Fitch Affirms Rowan County, NC’s $53MM GO Bonds at ‘AA’; Outlook Stable

NEW YORK

Fitch Ratings has taken the following action on Rowan County, North Carolina (the county):

–$52.9 million general obligation (GO) bonds affirmed at ‘AA’.

The Rating Outlook is Stable

SECURITY

The bonds constitute a general obligation of the county, secured by a pledge of its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: The county’s strong financial profile is demonstrated by its consistently ample reserves and management’s compliance with prudent internal fiscal policies.

MODEST DEBT BURDEN: Overall debt levels are expected to remain low, given the rapid pace of outstanding principal amortization and limited future capital needs and debt issuance plans.

MANUFACTURING-BASED ECONOMY: The economy is limited and remains somewhat concentrated in manufacturing, which has resulted in an above-average but improved unemployment rate. Recent capital investments by the county’s largest employers are expected to spur additional job growth and continued modest tax base growth.

RATING SENSITIVITIES

EFFECTIVE FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the county’s strong financial management practices. The Stable Outlook reflects Fitch’s expectation that such shifts are highly unlikely.

CREDIT PROFILE

Rowan County occupies 511 square miles and lies approximately 50 miles southwest of Greensboro and 42 miles northeast of Charlotte. The county’s 2014 population of 138,630 represents an increase of 6% since 2000.

SOUND RESERVE LEVELS

The county’s financial position appears healthy and continues to benefit from management controls on spending growth and timely revenue enhancement. The county annually appropriates fund balance but has continued to realize generally positive budget variances due to conservative budgeting and higher than expected revenues.

Property tax revenues continue to be the county’s largest revenue source at 60%. Tax collections are solid at more than 97% each for fiscal years 2014 and 2015. State law limits the property tax rate to $1.50 per $100 assessed value (AV) except for debt service purposes; the county’s tax rate is well below such limit at $0.65 per $100 AV.

EFFECTIVE FINANCIAL MANAGEMENT

The fiscal 2014 audit shows a $585,000 operating surplus (0.46% of spending) even following the budgeted appropriation of $7.5 million of fund balance in the original budget. Positive budget variances reflect conservative property tax revenue assumptions and savings due to careful management of personnel vacancies and department consolidations. The unrestricted fund balance totaled $24.1 million or an ample 19% of expenditures and transfers. In addition, including the county’s reserve required by state statute to offset accounts receivable increases reserves to $39.5 million or 31.6% of spending.

CONTINUED CONSERVATIVE BUDGETING FOR 2015

The fiscal 2015 budget reflects a continuation of conservative budgeting. Initial reviews indicate that actual revenues exceed budgeted amounts by 2.2% ($2.8 million) and expenditures are below budget by 6.9%. Preliminary results show an operating surplus of $1.1 million. The 2015 balance sheet liquidity is healthy with general fund cash and investments of $33.9 million, equivalent to three months of general fund spending.

The 2016 budget indicates a fund balance appropriation of $8.2 million but management expects actual results to add to the overall balance. This aligns with the pattern that has been seen in previous years of positive results despite budgeted fund balance appropriations. The revenue budget assumes a notable increase in sales tax revenues but appears to be in line with positive results seen in FY 2015. There has been a slight dip in AV of existing properties as a result of revaluation. However, an increase in new properties will offset this loss and minimize the impact on revenues. Based on the county’s historical financial performance, operations are expected to remain stable over time and reserves ample.

MANUFACTURING DOMINATED ECONOMY

The county’s location offers quick access to international airports in Greensboro and Charlotte, which supports the manufacturing dominated economy. Top employers include manufacturing companies, government agencies and medical groups. Recent investments by the county’s largest employers provide a positive outlook for future job growth and stability in the manufacturing and medical sectors.

The unemployment rate as of September 2015 was 5.6%, an improvement from the September 2014 figure of 6.1%. Income levels, as measured on a per capita and median household basis, are 10%-15% lower than those of the state and nation.

The county’s tax base is relatively diverse with the top 10 taxpayers including the Duke Energy Corporation (IDR ‘BBB+’/Outlook Negative) and Rowan County Power, LLC. The presence of these two large energy corporations represents 7.4% of the tax base.

LOW DEBT EXPECTED TO CONTINUE

Overall debt of $74.5 million remains low at 0.7% of market value and $541 per capita. The county plans to borrow a moderate $28 million over the intermediate term. Given projected AV growth and rapid amortization (96% retired in 10 years), the additional debt is not expected to impact the debt burden materially. The county does not have any exposure to variable-rate debt, derivatives, or short-term debt.

WELL-FUNDED PENSION AND MANAGEABLE OPEB COSTS

Pension and other post-employment benefits (OPEBs) continue to be a modest burden on resources. The county is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees’ Retirement System (LGERS). The state’s pension plan is extremely well funded at 97.1% (Fitch adjusted) as of the most recent valuation date. The county also administers a retirement plan for law enforcement officers and other county employees. The county consistently contributes its full pension payment, equivalent to a low 1.6% of spending.

The county has increased OPEB and pension payments in fiscal years 2013, 2014 and 2015. OPEB is a minimal burden on the county’s budget representing 0.2% of spending. As of 2012 OPEB is closed to new hires. Total carrying costs representing the debt service, pension ARC and OPEB annual payment equal a modest 13% of 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 less 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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994516

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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