Fitch Rates Raleigh, NC's LOBs 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Raleigh, North Carolina (the city) limited obligation bonds (LOBs):

--$27.4 million series 2010A, taxable Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZED);

--$18.3 million series 2010B, tax-exempt.

The bonds are expected to sell via negotiation on Aug. 12, 2010.

In addition, Fitch affirms the following ratings:

--$45.7 million in outstanding LOBs at 'AA+';

--$241.1 million general obligation (GO) bonds at 'AAA';

--capital improvement certificates of participation (COPs) at 'AA+';

--downtown improvement projects and parking facilities COPs at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The city's broad economy has remained relatively stable during the current economic downturn.

--Financial management is strong, highlighted by solid reserve levels and controlled expenditure growth.

--Capital plans have moderated in recent years due to the economic downturn but are expected to return to previous levels once the economy improves.

--LOBs contain solid legal provisions and are subject to appropriation. The financed project is essential and is subject to a lien.

--The affirmation of the COPs also reflects solid legal provisions with debt service subject to appropriation. The distinction in ratings for the different series is based on the level of essentiality of the leased assets.

KEY RATING DRIVER:

--Stable operating results are expected to continue despite ongoing budgetary pressures.

SECURITY:

As security for the LOBs, the city has executed and delivered a deed of trust granting a lien on the original mortgaged property. Additionally, the city will execute and deliver a First Supplemental Deed of Trust, dated Aug. 1, 2010, granting a lien on an additional site. Debt service payments by the city are limited to payments made by the city pursuant to the trust agreement and are subject to appropriation.

The GO bonds are secured by the full faith and taxing power of the city.

Debt service on the COPs is subject to appropriation. The capital improvement COPs have a lien on essential property. The parking facilities and downtown improvement COPs have a lien on non-essential assets.

CREDIT SUMMARY:

Raleigh is located in Wake County (rated 'AAA' by Fitch) in the north central portion of the state and adjacent to the successful Research Triangle Park, which serves as an important economic engine. The city has a skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, health care, and other professional services. Population growth has been strong with over a 30% increase in each of the past two decades. The economy has remained relatively stable despite the economic downturn with a 7.6% unemployment rate for June 2010, well below state and national averages. Economic development continues with IBM announcing the addition of 600 jobs in the area over the next two years and SKEMA, a French business school, expecting to open its first U.S. campus at Centennial Campus next January. Wealth levels are above average.

Financial flexibility is substantial due to the city's competitive tax rates, robust reserves, and conservative budgeting practices. General fund financial operations have been positive relative to the budget since fiscal 2004 with the unreserved fund balance ending fiscal 2009 equal to 33% of spending. The undesignated, unreserved fund balance totaled 17.4% of spending, comfortably above the city's fund balance policy requiring 14%. Estimated fiscal 2010 actuals show approximately a $6 million surplus due mainly to ongoing expense management controls. The fiscal 2011 budget is balanced with a small appropriation of fund balance, as is customary of the city but historically has not been used.

Debt levels are moderate and are expected to remain so over the next few years. The current five-year phase one of the city's capital plan totals $730 million, a 39% reduction from the prior year as various projects have been deferred due to the economic downturn. Fitch expects capital needs to increase to previous levels once the economy improves.

Applicable criteria available on Fitch's website at 'www.fitchratings.com':

'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. Some debt repayment requires annual legislative appropriation, and this lesser long-term commitment to repayment is reflected in a lower rating than that of the general obligation rating, usually by one to two notches.

The average local government general obligation rating is 'AA ' with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility

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

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492466

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

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