Fitch Rates Kenosha County, WI’s $18.5MM GO Bonds and $12.4MM GO Notes ‘AA’; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘AA’ rating to the following Kenosha County, WI (the county) securities:

–$18.525 million general obligation (GO) Brookside care center bonds, series 2015B; and

–$12.485 million GO promissory notes, series 2015C.

The bond offering will finance upgrades to the county owned Brookside Care Center. The note offering will fund various capital projects within the county. The bonds and notes are expected to price via competition on Aug. 18.

In addition, Fitch affirms the following ratings at ‘AA’:

–$21.92 million GO refunding bonds, series 2015A; and

–$11.925 million GO promissory notes series 2014A.

The Rating Outlook is Stable.

SECURITY

The county pledges its full faith and credit and unlimited taxing power for the repayment of principal and interest on the GO bonds and GO notes.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE AND RESERVES: The county’s sound financial performance is demonstrated by successive positive operating margins across various funds, increased reserves, and an ability to maintain adequate financial flexibility under a restrictive state law limiting revenue growth.

STRONG MANAGEMENT PRACTICES: Financial management features conservative budgeting and implementation of multi-year forecasting.

SIGNIFICANT TAX BASE DECLINES REVERSING: The county tax base grew 2.8% in 2014 with an additional 2%-3% expected for 2015, beginning to reverse a cumulative 22% assessed value (AV) decline since 2008. Fitch expects significant new commercial/industrial development activity coupled with stabilizing residential values to generate further tax base growth over at least the near term.

AVERAGE ECONOMIC PROFILE: Following a significant spike in county unemployment rates in 2009 and 2010, labor force and employment levels have exhibited stronger growth rates than the state and nation and improved county unemployment rates to near national norms. County wealth levels are generally on par with state and national levels.

MANAGEABLE LONG-TERM LIABILITIES: The overall debt burden is moderate and amortization is rapid. Pension costs should remain manageable, given state-wide changes in employee contributions. Other post-employment benefit (OPEB) costs are minimal. Fitch expects enterprise operations to remain self-supporting.

RATING SENSITIVITIES

SUSTAINED ECONOMIC GROWTH AND STABILITY: The rating is sensitive to demonstrated resiliency in overall economic performance.

SOUND FINANCIAL RESERVES: The rating is sensitive to maintenance of sound financial reserves given revenue limitations.

CREDIT PROFILE

Kenosha County comprises an area of 272.8 square miles in southern Wisconsin, bordering Illinois. The county seat is the city of Kenosha which is located 30 miles south of Milwaukee and 60 miles north of Chicago. The county’s population has grown a moderate 12.4% since 2000, to an estimated 168,068 in 2014.

IMPROVED OPERATING PERFORMANCE AND RESERVES

Over the past three years the county has restored structural balance to the general and various other government funds and demonstrated an ability to maintain adequate financial flexibility despite a 2011 state law that limits growth in property tax revenue. General fund balance was achieved through modest tax rate increases to offset tax base declines; improving sales tax revenues; staffing and benefit cost cuts; and more conservative budgeting offsetting increased tax delinquencies driven by the weakened residential sector. Performance was enhanced by transfers in from various enterprise and special revenue funds, which may be non-recurring.

Net general fund operating surpluses in 2012-2014 resulted in a total $8.5 million addition to general fund balance, bringing unrestricted general fund balance to $16.5 million or 27% of general fund spending, well above the county policy of 17%.

For fiscal 2014, property taxes made up slightly over 50% of general fund revenues followed by sales taxes at 19% and charges for services at 15%. Leading general fund expenses are public safety, at approximately 60% not including the county federal inmate program.

The county budgets and accounts for the operations of its nursing home and federal inmate fund as well as the health and social services fund in separate funds and annually transfers fund surplus, if any, to the general fund. Management’s goal is to ensure that these funds are at a minimum self-supporting without any general fund support. Fitch believes management has instituted strong oversight and monitoring procedures and that these funds pose moderate financial risk to the general fund.

Audited results for 2014 indicate a $3.5 million surplus increasing unrestricted general fund balance to a very strong $16.5 million or 27% of budget. County sales tax revenues in 2014 were up $2 million over budget in 2014 and thus far in 2015 continue tracking positively to budget. Some of the increase is due to construction activity and may fall off in future years.

