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U.S. PUBLIC FINANCE CREDIT OPINION 19 May 2017 New Issue Contacts John Nichols 214-979-6851 AVP-Analyst [email protected] Roger S Brown 214-979-6840 VP-Senior Analyst/ Manager [email protected] Austin Independent School District, TX New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017 Summary Rating Rationale Moody's Investors Service has assigned a Aaa rating to Austin Independent School District's, TX $250 million Unlimited Tax School Building and Refunding Bonds, Series 2017. Moody's maintains the Aaa underlying rating on the district's outstanding general obligation debt, which will total $1.13 billion post-sale. In addition to the underlying rating, Moody's has assigned a Aaa enhanced rating to the current sale reflecting the guarantee of the Texas Permanent School Fund (PSF). The outlook is stable. The Aaa underlying rating reflects the district’s vibrant and growing economy, above average wealth indices and healthy financial reserves. The rating also reflects the district's manageable debt and pension burdens. 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, 2017. Exhibit 1 Large District Continues to Experience Significant Taxable Value Growth 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2012 2013 2014 2015 2016 2017 Assessed Value ($ billion - left axis) Assessed Value Growth Over Prior Year (% - right axis) Source: Travis County Appraisal District, TX Attachment 2

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Page 1: CREDIT OPINION - BoardDocs - School Board Management ...€¦ · balance with revenues net of the fiscal 2016 $266.1 million wealth recapture payment, it was a stronger 39.1%. Historically

U.S. PUBLIC FINANCE

CREDIT OPINION19 May 2017

New Issue

Contacts

John Nichols [email protected]

Roger S Brown 214-979-6840VP-Senior Analyst/[email protected]

Austin Independent School District, TXNew Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TXGOULT Bonds, Series 2017

Summary Rating RationaleMoody's Investors Service has assigned a Aaa rating to Austin Independent School District's,TX $250 million Unlimited Tax School Building and Refunding Bonds, Series 2017. Moody'smaintains the Aaa underlying rating on the district's outstanding general obligation debt,which will total $1.13 billion post-sale. In addition to the underlying rating, Moody's hasassigned a Aaa enhanced rating to the current sale reflecting the guarantee of the TexasPermanent School Fund (PSF). The outlook is stable.

The Aaa underlying rating reflects the district’s vibrant and growing economy, aboveaverage wealth indices and healthy financial reserves. The rating also reflects the district'smanageable debt and pension burdens.

The Aaa enhanced rating is based on the rating of the Texas Permanent School Fund andthe structure and legal protections of the transaction which provide for timely payment bythe PSF if necessary. Moody’s currently rates the Permanent School Fund Aaa. For additionalinformation on the PSF program, please see Moody's Rating Update Report on the TexasPermanent School Fund dated January 27, 2017.

Exhibit 1

Large District Continues to Experience Significant Taxable Value Growth

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2012 2013 2014 2015 2016 2017

Assessed Value ($ billion - left axis) Assessed Value Growth Over Prior Year (% - right axis)

Source: Travis County Appraisal District, TX

Attachment 2

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Credit Strengths

» Strong and vibrant economy experiencing strong taxable growth

» Healthy financial reserve position

» Manageable debt profile

» Above average wealth indices

Credit Challenges

» Modest declines in student enrollment

» Additional borrowing plans

» Growing wealth recapture payment pressuring operations

Rating OutlookThe stable outlook is based on the assumption that the strength of the tax base coupled with the sophisticated and forward-lookingmanagement team will lead to a continuation of a healthy financial position.

Factors that Could Lead to an Upgrade

» N/A

Factors that Could Lead to a Downgrade

» Poor financial performance leading to a weakening of reserve levels

» Trend of declining taxable values

» Significant increase in debt absent taxable value growth

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Key Indicators

Exhibit 2

Austin Independent School District, TX 2012 2013 2014 2015 2016

Economy/Tax Base

Total Full Value ($000) $ 60,510,011 $ 62,672,946 $ 67,349,174 $ 75,479,270 $ 81,637,501

Full Value Per Capita $ 97,247 $ 89,627 $ 93,728 $ 102,333 $ 118,061

Median Family Income (% of US Median) 99.7% 102.9% 105.0% 108.7% 108.7%

Finances

Operating Revenue ($000) $ 929,278 $ 907,774 $ 928,943 $ 1,014,759 $ 1,121,038

Fund Balance as a % of Revenues 29.9% 30.1% 28.5% 26.2% 38.4%

Cash Balance as a % of Revenues 30.4% 34.2% 32.9% 32.5% 52.2%

Debt/Pensions

Net Direct Debt ($000) $ 841,833 $ 831,510 $ 818,723 $ 814,616 $ 852,798

Net Direct Debt / Operating Revenues (x) 0.9x 0.9x 0.9x 0.8x 0.8x

Net Direct Debt / Full Value (%) 1.4% 1.3% 1.2% 1.1% 1.0%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 0.2x 0.2x 0.2x 0.3x 0.3x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 0.2% 0.3% 0.4% 0.4% 0.5%

