Fitch Affirms Guilford County, NC’s GO Bonds at ‘AAA’; Outlook Stable

NEW YORK

Fitch Ratings has affirmed the ‘AAA’ rating on the following Guilford County, NC (the county) bonds:

–$706.13 million general obligation (GO) bonds at ‘AAA’;

–$16.85 million limited obligation QSCBs (LOBs) issued by Guilford County Public Facilities Corporation at ‘AA+’.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of the county, to which its full faith and credit and unlimited taxing power are pledged.

The LOBs are payable by lease payments subject to annual appropriation, and a deed of trust against certain public school assets of the county.

KEY RATING DRIVERS

SOLID FINANCIAL FLEXIBILITY: Positive financial operations and healthy reserve levels are a result of prudent fiscal practices and conservative budgeting. Liquidity is strong.

TRANSITIONING ECONOMY: The county’s economic base continues to transition from a textile based manufacturing core to an increasingly diversified manufacturing base. Economic indicators are moderately below national averages.

LIMITED LONG-TERM LIABILITIES: Carrying costs for debt, pensions and other post-employment liabilities do not pressure the credit.

WEAK DEBT PROFILE: The county’s debt service cost is somewhat elevated and contains exposure to variable-rate debt and derivatives. However, the county continues to reduce its variable rate exposure and conservatively budgets interest expense to mitigate this risk.

APPROPRIATION RISK ON LOBS: The ‘AA+’ rating assigned to the LOBs, one notch below the county’s GO rating, reflects appropriation risk mitigated by Fitch’s assessment of the essentiality of the public school assets pledged to bondholders.

RATING SENSITIVITIES

HEALTHY FINANCIAL FLEXIBILITY: The Stable Outlook reflects Fitch’s expectations that the county’s financial position will remain sound through the economic cycle. The rating would be sensitive to any material weakening of the county’s financial flexibility.

CREDIT PROFILE

Guilford County is the most populous county in the Piedmont Triad region of North Carolina, with a 2015 population of 512,119 compared to 488,406 in 2010. The county encompasses two of the state’s larger trade and population centers, the cities of High Point and Greensboro (GOs rated ‘AA+’ and ‘AAA’, respectively, both with a Stable Outlook by Fitch).

SOUND FISCAL POSITION

The county’s reserve levels have remained strong and in-line with historical levels. Fiscal 2015 concluded with a 2.2% surplus bringing the unrestricted general fund balance to $112 million, or a solid 20.3% of general fund spending. Fitch expects balances to continue to be well above the county’s reserve target of unassigned fund balance exceeding 8% of the subsequent year’s budget. Property tax revenue accounts for 64% of total general fund revenue, providing a stable revenue base, and the tax rate of $0.76 per $100 in assessed value is well beneath the state cap of $1.50. The county’s reserve by state statute, which is primarily to offset accounts receivable, is a source of additional financial flexibility. This reserve totaled $45.2 million at fiscal year-end 2015, or an additional 8.2% of spending.

The county’s fiscal 2016 budget added $18.7 million, or 3.3%, year-over-year, primarily due increased school and community college operating expenditures and debt service. The budget includes an appropriation of fund balance of $27.1 million, although the county has a history of very conservative budgeting. Year to date results for fiscal 2016 are positive. Property taxes are currently projected to be over budget due in part to a conservative budget.

TRANSITIONING MANUFACTURING ECONOMY

Guilford County’s economy has seen continued downsizing of its traditional furniture and textile manufacturing base. The county’s unemployment rate has been pressured since the onset of the recession and remains above state and national averages. Despite these difficulties, the county continues to expand the breadth of its economic base through the use of incentives and promotion of its quality of life, educational opportunities, and transportation infrastructure.

The local economy continues to grow through investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and aviation. Development of these sectors should add diversity and stability to the county’s economic base. A good deal of growth is centered on the Piedmont Triad International Airport (PTIA) in Greensboro, where several companies have announced expansions in recent years including Honda Aircraft Co. The company delivered its first commercial aircraft, the HondaJet, in December 2015 and now employs 1,700 workers.

The county’s education sector may also contribute to future growth. In particular, North Carolina Agricultural and Technical State University and the University of North Carolina at Greensboro were involved in the development of The Gateway University Research Park, which features a joint school of nanoscience and nanoengineering.

As of November 2015, the county’s unemployment rate of 5.5% was equal to the state, but behind the national average of 4.8%. Wealth indicators for the county are likewise on par with the state but below national averages. Housing prices are up 3.1% year-over-year and projected to increase another 3.2% in the next year, back to pre-recession levels, according to Zillow.com.

AVERAGE DEBT LEVELS WITH HIGH EXPOSURE TO VARIABLE-RATE DEBT AND DERIVATIVES

Overall debt levels are affordable at 2.2% of market value, but could rise with funding of capital requirements related to Guilford County Schools and Guilford Technical Community College. The county issued $2.35 million in bond anticipation notes in the previous two fiscal years to fund community college capital needs. Debt service was a relatively high 13.6% of governmental spending in fiscal 2015, exceeding the county’s debt service target of 15% of general fund expenditures. The county expects debt service to peak in fiscal 2018 and then regain compliance in fiscal 2019. The county is well below the state’s statutory debt limit and Fitch believes future planned debt issuance is manageable based on the low current debt levels and rapid amortization.

As of June 30, 2015, the county’s variable rate debt remained an elevated 22.8% of total debt outstanding. The county conservatively budgets its variable rate cost of interest at 4.25% compared to actual rates under 0.1%, contributing to the favorable expenditure performances in recent years. Fitch will monitor the county’s variable-rate exposure for pressure on the county’s debt profile or on its financial flexibility.

LIMITED PENSION AND OPEB LIABILITIES

The majority of county employees participate in the well-funded North Carolina Local Governmental Employees’ Retirement System (LGERS), a cost-sharing multiple-employer plan. The county also administers a single-employer pension plan to provide retirement benefits to qualified sworn law enforcement officers and a separate CSME plan for the county’s retired registers of deeds. Combining the three defined benefit plans, the county’s net pension assets are greater than their net pension liability. This is true even when adjusting the liability with Fitch’s more conservative 7% discount rate. The county’s total fiscal 2015 pension contribution was an affordable $8.7 million or a very low 1.4% of governmental spending.

Other post-employment benefit (OPEB) liabilities remain low with the unfunded liability at just 0.3% of market value. Fitch does not consider the county’s OPEB liability as exerting pressure on its finances given the relatively small size of the OPEB cost. In fiscal 2015, the actuarially required contribution was $13 million, or 2.1% of spending, compared to the actual contribution of $6.8 million. Furthermore, the OPEB plan was closed to new employees in fiscal 2008.

Total carrying costs including pension required contributions, OPEB actual contribution and debt service payments are a moderate 16.2% of governmental spending.

Additional information is available at ‘www.fitchratings.com‘.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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