Fitch Rates Winston-Salem, NC's $52MM LOBs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following rating to the limited obligation bonds (LOBs) of the city of Winston-Salem, North Carolina (the city):

--Approximately $52 million LOBs, series 2012A.

The bonds will sell via negotiation on or about Feb. 28th.

In addition, Fitch affirms the following ratings:

--$90.9 million general obligation (GO) bonds at 'AAA';

--$36 million certificates of participation (COPs), series 2008C at 'AAA';

--$18 million LOBs, series 2010B at 'AAA';

--$5.2 million special obligation bonds at 'AAA';

--$16.9 million COPs, series 2001A and 2006A at 'AA+';

--$19.1 million LOBs, series 2010A at 'AA+';

--$18.3 million COPs, series 2004A, 2004B and 2006B at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LOBs, series 2010B and 2012A, and the COPs, series 2008C, represent an absolute and unconditional contractual obligation of the city, not subject to annual appropriation.

The remaining COPs and LOBs are secured by lease payments, subject to annual appropriation, and a deed of trust against certain governmental assets of the city.

The GOs are general obligations of the city to which its full faith and credit and unlimited taxing power are pledged.

The special obligation bonds are secured by a portion of the city's sales and use taxes.

KEY RATING DRIVERS

'AAA' LOBs and COPs: Lease payments on the 'AAA'-rated LOBs and COPs are not subject to appropriation; they represent an absolute and unconditional obligation of the city payable from its general fund, and the city may levy taxes to meet its payment obligation subject to statutory limitations. The rating assigned to the other LOBs and COPs reflect appropriation risk in addition to the level of essentiality assigned to assets securing bondholders.

SPECIAL OBLIGATION RATING: The 'AAA' rating on the special obligation bonds reflects the exceptional coverage provided by pledged sales tax revenues at 10.2 times (x) in fiscal 2011. Fitch expects coverage to remain at comparable levels given the city's lack of plans to further securitize these revenues.

HEALTHY FINANCIAL FLEXIBILITY: Robust reserves are buttressed by a liquid balance sheet. Financial management is strong, and budgeting practices are conservative.

SOUND ECONOMIC PROFILE: The city has become a regional hub for health care, higher education, and biotechnology, having diversified from its traditional concentration in manufacturing. Unemployment is below that of the nation.

AVERAGE DEBT BURDEN: Overall debt levels are average, and principal payout is rapid. Pension and other post employment benefit (OPEB) costs are reasonable, consuming approximately 10% of spending.

CREDIT PROFILE

STRUCTURE OF THE 2012A LOBS

The majority of the city's rolling stock equipment is financed through the issuance of LOBs and COPs every one to two years. These bonds evidence the right to receive revenues under a lease agreement between the city and the North Carolina Municipal Leasing Corporation (a single-purpose non-profit component unit of the city).

Rent payments under terms of the lease represent an absolute and unconditional obligation of the city per G.S. 160A-19. The city intends to make lease payments from the general fund and from any other available revenue sources. If those sources are insufficient, the city may levy property taxes to meet its payment obligations, subject to the limitations set forth in G.S. 160A-209(d), which limits the tax levy for lease purposes to $1.50 per $100 of assessed value (AV). The city's current levy is $0.475 per $100 AV, providing the city substantial flexibility to meet lease payments.

STRONG FINANCIAL MANAGEMENT

Reserve and liquidity levels remain ample, reflecting the city's strong financial position. For fiscal 2011, the general fund's unrestricted fund balance (the sum of assigned, unassigned and committed fund balances under GASB 54) was $32.3 million (an ample 19.7% of spending). The restricted portion of the general fund balance sheet includes a statutory reserve for stabilization of $10.8 million (6.5% of spending), which Fitch considers an available source for operations, if necessary. General fund cash and investments of $40.7 million in fiscal 2011 cover total liabilities 3.7x, or more than three months of operating expenses.

The city has remained in compliance with its unrestricted fund balance policy of 10% of budgeted expenditures for at least the past five fiscal years. Financial operations in fiscals 2010 and 2011 have yielded net surpluses (after transfers) of $3.1 million and $5.2 million, respectively, following a $2.2 million draw on fund balance in fiscal 2009, which was partly due to weak sales tax revenues. Recent positive financial results have been achieved through prudent fiscal stewardship, evidenced by management's willingness to combine recurring revenue and expenditure actions as necessary to stabilize city finances.

