Allen Independent School District, TX

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1 CREDIT OPINION Allen Independent School District, TX New Issue - Moody's Assigns Aa2 UND/Aaa ENH to Allen ISD's, TX Series 2017A GO Bonds; Outlook is Stable New Issue Summary Rating Rationale Moody's Investors Service has assigned a Aa2 underlying rating and Aaa enhanced rating to Allen Independent School District's, TX 38.8 million Unlimited Tax Refunding Bonds, Series 2017A. Concurrently, Moody's has maintained the Aa2 underlying rating on the district's previously rated general obligation debt. The outlook remains stable. Contacts Alex Rawlings Analyst alex.rawlings@moodys.com Alexandra S. Parker MD-Public Finance alexandra.parker@moodys.com Alexandra J Cimmiyotti VP-Senior Analyst alexandra.cimmiyotti@moodys.com The Aa2 underlying rating reflects the district's large and expanding tax base, above average wealth levels and a history of strong general fund reserves. The Aa2 rating also reflects the district's elevated debt burden and slow principal amortization, albeit with manageable pension costs. The Aaa enhanced rating is based on the rating of the Texas Permanent School Fund and the structure and legal protections of the transaction which provide for timely payment by the PSF if necessary. Moody's currently rates the Permanent School Fund Aaa. For additional information on the PSF program, please see Moody's Rating Update Report on the Texas Permanent School Fund dated January 27, Credit Strengths CLIENT SERVICES Americas » Large and growing tax base located within the Dallas-Fort Worth metro area Asia Pacific » Strong reserves despite an intentional drawdown in fiscal 2017 Japan EMEA » Above average wealth levels Credit Challenges» Elevated debt burden with slow principal amortization Rating Outlook The stable outlook reflects our expectation that strong demand for housing in the Allen area will result in continued assessed valuation growth in the near term. Based on historic performance, we also expect that the district will continue to exhibit sound financial management with strong reserve levels. The stable outlook also incorporates our expectation the district will continue to manage its elevated debt burden and long term capital needs. Factors that Could Lead to an Upgrade» Significant taxable value growth

