DALLAS - The Tyler Independent School District will venture into the muni market on its own credit rating next week after the Texas Permanent School Fund reached its capacity limit for backing bonds.

The East Texas district plans to issue about $125 million of unlimited-tax school building bonds on Jan. 14 in a negotiated deal led by Merrill Lynch & Co. The debt, authorized by voters last November, will finance construction of five elementary schools in the growing district. The serial bonds will carry maturities from 2009 to 2034.

Without the triple-A guarantee of the Permanent School Fund, Tyler ISD will rely on its double-A credit from Standard & Poor's and Fitch Ratings to attract buyers.

"That's a really strong rating," noted Tosha Bjork, director of financial services for the district. "Our financial adviser was telling us that it might cost us about 25 basis points" to issue bonds without PSF backing.

The district's financial adviser, RBC Capital Markets vice president David Tiffin, said that "while it would be nice to have PSF, we plan to go ahead and issue. Our desks tell us that that kind of credit is being well received in the market."

Indeed, Jeffrey Timlin, portfolio manager for Sage Advisory Services in Austin, said that issuers such as Tyler ISD should continue to benefit from a flight to quality.

"Natural double-A or triple-A credits are still finding good demand," he said.

Next week's deal will include Estrada Hinojosa & Co., First Southwest Co., Southwest Securities, and Raymond James & Associates as co-managers.

The law firm of Bickerstaff Heath Delgado Acosta serves as bond counsel.

Tyler ISD applied for PSF backing in December, about two weeks after the Dallas Independent School District. With DISD's issuance of $400 million last month, the PSF was tapped out for further issues, leaving some districts in a quandary.

"We knew it was iffy," Bjork said. "Dallas pretty much took all of it."

For districts with lower ratings, the decisions could be tougher, he said.

Tiffin, who advises some 20 Texas school districts, said that "the lower the credit rating, the more analysis ought to go into issuing the debt to meet near-term needs or waiting until the economy improves and PSF support is available."

In its preliminary official statement, Tyler ISD noted the unavailability of the PSF and said the Texas Education Agency, which administers the fund, would reconsider the district's application for the bond guarantee this month.

"The TEA advised the district that the Permanent School Fund assets have declined in value over the past several months, reaching a level that requires precise calculation of the limit placed on the bond guarantee program by the applicable Internal Revenue Service regulation," the statement read.

The value of the PSF investments had fallen 31% from a peak of $26 billion in October 2007 to $17.6 billion a year later. Even before the decline, the fund was nearing capacity because of the high volume of school bond issues in Texas.

Created in 1854 to help finance the state's public school system, the PSF owns a large amount of state land and receives income from land leases, mineral royalties, and leases of offshore oil tracts.

In the current school year, the fund will provide about $1.2 billion for public education while guaranteeing school bonds. Under IRS limitations, the PSF has backed $80 billion of debt since 1983.

For districts like Tyler that must accommodate growing enrollment, the need for facilities outweighs a few basis points in interest cost, according to Bjork.

Covering 193 square miles, Tyler ISD has an enrollment of 18,100 students in a population of 112,000, and is located about 100 miles south of Dallas and west of Shreveport, La.

As a hub for East Texas, Tyler's economy is supported by health care services, higher education, manufacturing, oil and gas, agriculture, tourism, and general trade. City median household effective buying income is 84% of the national level, while Standard & Poor's rates market value "a strong $65,650 per capita."

Growing at a moderate rate, the district operates 38 instructional and auxiliary facilities, as well as about 65 temporary classrooms to relieve overcrowding, according to Standard & Poor's. The completion of school expansion projects has increased the district's capacity and affords a measure of flexibility for when management implements planned capital projects.

While next week's issue will double the district's debt, analysts consider the debt ratios to be strong.

"We view Tyler Independent School District's financial position and performance as very strong," Standard & Poor's analysts wrote. "The district finished fiscal 2007 with a $23 million unreserved general fund balance, or 19% of operations. Management is projecting to end fiscal 2008 with a $4.5 million operating surplus due to a significant state aid increase."

Fitch Ratings said Tyler ISD's conservative financial practices allowed flexibility in dealing with economic constraints.

"Debt levels remain modest with amortization somewhat below average, despite the district nearly doubling its debt with this issuance," Fitch analysts wrote. "The considerable presence of health care and higher education should provide stability to the district's tax and enrollment base."

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