Public Finance Tax-Supported / U.S.A.

Austin Community College District, Texas Limited Tax Bonds Full Rating Report New Issue Details Ratings Issuer Default Rating New Issue Limited Tax and Refunding Bonds, Series 2016 Outstanding Debt Limited Tax Bonds

AA+

AA+ AA+

Sale Information: $86,340,000 Limited Tax and Refunding Bonds, Series 2016, scheduled to sell July 20 via negotiation. Security: Ad valorem tax levied on all taxable property within the district, limited to $0.50 per $100 of taxable assessed valuation (TAV). Purpose: To construct, equip, and renovate school facilities, refund certain outstanding maturities for debt service savings, and to pay related costs of issuance. Final Maturity: Aug. 1, 2036.

Rating Outlook Stable

Key Rating Drivers Analytical Conclusions: The ‘AA+’ rating reflects Fitch’s expectations of a continued, strong pace of growth in the property tax base, as well as use of the district’s sound expenditure flexibility and ample tuition-raising ability, which should allow the district to preserve a sound reserve cushion throughout the economic cycles. Fitch expects the long-term liability burden to remain low.

Economic Resource Base: Most of the district’s resources are locally derived from the robust and relatively diverse Austin-Round Rock metropolitan statistical area (MSA) economy, which is underpinned by a highly educated workforce. Fitch anticipates further strong gains in population, jobs, and income levels should drive additional economic expansion. Revenue Framework: 'aaa' factor assessment. Fitch believes the district’s natural revenue growth prospects (a portion of which is attributable to typically counter-cyclic enrollment) are strong and will continue to exceed U.S GDP. The district maintains superior revenue-raising flexibility.

Expenditure Framework: 'aa' factor assessment. The pace of spending growth should remain more or less aligned to revenues over time, led by passive operating revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases. Underlying the district’s solid expenditure flexibility is its strong workforce control. Fitch expects carrying costs to remain moderate. Related Research Fitch Rates Austin, TX PIBs, COs, & PPFCOs 'AAA'; Outlook Stable (August 2015)

Analysts Rebecca C. Moses +1-512-215-3739 [email protected] Tipper Austin +-1-212-908-9199 [email protected]

Long-Term Liability Burden: 'aaa' factor assessment. The long-term liability burden as a percentage of personal income is low. Fitch expects the burden to remain consistent with the assessment going forward.

Operating Performance: 'aaa' factor assessment. Use of the district’s significant operating flexibility has preserved a strong and stable reserve cushion through the economic cycle. Fitch believes the district’s operating cushion would remain consistent with an ‘aaa’ financial resilience assessment in a moderate economic decline.

Rating Sensitivities Financial Flexibility: Deterioration of the district’s operating flexibility would likely lead to negative rating action.

www.fitchratings.com

July 19, 2016

Public Finance Austin Community College District (TX) Scenario Analysis

v. 1.10 2016/06/22

Analyst Interpretation of Scenario Results:

Reserve Safety Margin in an Unaddressed Stress

Actual

35.0%

Fitch believes the district would use a combination of its sound reserves and superior inherent budget flexibility to offset the impact of a moderate recessionary revenue decline.

Scenario

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2009

2010

2011

2012

2013

2014

2015

Year 1

Year 2

Year 3

Financial Resilience Subfactor Assessment: Available Fund Balance

bbb

a

aa

aaa

Scenario Parameters:

Year 1 (1.0%)

GDP Assumption (% Change) Expenditure Assumption (% Change) Revenue Output (% Change)

Year 2 0.5%

Year 3 2.0%

2.0%

2.0%

2.0%

(1.0%)

4.8%

7.1%

Inherent Budget Flexibility Revenues, Expenditures, and Fund Balance Total Operating & Non-Operating Revenues % Change in Revenues Total Operating & Non-Operating Expenses % Change in Expenditures

Actuals

Scenario Output

2009

2010

2011

2012

2013

2014

2015

Year 1

Year 2

Year 3

230,646

276,687

284,382

284,095

286,481

292,637

317,176

314,004

329,177

352,634

-

20.0%

2.8%

(0.1%)

0.8%

2.1%

8.4%

(1.0%)

4.8%

7.1%

224,663

269,435

289,584

282,322

297,108

298,690

309,836

316,032

322,353

328,800

-

19.9%

7.5%

(2.5%)

5.2%

0.5%

3.7%

2.0%

2.0%

2.0%

Transfers In and Other Sources

-

-

-

-

-

-

-

-

-

-

Transfers Out and Other Uses

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Change in Net Assets/Net Position