Operating Revenue, Fund Balance, and Cash Balance are the General & Debt Service Funds CombinedSource: Austin ISD, TX; Moody's Investors Service

Detailed Rating ConsiderationsEconomy and Tax Base: Near-term Growth Expected in District’s Large Tax Base; Modest Decline in EnrollmentThe district’s significantly large and diverse tax base is not only supported by strong institutional presence, but is expected to continueto see notable growth in the near term future. Growth has accelerated in the last five years with the fiscal 2017 full valuation of $94.1billion reflecting a sizeable 15.2% growth over the previous year. The five-year compound annual growth in the district’s tax base was astrong 9.2% from 2012 to 2017, which is above average for similarly rated and sized districts throughout the US. Based on preliminaryindications from the county appraisal district, the district anticipates that tax base growth for fiscal 2018 will be approximately 10%,but does not reflect protested values yet. Reappraisals of existing property within Travis County (Aaa Stable) and the City of Austin(Aaa stable) remains strong and the surrounding area continues to attract businesses, tourists, and visitors. The top taxpayers andemployers are not only diverse, but also benefits from strong institutional presence as the district is home to the state capital and theUniversity of Texas System (Aaa stable), both of which account for a significant amount of the employment base in the area.

According to Moody's Economy.com, the Austin-Round Rock, TX area is in an expansion business cycle status. The area will grow atan above-average pace over the coming year, led by high tech and professional services. Residential construction will provide support,based on demand by incoming IT professionals. Longer term, the especially well-educated labor force, the high concentration oftechnology businesses, the relatively low cost of doing business compared with other high-tech centers, and fast population growth willyield above average performance. (Précis U.S. Metro/South/March 2017).

The American Community Survey data indicates slightly above average wealth levels for residents living in the district, evidenced bya per capita income and median family income of 116% and 108.7% of national levels, respectively. The March 2017 unemploymentrate for Travis County of 3.5% was below that of the state (5.0%) and the nation (4.6%) for the same time period. District enrollmenthas fallen modestly in the last few years which district officials report is an indication of significant increases in housing prices, which inturn makes affordability of the area for families with school age children a growing challenge. Current district enrollment is estimatedat 83,060. Management plans to conservatively budget for a modest annual enrollment decline for the coming year.

Financial Operations and Reserves: Healthy Reserves Despite Growing Wealth Recapture PaymentThe district’s financial reserves are expected remain healthy in the near-term, despite potential draws on General Fund balance. Fiscal2016 ended with a sizable $74.5 million surplus, which increased the total General Fund balance to $292.3 million or a healthy 28.9%of revenues. Inclusive of the Debt Service Fund, the total operating balance equaled $429.9 million, or a solid 38.4% of total operating

3 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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revenues. Moody's notes that the surplus was mainly driven by the district's change in fiscal year-end date to June 30 from August 31.In fiscal 2016 General Fund revenues were predominantly derived from property taxes (92.4% of General Fund revenues).

The district remains in Chapter 41 or property wealthy status with a recapture payments made annually, which has continued toincrease significantly given the rapid assessed value growth and stagnant enrollment levels. When comparing the total General Fundbalance with revenues net of the fiscal 2016 $266.1 million wealth recapture payment, it was a stronger 39.1%. Historically districtmanagement has established and adhered to strong fiscal management practices, including a formal fund balance reserve policy ofmaintaining 20% of annual expenditures in reserve. Management recently adjusted the formal fund balance policy calculation to netout the increasing recapture payment while maintaining the 20% target. The district currently levies $10.79 per $1,000 of assessedvaluation for its maintenance and operations (M&O) tax levy. We do not anticipate this will change in the near-term.

After originally adopting a $4 million surplus for fiscal 2017, district officials amended the budget with a $34.8 million planned used ofreserves for one-time expenditures. Management does not anticipate to fully utilize the entire amount due positive budgetary varianceand conservative budgeting and currently projects a $13.5 million use of reserves. If realized, the total General Fund balance woulddecline to $278.7 million, or a still healthy 23.9% of budgeted revenues. Net of the district’s $405 million wealth recapture payment,reserves would still equate to a healthy 36.6% of operations.

Preliminary fiscal 2018 budgetary figures exhibit a $46.2 million draw on reserves for recurring operations, but management reportsthat conservative assumptions and positive variances are anticipated to partially mitigate the deficit. If the budgeted deficit is realized,the General Fund Balance would still equate to a satisfactory 18.5% of total revenues or 32% of revenues net of the budgeted Chapter41 payment at fiscal year-end 2018. Despite the sizable deficits, although not anticipated to be fully realized, the projected reservelevels are still consist with the Aaa rating category. Management plans to implement an expenditure reduction plan that calls forsizable cuts in fiscal 2019, 2020, and 2021 in order to ensure the maintenance of healthy reserves. If unable to return to structuralbalance, or a prolonged trend of deficit operations decreases the district’s operating flexibility, downward rating pressure could exist.