2 » Decline of the districts direct debt burden Factors that Could Lead to a Downgrade» Additional debt issuance that is not supported by tax base growth» Contraction of the tax base» Significant deterioration of liquidity and reserves Key Indicators Exhibit 1 Allen Independent School District, TX Economy/Tax Base Total Full Value (000) Full Value Per Capita Median Family Income (% of US Median) 7,870,112 8,234,388 9,080,358 10,146,543 11,283,680 91, % 91,750 97, , , % 169.7% 169.7% 169.7% Finances Operating Revenue (000) 184, , , , ,436 Fund Balance as a % of Revenues 32.8% 43.5% 45.7% 51.0% 48.3% Cash Balance as a % of Revenues 43.9% 46.7% 50.0% 54.5% 56.0% Debt/Pensions Net Direct Debt (000) Net Direct Debt / Operating Revenues (x) Net Direct Debt / Full Value (%) 488, , , , x 2.6x 2.2x 2.7x 657, x 5.8% 6.2% 6.1% 5.3% 5.9% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 0.4x 0.4x 0.3x 0.4x 0.5x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 0.8% 0.8% 0.8% 0.9% 1.1% Source: Allen ISD Audited Financial Statements, Moody's Investors Service Detailed Rating Considerations Economy and Tax Base: Rapidly Growing, Primarily Residential District Near Dallas Due to its favorable location within the Dallas-Fort Worth Metroplex and diversity of employment opportunities in the area, Allen Independent School District's tax base should continue to benefit from ongoing development as well as reappraisal of existing property. The district serves a primarily residential community (73% of the tax base) located approximately 25 miles north of Dallas (A1 negative). Fiscal year 2018 assessed values increased by a strong 12.1% to reach a sizeable 12.6 billion. Over the past five years, the tax base has grown at an average annual pace of 10%. Large scale homebuilding within the district has ended due to a lack of available land, with the majority of recent growth attributable to increased valuation of existing properties. The lack of land will likely lead to reduced growth in future, although there are some undeveloped properties currently earmarked for commercial development. Demand for housing within the district is strong due to the diverse employment opportunities available for residents. Several large corporate relocations to Collin County (Aaa stable) have occurred in recent years, including Toyota's (Aa3 stable) North American headquarters. Unemployment in Collin County was 3.7% as of August 2017, compared to 4.5% for both Texas and the nation. Population as of the 2010 census was 81,836, 96.9% higher than in Based on the 2015 American Community Survey, the population has increased an additional 13.8% to 93,092. Population growth is expected to slow over the next several years due to a lack of available land for additional home construction. Income indices are above average with median family income and per capita income of 169.7% and 139.5% of the U.S., respectively. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Enrollment for fiscal 2018 is 20,965 students, which is 1% higher than the previous year. The district's enrollment has been slowly but steadily climbing at an average annual pace of approximately 1% over the past five years. This trend is expected to continue for the foreseeable future, although the manageable pace of growth is not expected to produce significant growth pressures for the district. Financial Operations and Reserves: High Reserves Despite Recent Intentional Drawdown The district's finances are strong and are expected to remain a supporting factor for the rating over the long term. Historically, the district has maintained strong reserves and surplus operational results although officials intentionally utilized reserves to fund capital needs in fiscal Following a 4.4 million general fund deficit on the year, the district's available general fund balance remained very strong at 87 million or 48% of general fund revenues. Available operating funds, inclusive of both the general and debt service funds, are also strong at 112 million or 48% of operating revenues. The district adopted a budget for fiscal 2017 that indicates a 2 million general fund deficit, although Allen ISD has historically outperformed its adopted budgets by year end. Based on year-to-date performance, officials expect roughly break even operations on the year. Over the long run, the district has identified several potential capital needs to be funded utilizing cash on hand, although none would have a material impact considering the district's high fund balance in comparison to peers. As of fiscal 2018, Allen ISD levies a total property tax of per 1,000 of valuation, with used to fund operations and the remaining 4.30 devoted to debt service. The operations tax levy generated 73% of general fund revenue in fiscal 2017 and could be increased to pursuant to a tax ratification election conducted in This headroom is unusual among Texas school districts and is credit positive for Allen ISD. The debt service tax rate is not subject to limitation, however Texas does not generally allow districts to issue debt in an amount that would require a greater than 5.00 per 1,000 debt service tax rate. LIQUIDITY The district's operating funds (general and debt service Fund) cash position at the close of fiscal 2017 was million, an above median 56% of fiscal 2017 operating fund revenues. Based on budgetary expectations for fiscal 2018, no near term declines in liquidity are expected. Debt and Pensions: Elevated Debt Burden Expected to Decline Allen ISD's debt burden is elevated, although the debt burden will likely decline over the next several years as valuation growth continues and amortization occurs. The district's debt burden is high in comparison to peers at 5.1% of fiscal 2018 assessed value. Overall net debt, inclusive of overlapping entities, is 6.2% of valuation. There is no remaining voter authorization to issue additional debt and district officials have no definitive plans to call an election, although upcoming facility renovation needs make an election likely at some point within the next three years. DEBT STRUCTURE All of the district's debt is fixed rate. Principal payout is slow with 36.3% of principal paid in 10 years. Projected maximum annual debt service is 52 million and occurs in Debt service accounted for an elevated 21.4% of operating funds expenditure in fiscal DEBT-RELATED DERIVATIVES The district is not party to any interest rate swaps or other derivative agreements. PENSIONS AND OPEB Allen ISD participates in the Teacher Retirement System of Texas (TRS), a multiple-employer plan administered by the state. The state made 76% of the district's employer pension contribution on behalf of the district in the 2017 fiscal year. Moody's adjusted net pension liability (ANPL) for the district, under our methodology for adjusting reported pension data was million, or a manageable 0.68 times fiscal 2016 operating revenues. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the district's report contribution information, or the reported liability information of the statewide cost sharing plans, but to improve comparability with other rated entities. Management and Governance: Strong Management and Institutional Framework The district is governed by an elected board of trustees comprised of seven members serving staggered three year terms. The board is charged with policy-making and supervisory functions and delegates administrative responsibilities to a superintendent who is the chief 3

4 administrative officer of the district. The district demonstrates good governance through proactive management of its finances, which has resulted in strong reserves and a record of operational surpluses. Texas School Districts have an Institutional Framework score of Aa, which is high compared to the nation. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. Property taxes, one of the sector's major revenue sources is subject to a cap of per 1,000 of assessed value, which can be overriden at the local level to (with voter approval). The voter approved levy override provides for additional revenue-raising flexibility. Unpredictable revenue fluctuations tend to be minor, or under 5% annually. Across the sector, fixed and mandated costs are generally greater than 25% of expenditures. Texas is a Right to Work state, providing significant expenditure-cutting ability. Unpredictable expenditure fluctuations tend to be minor, under 5% annually. Legal Security The bonds are secured by an unlimited ad valorem tax on all taxable property within the district. Use of Proceeds Proceeds from the bonds will be used refund previously issued debt in order to achieve a projected 4.3 million total savings on debt service. Obligor Profile The district is a political subdivision of the State of Texas created in 1911 and is located in the southwest quadrant of Collin County, approximately 25 miles from downtown Dallas. The District serves an enrollment of 20,793 students and encompasses the City of Allen. Methodology The principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December The principal methodology used in the enhanced rating was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May Please see the Rating Methodologies page on for a copy of these methodologies. Ratings Exhibit 2 Allen Independent School District, TX Issue Rating Unlimited Tax Refunding Bonds, Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description Unlimited Tax Refunding Bonds, Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description Aa2 Underlying LT 38,774,991 12/01/2017 General Obligation Aaa Enhanced LT 38,774,991 12/01/2017 General Obligation Source: Moody's Investors Service 4

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6 Contacts Alex Rawlings Analyst CLIENT SERVICES Alexandra J. Cimmiyotti VP-Senior Analyst 6 Alexandra S. Parker MD-Public Finance Americas Asia Pacific Japan EMEA