5,983

7,252

(5,202)

1,773

(10,627)

(6,053)

7,341

(2,028)

6,824

23,834

Operating Margin (Surplus/(Deficit)

2.7%

2.7%

(1.8%)

0.6%

(3.6%)

(2.0%)

2.4%

(0.6%)

2.1%

7.2%

50,139

55,244

54,957

56,276

52,094

54,119

70,729

68,701

75,525

99,359

-

-

-

-

-

-

-

-

-

-

Unrestricted Cash/Investments

50,139

55,244

54,957

56,276

52,094

54,119

70,729

68,701

75,525

99,359

Unrestricted Cash/Investments (% of Expend. and Transfers Out)

22.3%

20.5%

19.0%

19.9%

17.5%

18.1%

22.8%

21.7%

23.4%

30.2%

Net Transfers Bond Proceeds and Other One-Time Uses

Unrestricted Cash/Investments

Inherent Budget Flexibility

Reserve Safety Margins Minimal

Limited

Midrange

High

Superior

Reserve Safety Margin (aaa)

16.0%

8.0%

5.0%

3.0%

2.0%

Reserve Safety Margin (aa)

12.0%

6.0%

4.0%

2.5%

2.0%

Reserve Safety Margin (a)

8.0%

4.0%

2.5%

2.0%

2.0%

Reserve Safety Margin (bbb)

3.0%

2.0%

2.0%

2.0%

2.0%

Notes: Scenario analysis represents an unaddressed stress on issuer finances. Fitch's downturn scenario assumes a -1.0% GDP decline in the first year, followed by 0.5% and 2.0% GDP growth in Years 2 and 3, respectively. Expenditures are assumed to grow at a 2.0% rate of inflation. Inherent budget flexibility is the analyst's assessment of the issuer's ability to deal with fiscal stress through tax and spending policy choices, and determines the multiples used to calculate the reserve safety margin. For further details, please see Fitch's US Tax-Supported Rating Criteria.

Austin Community College District, Texas July 19, 2016

2

Public Finance Rating History

Credit Profile

Rating Action

Outlook/Watch

AA+

Affirmed

Stable

7/18/16

AA+

Affirmed

Stable

5/14/15

AA+

Affirmed

Stable

3/31/15

AA+

Affirmed

Stable

4/3/13

AA+

Affirmed

Stable

12/611

AA+

Affirmed

Stable

8/2/11

AA+

Revised

Stable

4/30/10

AA

Affirmed

Stable

4/6/09

AA

Affirmed

Stable

10/13/06

AA

Assigned Stable

6/10/03

a

Date

a

Reflects rating recalibration.

ACC operates 10 comprehensive campuses in its taxing jurisdiction, which is largely comprised of some of the region’s most rapidly growing counties (Travis, Williamson, and Hays) and offers instructional programs at its educational centers throughout its larger, eight-county service area. The district's resources are primarily influenced by local trends, including enrollment and the tax base. Enrollment typically runs counter-cyclical to local economic conditions. A pattern of moderate enrollment declines over fiscals 2012-2014 was largely reflective of the area’s strengthening economy, post-recession. Enrollment has since stabilized and remained flat in fiscal 2016 at about 20,000 in full-time equivalent students. The MSA continues to grow strongly given ongoing population gains and the resulting economic expansion. IHS Economics anticipates regional job growth, personal income, and real gross metro product to significantly outpace the U.S. over the medium term with the greatest growth in the construction and professional and business services sectors. Growth resulting from the MSA evolving into one of the country’s high-tech hubs lends some economic vulnerability to potential technology downturns; however, the stable and sizeable presence of higher education (particularly the University of Texas) and state government counter-balances some of that risk. The district’s tax base is diverse, although some technology sector concentration is present. TAV trends generally reflect consistently solid annual gains. Fitch expects this trend will be sustained given a robust housing market, typically healthy increases in reappraisals, and significant residential, retail and commercial development underway or planned. Revenue Framework Property taxes, levied for both operations and debt service, presently provide about 40% of total revenues. ACC’s operations have become significantly more dependent on the local tax base in the past decade. Additional tax revenue as a result of TAV growth has largely offset moderate declines in enrollment-related revenues, such as federal (largely Pell grant) revenue, state appropriations, and tuition, as well as some recessionary cuts to state funding. The district's total tax rate is limited to $1.00 per $100 TAV according to state statute, of which no more than $0.50 per $100 TAV can be for debt service. However, the district’s operating property tax revenue is capped at a much lower $0.09 per $100 TAV tax levy (the current rate) by locally voted limitations. The district maintains ample margin in its debt service tax rate at $0.01 per $100 TAV. Nonetheless, Fitch expects a continuation of strong demographic and economic trends should drive much of the future revenue growth trends for the district, exceeding U.S GDP and aligning with historical revenue performance. The district is able to capture that growth in its property tax revenue.