LIQUIDITY

Liquidity maintained in the district's General Fund was $447.8 million as of fiscal year-end 2016 (a strong 44.2% of revenues). Inclusiveof the Debt Service Fund, total operating cash equaled $585.5 million (a solid 52.2% of operating revenues). If the budgeted draws forfiscal 2017 and 2018 are realized liquidity levels will likely decrease in tandem and remain similar to total General Fund balance levels.

Debt and Pensions: Manageable Debt and Pension BurdenPost sale, the district will have $1.13 billion in outstanding general obligation debt, which equates to a manageable 1.2% of the fiscal2017 assessed value. The overlapping debt burden is higher at 3.1% and heavily influenced by the City's of Austin. Roughly $100 millionin bond authorization will remain outstanding after the current sale, and will likely be exhausted in 2019. Although plans are notfinalized, the district plans to approach voters for additional general obligation debt authorization. The size of the bond package maybe signifiant, but officials are targeting no tax rate increase from the current $1.13 per $1,000 of assessed value. Given tax base growthprojections we anticipate the district’s debt burden will remain below average and manageable in the near-term, despite expectedfuture borrowing.

The district's debt management plan includes the use of commercial paper to short-term finance capital expenditures throughout theyear. Long-term, fixed rate debt is typically issued annually to redeem the commercial paper notes as is with the current issuance. Theprogram is rated P-1. For additional information on the district's program, see Moody's Update Report published on June 3, 2015.

DEBT STRUCTURE

All of the district's debt is fixed rate. Principal amortization is below-average at 51.8% retired in ten years, and final maturity in 2039.Debt service payments are structured to slightly decline over time.

DEBT-RELATED DERIVATIVES

The district has no variable rate bonds outstanding and is not party to any interest rate swaps.

PENSIONS AND OPEB

Budgetary pressure due to the district's participation in the Texas Teachers Retirement System (TRS) pension plan is expected to remainminimal in the near term. The State of Texas (Aaa stable) makes most of the employer pension contributions on behalf of the district

4 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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annually. Moody's fiscal 2016 adjusted net pension liability (ANPL) for the district, under our methodology for adjusting reportedpension data, is $370.5 million, or a modest 0.3 times operating revenues. The district's three-year average ANPL to operating revenuesis a modest 0.3 times, while the three-year average ANPL to full value is 0.5%.

Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments arenot intended to replace the district's reported liability information, but to improve comparability with other rated entities. For moreinformation on Moody's insights on employee pensions and the related credit impact on companies, government, and other entitiesacross the globe, please visit Moody's on Pensions at www.moodys.com/pensions.

Management and GovernanceThe district's board consists of nine members and supervises and controls all public schools and property within the district. The boardemploys a Superintendent of Schools, delegates administrative and supervisory functions to the superintendent, reviews and approvesthe district's budget.

Texas School Districts have an Institutional Framework score of Aa, which is high compared to the nation. Institutional Frameworkscores measure a sector's legal ability to increase revenues and decrease expenditures. Property taxes, one of the sector's major revenuesources is subject to a cap of $10.40 per 1,000 of assessed value, which can be overriden at the local level to $11.70 (with voterapproval). The voter approved levy override provides for additional revenue-raising flexibility. Unpredictable revenue fluctuations tendto be minor, or under 5% annually. Across the sector, fixed and mandated costs are generally greater than 25% of expenditures. Texasis a Right to Work state, providing significant expenditure-cutting ability. Unpredictable expenditure fluctuations tend to be minor,under 5% annually.

Legal SecurityThe bonds constitute direct obligations of the district, payable as to principal and interest from the proceeds of a continuing directannual ad valorem tax levied by the district, without legal limit as to rate or amount, on all taxable property within the district.

Use of ProceedsProceeds from the sale of the Series 2017 Bonds will be used to currently refund the district’s outstanding commercial paper notesissued for a variety of purposes ($25 million). The remaining proceeds will be used to fund district wide improvements to currentfacilities.

Obligor ProfileAustin Independent School District is a political subdivision located in central Texas. The district provides K-12 educational services tothe City of Austin are and enrolls roughly 83,000 students.

MethodologyThe principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December2016. 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 December 2015. Please see the Rating Methodologies page onwww.moodys.com for a copy of these methodologies.

Ratings

Exhibit 3

Austin Independent School District, TXIssue RatingUnlimited Tax School Building and RefundingBonds, Series 2017

Aaa

Rating Type Underlying LTSale Amount $250,000,000Expected Sale Date 05/31/2017Rating Description General Obligation

Unlimited Tax School Building and RefundingBonds, Series 2017

Aaa

5 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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Rating Type Enhanced LTSale Amount $250,000,000Expected Sale Date 05/31/2017Rating Description General Obligation

Source: Moody's Investors Service

6 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

© 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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REPORT NUMBER 1070637

7 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

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Contacts

John Nichols [email protected]

Roger S Brown 214-979-6840VP-Senior Analyst/[email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

8 19 May 2017 Austin Independent School District, TX: New Issue: Moody's Assigns Aaa Ratings to Austin ISD's, TX GOULT Bonds, Series 2017

Attachment 2