Fitch Affirms Mecklenburg County GOs at ‘AAA’; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has affirmed the following ratings on Mecklenburg County, North Carolina bonds:
–$1.0 billion general obligation (GO) bonds at ‘AAA’
–$105.7 million variable-rate GO refunding bonds series 2009D at ‘AAA/F1+’
–$339.7 million certificates of participation (COPs) and limited obligation bonds (LOBs) at ‘AA+’.
In addition, Fitch has affirmed the county’s Long-Term Issuer Default Rating (IDR) at ‘AAA’.
The Rating Outlook is Stable.
The general obligations of the county are secured by a pledge of the faith and credit and unlimited taxing power of the county.
The LOBs and COPs are payable from lease rental payments made by the county, subject to annual appropriation. The LOBs and COPs are additionally secured by a deed of trust granting a lien on essential government assets.
KEY RATING DRIVERS
The ‘AAA’ IDR is supported by a strong economic base and solid control over revenues and spending, which leave the county well positioned to address economic downturns. The county’s long-term liability burden is low, reflecting healthy funding of retiree benefit liabilities and rapid debt amortization.
The COP and LOB rating is rated one notch lower at ‘AA+’, reflecting the risk of appropriation for lease payments.
The ‘F1+’ rating on the variable rate GO series 2009D bonds reflects the county’s Long Term ‘AAA’ IDR and demonstrated access to capital markets. In addition, the county’s strong liquidity position provides a potential source of repayment in a failed remarketing scenario.
Economic Resource Base
Mecklenburg County encompasses 546 square miles and is located in south-central North Carolina on the South Carolina border. The county is the most populous in the state, with a 2015 population of over 1 million, which grew by more than 12% since 2010, significantly outpacing the state and the nation.
Revenue Framework: ‘aaa’ factor assessment
Revenue growth prospects are solid based on historical performance, increasing assessed values and continued economic development. The county’s revenue base is largely driven by property taxes and current rates are elevated but well below the statutory limit, providing significant revenue raising ability.
Expenditure Framework: ‘aa’ factor assessment
The pace of spending is expected to be generally in line with or marginally above revenue growth. The county has a solid spending flexibility; carrying costs are moderate and the county’s ability to control wages and benefits is strong in the absence of collective bargaining.
Long-Term Liability Burden: ‘aaa’ factor assessment
The county’s long-term liability burden is relatively low, due to the overfunded pension system and manageable debt levels. Fitch expects long-term liabilities to remain a low burden on resources, given rapid debt amortization and conservative debt management policies.
Operating Performance: ‘aaa’ factor assessment
Fitch expects the county to continue to maintain a high level of financial flexibility throughout the economic cycle, given its solid revenue and expenditure flexibility and strong revenue and economic growth prospects.
Sound Credit Profile: The rating is sensitive to shifts in fundamental credit characteristics, including its commitment to maintain structural balance and low long term liability burden.
Mecklenburg County’s robust economy is mainly supported by financial and professional services and manufacturing, with a growing presence in energy production, tourism, high-technology manufacturing, and health and education. The county is anchored by the city of Charlotte, with access to transportation alternatives that include the Charlotte-Douglas International Airport (revenue bonds rated ‘A+’/Stable Outlook), light rail and multiple highways which support economic development. The county is the second largest financial center in the U.S. and home to six Fortune 500 companies. County wealth levels exceed the state and national average. Unemployment levels remain low in line with state and national norms, and have notably improved from the recessionary peak.
The county’s primary revenue source is property tax revenues which represented 61% of general fund revenues in fiscal 2015. Sales tax revenues are the next largest revenue source, equal to 15% of general fund revenues.
Historical general fund revenues growth has trailed national GDP growth but well exceeded the level of inflation. Property tax revenues were impacted by declining home values and lower home sales during the recession, although home values and sales have strongly rebounded due to improving market conditions. Property tax revenues were recently impacted by the county-wide revaluation that occurred in early 2011, which resulted in property tax revenue refunds in subsequent years. Management has affirmed that property tax revenue refunds have since eased as they were largely settled in fiscal 2015. Favorably, current estimates for fiscal 2016 property tax revenues are exceeding the budget. Sales tax revenues were also impacted by the recession, reflecting declines in retail spending, although consumer spending and sales tax revenues have solidly recovered. The county’s growth prospects are favorable due to the strong economic base and continued ongoing capital investments.
The county maintains ample capacity to raise revenues, with the fiscal 2016 budget tax rate of $0.8157 per $100 of assessed value well below the statutory cap of $1.50. The proposed 2017 budget maintains the property tax rate for the fourth consecutive year.
General fund expenditures are mainly driven by education spending, which represented 41% of fiscal 2015 spending, followed by health and social services at 24%.
Fitch expects the pace of spending, over time, to be in line with or marginally above revenue growth trends, given rising population and increased demand for services. The county managed expenditures during the recession by decreasing its workforce, reducing certain services and deferring maintenance. The county has solid flexibility in controlling wages and benefits in the absence of collective bargaining. Management is in the process of restructuring its health benefits for additional cost savings.
