax base growth prospects are good.

AFFLUENT SOCIO-ECONOMIC PROFILE: District wealth and educational attainment levels are very high. Unemployment rates trend well below average.

SOUND FINANCIAL POSITION: The district maintains a sound fiscal position with a satisfactory reserve cushion and a history of steady, structurally balanced operations. Planned pay-go capital spending has periodically driven drawdowns on reserves. Enrollment is stable and projected growth trends should be manageable.

MANAGEABLE LONG-TERM LIABILITIES: Historically low debt levels will rise significantly with the use of this large, voter-approved bond authorization. However, the impact on the wealthy tax base is moderate. Moderate carrying costs once the new debt is issued are attributable largely to the significant role played by the state in funding pensions.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: Preservation of adequate financial cushion and demonstrated ability to control spending as needed are key determinants of rating stability.

CREDIT PROFILE

Highland Park ISD is a small, primarily residential district (population estimated at about 37,500) in the heart of the Dallas metro area, serving the residents of the city of University Park and the town of Highland Park.

WEALTHY DALLAS DISTRICT WITH MATURE ENROLLMENT PROFILE

District residents enjoy the diverse employment opportunities and economic stability provided by the area's location in the center of the Dallas MSA. Dallas is the third largest city in Texas and headquarters a broad array of corporate entities, serving as a nationally recognized technology, trade, and health service center. Top employers in the education, government and health services sector lend stability to the city's employment base. Unemployment in Dallas County remains low and down year-over -year at 4.1% in November 2015. District income levels are high and totaled $90,000 on a per capita basis in fiscal 2014.

The district's predominately high-end, residential tax base is relatively stable at $13.6 billion in fiscal 2016, reflecting a 7.5% year-over-year gain. The tax base is diverse with the top 10 taxpayers representing various local commercial properties. Steady TAV growth since fiscal 2012 reflects healthy redevelopment activity as well as ongoing home appreciation trends as the district is largely built-out. Fiscal 2016 market value per capita is a very high $440,000. Management projects modest TAV growth of about 3% over the near term, which appears reasonable to Fitch given current trends.

The enrollment base is stable, totaling about 7,100 students in fiscal 2016. Growth trends are expected to remain modest in the near term at about 1% or 80 students annually over the next five years.

SOUND FINANCIAL FLEXIBILITY

The district's financial operations are sound and stable. Management's careful budgeting and spending practices have historically allowed for modest surpluses to break-even operating results. Planned pay-go capital spending has periodically driven reserve drawdowns, although district management informally maintains a goal of keeping reserves at about two months of spending (net of the property wealth payment). Unrestricted reserves have been maintained no less than 13% of total general fund spending (inclusive of property wealth payments) over fiscals 2011-2014.

The district closed fiscal 2015 with a reduced $8.3 million in unrestricted reserves (6% of total spending) after advancing about $6 million for land and other capital purchases. Management anticipates reimbursing most of the year's drawdown for capital projects from proceeds of the current bond issue, and Fitch expects reserves to be restored to historical levels. The $144 million fiscal 2016 operating budget was adopted as balanced net of this reimbursement; management indicates actual performance to date is running in line with budget.

The district is considered property wealthy and relies largely on local property taxes, but its funding is subject to the state's formula and a sizeable portion of the district's operating tax levy is effectively recaptured by the state for distribution to less wealthy school districts. For fiscal 2015, this payment approximated $76 million or half of total general fund spending. Modest revenue flexibility exists in the district's strong fund raising efforts through its foundation; donations have consistently provided about $5-$6 million or 5% of total governmental fund revenues in fiscal 2015.

The district's M&O tax rate is at $1.03 per $100 TAV, (effectively the same as the statutory cap of $1.04 per $100 of TAV), which can be increased by an additional $0.13 with voter approval. District officials report no plans to approach voters for a rate increase.

LARGE GO BOND PROGRAM TO BEGIN

This issuance is the first portion of a $361 million GO bond package, the largest in the district's history, which was recently approved by voters. All of the district's 7 schools will be either replaced or renovated and one new elementary school will be constructed. These expanded facilities are projected to meet the district's needs over the next 15-25 years assuming relatively modest future enrollment growth trends. Overall debt levels rise with this issuance to a very high $10,375 per capita, although they remain at a low 2.4% of fiscal 2016 market value. Including this issuance, principal amortization slows to below average at 41% in 10 years despite maintaining a 20-year amortization schedule.

Additional issuances are planned through fiscal 2019 and annual debt service for the entire authorization is projected to rise from $11 million in fiscal 2016 to about $29 million in fiscal 2020 (18% of fiscal 2015 governmental spending), remaining level thereafter through the remainder of the schedule. Projections estimate a roughly $0.12 per $100 TAV increase over the next few years to the currently low debt service tax rate of just under $0.09 per $100 TAV. The district's debt service tax rate is projected to maintain ample capacity below the statutory new issuance tax rate cap of $0.500.

STATE FUNDED PENSIONS CONTRIBUTE TO MODEERATE CARRYING COSTS

Fitch's concern about the district's overall long-term liabilities is lessened in part by its low retiree cost burden. The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer defined benefit plan. The state assumes the vast majority of Texas school districts' net pension liabilities and the corresponding employer contributions. However, like all Texas school districts, the district is vulnerable to future policy changes by the state -- as evidenced by a relatively modest 1.5% of salary contribution requirement effective fiscal year 2015. Legislative changes in 2013 increased the state's annual contributions, although it remains to be seen whether this improves TRS' ratio of assets to liabilities over time.

Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $7.7 million, with fiduciary assets covering 83.3% of total pension liabilities at the plan's 8% investment rate assumption (approximately 75% based on a more conservative 7% investment rate assumption). The NPL represents less than 1% of the district's fiscal 2016 market value. Other post-employment benefit (OPEB) contributions paid by the district are also nominal as the state and employees also pay the bulk of these costs. Carrying costs for debt service, pensions and OPEB are low at roughly 9% of fiscal year 2015 governmental spending, but Fitch approximates they will increase to about 18% once the authorized debt is fully issued.

TEXAS SCHOOL FUNDING LITIGATION

A Texas district judge ruled in August 2014 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 and was the second such ruling in the past two years, 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.

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 would likely follow with change intended to restore its constitutionality. Fitch would consider any changes that include additional funding for schools and more local discretion over tax rates to be a credit positive.

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, IHS Global Insight, the Texas Municipal Advisory Council.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998759

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998759

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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