Applicable Criteria U.S. Tax-Supported Rating Criteria (April 2016)

Austin Community College District, Texas July 19, 2016

Tuition/fee revenue accounts for about 20% of ACC’s total revenue and Fitch judges the district’s independent ability to raise its tuition and fee charges as ample. Third-party funding support stems from the long-standing commitment of the state (rated 'AAA'/Stable) and U.S. to fund higher education. Nonetheless, these revenue streams remain susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures

3

Public Finance Expenditure Framework Further revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases should lead the pace of spending growth to be more or less aligned with revenues over time. The district maintains sound flexibility to adjust instruction (its largest operating expense) to evolving enrollment trends. The district retains strong control over its workforce costs and can adjust employee headcount and compensation accordingly, enabled by the absence of multiyear, contractual agreements or collective bargaining with labor. This expenditure flexibility is tempered by the district's need to recruit and retain a sufficient number of highly educated professionals for instructional purposes. The district demonstrated its ability to rapidly respond to revenue declines and maintain structural balance following the last downturn with the implementation of various salary and staffing cost efficiencies as enrollment gains reversed in conjunction with a developing economic recovery. Fixed carrying costs — the combination of total annual debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits (OPEB), net of state support — consumed a moderate 11.5% of total operating/nonoperating expenses in fiscal 2015. Fitch expects carrying costs will increase somewhat given rising annual debt service projected and future tax-supported debt issuances planned, but remain moderate given manageable retiree costs shared with the state. Long-Term Liability Burden Including this issuance, the long-term liability burden is low at 8.6% of 2014 MSA personal income, derived largely from overlapping debt in a growing MSA. Fitch expects the burden to remain consistent with an 'aaa' assessment despite pressure from ongoing population gains as growth in the long-term liability burden should be offset by continued economic expansion that drives additional income and population gains, in line with historical trends. About half of the district's debt is supported by ample taxing margin under a separate levy of up to $0.50 per $100 TAV given much of the recent $386 million GO bond authorization (including this new money portion) has been issued. The remainder is supported by either the district’s general operating revenues in the form of annually appropriated lease payments or a specifically pledged portion of tuition/fees. In total, the district’s direct debt is a small fraction of the overall long-term liability burden. District officials anticipate near-term issuance of the remaining bond authorization, which is expected to require a maximum two-cent tax rate increase under what Fitch believes to be reasonable TAV assumptions. The GO bond program was largely directed toward various renovation/expansion needs at existing facilities, and management anticipates there may be some positive effect on enrollment from the near-term completion of these projects. The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing, multiple-employer plan for which the state provides roughly half of the community college's (employer) annual pension contribution. Under GASB 68, the district reports its share of the TRS net pension liability (NPL) at $40.1 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 adjusted for 7% IRR remains small at less than 1% of personal income.

Austin Community College District, Texas July 19, 2016

4

Public Finance Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects there will be modest growth in the net pension liability even if investment returns meet assumed rates, although not outside of expectations for the 'aaa' assessment given how small the pension liability is relative to overall debt. In addition, the district remains vulnerable to future policy and funding changes by the state, similar to all Texas community colleges. The district also provides OPEB through the state-run, post-employment benefit healthcare plan, and its individual obligation associated with the decision to fully fund retiree dental care in this same plan remains small at less than 1% of personal income. Operating Performance The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves through the economic cycle. This assessment is informed by the district’s recent fiscal history of unrestricted cash/investments as a proxy for unrestricted general fund balance. The district has steadily increased funding for annual capital pay-go as key revenues and enrollment trends strengthen. Fiscal 2016 performance is projected to generate a healthy operating surplus (roughly $9 million or 3% of operational spending), positive to budget. Management expects these results, in addition to the year’s budgeted set aside of $3 million, will maintain the district’s internal reserve of unrestricted cash/investments at no less than 17% of spending at year-end (in line with policy).

Austin Community College District, Texas July 19, 2016

5

Public Finance

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Austin Community College District, Texas July 19, 2016

6