The county maintains healthy expenditure flexibility. Carrying costs, which comprise total debt service, actuarially determined pension payments, and other-post employment benefit (OPEB) actual contributions are moderate at 16% of fiscal 2015 governmental spending. The county’s ability to control wages and benefits is strong in the absence of collective bargaining, providing additional expenditure flexibility.
Long-Term Liability Burden
Fitch expects the county’s long-term liability burden, currently at 8% of personal income, to remain low. The county’s long-term liability burden is almost entirely derived from debt, which benefits from rapid amortization of direct debt (approximately 75% in 10 years), above the county’s conservative policy of 64%. The county has exposure to variable rate debt, which comprised 16% of total debt in fiscal 2015 but is notably reduced from 46% of total debt in fiscal 2010. The county’s revised debt guidelines limit variable rate debt exposure to 20%, which Fitch considers to be manageable.
The county’s total direct debt of $1.6 billion in fiscal 2015 comprises half of the long-term liability burden, equal to 3.1% of personal income. The county’s 2015-2018 capital improvement plan totals $914.6 million, a majority of which will be dedicated to education-related projects. The plan will be funded with future debt issuances of about $100 million annually, pay-as-you-go financing equal to three cents of the property tax rate, and a portion of excess fund balance in the debt service fund. Fitch considers the county’s debt issuance plans to be manageable given its rapid debt repayment and commitment to fund a portion of capital projects on a pay-go basis.
Long-term obligations associated with pensions and other post-employment benefits (OPEB) are nominal. The county contributes 100% of its ARC to the statewide cost-sharing multi-employer defined benefit Local Government Employees’ Retirement System (LGERS). The county’s portion of the LGERS plan is fully funded at approximately 100%, using the Fitch adjusted 7% discount rate. The county also provides various supplemental defined benefit pension plans, including the law enforcement officer’s plan, which it funds on a pay-go basis. The law enforcement officer’s plan had an unfunded liability of $11.5 million, equal to less than 1% of personal income in fiscal 2015. The county current funds OPEB benefits on a pay-go basis. As of 2014, the unfunded actuarial accrued liability was $399 million or less than 1% of AV.
The county’s variable rate GO bonds are subject to remarketing risk. Upon an investor tender notice, the bonds are subject to a remarketing window. The remarketing agent has one month to find another buyer at the existing spread or at a higher spread acceptable to the county. If neither is completed, the funding window begins. Within the six-month funding window, the county has the option at any time to: refund or redeem the bonds, convert to another mode under the bond resolution (such as weekly with letter of credit), or remarket in the windows mode at a new spread. If no option is exercised during the funding window, the bonds are subject to mandatory tender. A failure to pay the tender price of the bonds on a mandatory tender date will constitute an event of default under the bond resolution. Given the county’s strong credit profile and demonstrated access to the capital markets, Fitch expects the county would be able to refund the bonds. In addition, the county’s strong liquidity position provides sufficient source of repayment in the event of a failed remarketing.
Fitch’s Analytical Sensitivity Tool (FAST) produces a general fund revenue decline of a modest 1% in year one of a moderate economic downturn scenario. The county has demonstrated a solid history of strong fiscal management throughout the economic cycle. Fiscal 2015 ended with an unrestricted general and debt service fund balance of $542.6 million or a sizeable 34% of spending. Year-end results were lower than expected primarily as a result of a reduction in property tax revenues relating to refunds following the countywide 2011 property revaluation. Favorably, sales tax revenues were strong and performed better than the 2015 budget, reflecting a rise in consumer spending. When adding in the state-required restricted fund balance for certain receivables, and comparing it to fund balance presentations in other states, reserves equaled $655.7 million or 42% of spending. Although the fund balance declined in fiscal 2015, the county historically budgets conservatively and reserves are expected to remain in line with the county’s 28% reserve policy.
The fiscal 2016 budget is balanced and represents a less than 3% increase over the fiscal 2015 budget while maintaining the current property tax rate. The fiscal 2016 budget includes a $39 million fund balance appropriation to fund various general government and school capital projects on a pay-go basis, OPEB benefits, enterprise reserves for capital, technology and fleet, and non-recurring expenses. County policy permits the appropriation of available fund balance in excess of its 28% reserve policy towards capital, fleet and technology reserves, subject to a cap. Current year-end estimates indicate operations are performing better than the budget due to solid property tax and sales tax revenue performance. Management projects fund balance to increase at year end.
The proposed fiscal 2017 budget is balanced with no change to the property tax rate and represents a 3% increase over the 2016 budget. The recommended budget utilizes a $46.8 million fund balance for enterprise reserves, deferred maintenance, OPEB benefits, pay-go capital and non-recurring expenses. The recommended budget also incorporates a proposal for a five-year $150 million deferred maintenance plan beginning in fiscal 2017, to be funded with a combination of pay-go, capital and general fund reserve balances.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Elizabeth Fogerty, +1 212-908-0526