AFTER BISD FACILITY CONSTRUCTION BINGE, THE CHICKENS COME HOME TO ROOST

Sept. 28 – The Fitch Ratings Service downgraded $166.1 in unlimited tax (ULT) bonds, series 2001, 2005, and 2006 bonds to 'AA-' from 'AA':

– $166.1 million unlimited tax (ULT) bonds, series 2001, 2005, and 2006.
The Rating Outlook is revised to Stable.

SECURITY
The bonds are secured by an unlimited ad valorem property tax pledge. The bonds
additionally carry a guarantee from the Texas Permanent School Fund (PSF), whose
bond guaranty program is rated 'AAA' by Fitch.

KEY RATING DRIVERS

DIMINISHED FISCAL CUSHION: The key rating drivers supporting the downgrade to
'AA-' are the significantly diminished fiscal cushion of the district and
limited ongoing budget flexibility. A projected fiscal 2012 surplus would arrest
the trend of significant draws on fund balance. However, the current level of
available reserves, which Fitch expects to remain below the district's formal
target, together with limited revenue raising ability and mixed economic base is
more consistent with the lower 'AA-' rating.

FINANCES APPARENTLY STABILIZING: The Stable Outlook reflects positive steps the
district has taken to return to budgetary balance, including management of state
aid cuts in fiscal 2012 and adoption of a fiscal 2013 balanced budget.

STABLE TAX BASE: The district's proximity to Mexico and an extensive and
expanding transportation network support strong international trade activity.
Tax base growth resumed in fiscal 2013 after being flat in the prior two years.

WEAK SOCIOECONOMIC INDICATORS: District wealth levels are low, and the region
suffers from structurally high unemployment and poverty rates.

MANAGEABLE DEBT LOAD: Overall debt ratios are low to moderate due to generous
state aid for debt service. The rate of amortization is average.

FLAT ENROLLMENT: Current-year enrollment is flat after declining modestly in
2012, demonstrating the impact of charter-school competition.


CREDIT PROFILE

BUDGET FORECASTS MISSED THE MARK FROM 2009 - 2011

Declines in operating reserves in fiscal years 2009 - 2011 were largely to fund
facility construction but were exacerbated by construction cost overruns,
unplanned capital outlays, and over-budgeting of enrollment-driven state
revenues. The net effect has been a cumulative 44% decline in general fund
balance during this three-year period and a drop in the unrestricted general
fund balance (the sum of committed, assigned, and unassigned per GASB 54) to
$83.3 million or 19% of expenditures and transfers in fiscal 2011. While this
level of reserves still provides a solid fiscal cushion, the declining trend is
troubling and the budgetary fund balance is below the district's formal fund
balance floor of 75 days of operating costs.
Of concern to Fitch is the instability in the administrative team in recent
years, which coincided with the trend of negative budget variances. In addition,
in contrast to Fitch's prior understanding, the district lacks the ability to
increase its operating tax rate without voter approval which limits budget
flexibility.

RETURN TO BUDGET BALANCE FORECAST IN 2012; OUTLOOK FOR 2013 UNCERTAIN

The new management team, which has been in place since June 2011, is forecasting
a modest operating surplus after transfers in fiscal 2012 (June 30 fiscal year),
which is notable given that interim projections called for a $4 million
draw-down on reserves to fund targeted campus improvements added to the budget.
The original budget was trimmed to absorb a nearly $18 million reduction (6%) in
state formula-funding; officials froze salaries and hiring and initiated an
early retirement incentive to achieve measurable attrition savings, while also
using $9 million in one-time federal aid. Management reports that tighter cost
controls and ongoing attrition savings will yield a $600,000 surplus after
transfers. This would keep the unrestricted portion of general fund balance at
roughly $84 million or 19.0% of spending and transfers on a GAAP basis.

The $423.7 million 2013 budget was balanced due to a stabilizing revenue
picture, as gains in local funding from climbing AV and modestly improved state
revenues more than offset the loss of one-time federal funds. Spending is up
5.7% from the 2011 budget to absorb a one-time staff retention payment, costs
associated with the opening of three new campuses, and expansion of a
federally-reimbursed school breakfast program. However, an unbudgeted lawsuit
settlement ($700,000 net cost to the district) was just recently paid from
general fund resources. Average daily attendance, which is a key revenue driver,
remains flat in 2013 after declining modestly last year due to charter-school
competition. Management expects a level enrollment trend for the near-term, but
further enrollment declines could also pressure operating revenues.

MANAGEABLE DEBT BURDEN DUE TO GENEROUS STATE DEBT SERVICE AID

The state currently supports about 67% of the district's debt. As a result of
the generous state support and pay-go capital spending practices, direct debt
levels and the debt burden on the budget are very low; overall debt is low to
moderate at $1,629 per capita and 4.9% of market value.

The district issued $41.2 million in limited tax qualified school construction
bonds (QSCBs) in 2009 and 2010 to complete several new campuses and make
district-wide facility improvements, but has no ULT authorization and no current
plans to issue new debt. The QSCBs are paid from general fund moneys and could
have a modestly adverse impact on the budget if the federal sequestration were
to reduce the subsidies, a situation Fitch is continuing to monitor. Pension
costs are statutorily determined by the state and were a low 1.3% of 2011
spending as most of the cost belonged to the state.

ECONOMC HUB OF THE RIO GRANDE VALLEY

Brownsville is the population and economic center of the expanding lower Rio
Grande Valley. The area economy is largely driven by manufacturing reflecting
its location across from Matamoros, Mexico and extensive transportation network
(including the Port of Brownsville). The city's low cost of living and doing
business support continued economic growth, and a growing healthcare and
education sector, including a branch of the University of Texas, contributes to
the stability of the region. The potential for prolonged manufacturing stress
coupled with the shortcomings of a relatively low-skilled labor force and
vulnerabilities in Mexico's economic outlook are concerns inherent to Fitch.

Growth in the district's tax base accelerated in fiscal 2013 after stalling in
the prior two years; TAV has averaged 1% annual gains from fiscal years 2008 to
2012 but climbed 3% in fiscal 2013 to $4.8 billion. Typical for the border area,
the city's unemployment rate is high (12.3% in July 2012) and income levels are
very low.