The general fund budget and year-to-date forecast indicate 2015 will close with no material changes to overall reserves. Fitch believes that such projections are reasonable given year-to-date performance and the county’s conservative budgeting approach. Expectations for the 2016 budget include continued tight expenditure controls, a modest increase in tax rates and no fund balance appropriation. The county expects to remain well below its statutory levy limitation, which provides modest revenue raising flexibility if required.

RECOVERING ECONOMY; MODERATE GROWTH EXPECTED

The county’s longtime manufacturing-dominated economy is proximate to the Chicago and Milwaukee employment centers. It was hit hard during the recent recession with a significant increase in unemployment and valuation declines but is showing signs of strong recovery, expansion and diversification. A significant economic impact was the 2008 closure of the Chrysler Motors engine assembly plant which employed over 1,000.

This and other losses caused county unemployment rates to spike to over 10% for 2009 and 2010. The county population and labor force remained stable and growing. Recent commercial/industrial activity within the county’s multiple business/office parks has improved the county unemployment rate which averaged 6.5% in 2014, slightly above state and national levels, but fell to 5.7% in May 2015 from 6.1% in May 2014. The 2013 county median household income levels are slightly above state (105%) and national (104%) levels, although per capita personal income levels are only 89% and 85%, respectively.

Over the past two years, the county has benefitted from improved interstate access via I-94. New commercial/industrial development activity totals over $800 million of capital investment currently in process and an expected 4,000 new jobs expected over the next few years. One of the major current development projects is Amazon.com, Inc., which recently invested over $300 million to construct a 1.5 million square foot fulfillment center complex in the city of Kenosha which is expected to employ 1,600 full-time and up to 2,600 at peak times when it opened in summer 2015. Other major developments in process are regional distribution centers, manufacturing and retailing.

The county employment base includes numerous educational institutions, two large healthcare providers and numerous global commercial/industrial firms. Top current employers include the city and county governments, the county school district, Carthage College, Gateway Technical College and University of Wisconsin – Parkside campus; United Health Systems and Aurora Healthcare.

The county tax base is predominantly residential (71% of 2014 equalized value) and contracted a sizable 22% between 2008 and 2014 due to declines in home prices. The negative trend reversed in 2014 with a 2.6% increase driven by new commercial/industrial development and modest recovery in residential valuations. State released amounts for county 2015 valuation indicate a 4.76% valuation increase for fiscal 2016. Housing valuations continue to rebound, driven by strong job growth and demand.

FAVORABLE LONG-TERM LIABILITY PROFILE

The county’s credit profile benefits from moderately high overall debt, rapid amortization (84% retired in 10 years), and manageable future borrowing plans. Overall debt is $4,129 per capita and 5.5% of market value. Annual debt service equaled a moderate 9% of total governmental fund spending in 2014. The county’s capital plans in the near term are manageable, with a moderate $11 million in 2016-2019. The new debt would roughly replace amounts amortized annually. The county’s cost of carry for combined debt, pension, and OPEB is moderate at 14% of 2014 governmental fund spending.

The series 2015B debt will fund improvements and expansion at its Brookside nursing home. The county facility has had positive operations over the past decade and there is significant demand for additional capacity and services. The county expects to maintain this and all enterprise related debt as self-supporting. Fitch believes that while expanding nursing home operations may present risks, management’s close oversight of these operations should enable continued balanced operations.

The county participates in a state-run defined benefit pension plan, which is well funded at nearly 100% as of its 2014 valuation or a Fitch-estimated 98% under a 7% rate of return and liability adjustment assumption. Actuarially-based payments for the plan are low at $3.6 million or 2.5% of total 2013 governmental fund spending. Recent changes in pension funding requirements may help contain cost growth, due to state reductions in required duty disability pension payments as well as an increase in contributions by non-uniform employees.

The county adopted a new other post-employment benefit (OPEB) health insurance policy effective January 2013 which changed eligibility and benefits resulting in reduced annual OPEB costs and unfunded liabilities. The county contributed $3 million for OPEB costs in 2014 or 57% of the actuarially-based annual required OPEB cost. Had the entire cost been paid it would represent a low 3.6% of 2014 total governmental spending. The county’s unfunded actuarially accrued liability is minimal at less than 0.5% of market value.

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

In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Zillow.

Applicable Criteria

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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