The city's tax rate of $0.475 per $100 AV is low relative to the statutory cap and competitive regionally, enhancing future budget flexibility. Spending cuts over the past several years have been relatively modest in nature, including hiring freezes, employee pay increase deferrals, and capital equipment replacement limits.

FISCAL 2012 BUDGET SUMMARY

The fiscal 2012 budget represents an approximate 1.3% increase over that of fiscal 2011. The millage rate will be held constant as will other taxes and fees, and expenditure controls will be similar to those of prior years. The city has appropriated the use of $1.97 million in reserves (1.2% of budgeted spending), but officials are projecting a year-end surplus of more than $2 million based on year-to-date revenue and expenditure performance.

CONTINUED DIVERSIFICATION OF LOCAL ECONOMY

Winston-Salem is a major economic and commercial center in northwestern North Carolina and is part of the growing 12-county Piedmont Triad region. Wake Forest Baptist Health (WFBH) and Novant hospitals are located in Winston-Salem and are the second and fourth largest hospitals in the state, respectively. The city along with WFBH has supported the development and growth of the Piedmont Triad Research Park (PTRP) in downtown Winston-Salem. PTRP was ranked among the top three biotech centers in the nation by Brookings in 2004, and an estimated 39 private companies and Wake Forest departments are housed in PTRP's 200-acre campus. Wake Forest University, Winston-Salem State University, NC School of Arts, and Forsyth Technical Community College are all located within city limits and have a total enrollment exceeding 20,000 students.

Manufacturing continues to play a significant role in the economy even though it is no longer the city's primary source of jobs. Caterpillar, Inc. began operations at its new $426 million axle-manufacturing plant at the end of calendar year 2011 and expects to hire 400 full-time and 112 contractor positions to staff this plant. Reynolds American Inc. (RAI) is the city's largest taxpayer and maintains its headquarters in the city. This year, the company closed its last manufacturing plant in the city and transferred employees to its plant in nearby Tobaccoville; city management does not believe that the closure of the plant will negatively impact tax rolls.

Economic indicators for the city are average. The city's unemployment rate was 8.2% in December 2011, ranking below the nation's 8.8%. Wealth indicators are on par with those of the state and on average approximately 10% below those of the U.S.

The city's tax base has experienced consecutive year-over-year declines of 0.8% and 1% in fiscals 2011 and 2012, respectively. Forsyth County's next revaluation of real property is scheduled for fiscal 2014. Early estimates from the county tax office show a potential 6% decrease in the value of real property.

MANAGEABLE LONG-TERM LIABILITIES

Overall debt is average at $3,923 per capita and 4.2% of market value (MV) for fiscal 2011 due to sizable overlapping debt of Forsyth County (74.7% of the overall burden). The city's outstanding direct debt totals approximately $270 million and is largely a close mix of LOBs/COPs and GOs. Historically, the city has issued variable-rate debt for short-term equipment deals; variable-rate debt outstanding after this issue totals a manageable $17 million, all privately placed with no put option and eliminating the need for liquidity support.

The tax-supported portion of the fiscal 2011-2016 CIP totals $79.9 million (or 0.4% of MV). Transportation projects ($45.2 million) comprise the majority of the CIP, followed by community and economic development projects ($20.6 million). To finance these projects, the city will issue $10.1 million in GO bonds and $7.4 million in COPs in relatively equal annual increments. Fitch does not believe that the city's future debt plans will materially impact credit quality.

Total pension contributions for fiscal 2011 were $12 million (a manageable 7.3% of spending). General employees are members of the North Carolina Local Government Employees' Retirement System, and police officers are members of the city's Winston-Salem Police Officers' Retirement Fund (WSPORF). The city has paid 100% of its annual required contribution (ARC) to both plans for at least the past three fiscal years.

In 1992, the city issued COPs and used a portion of bond proceeds to fully fund WSPORF that year, and those COPs are recorded as a liability in the city's post-employment trust fund. As of Jan. 1, 2011, the WSPORF funded ratio was a weak 55.7% (using an adjusted 7% rate of return). Pension costs may exert some pressure on the city's financial flexibility in the future due to state-mandated increases in employer contributions and the low funding level of the city's plan.

OPEB liabilities do not represent a significant cost pressure. The city offers health care and death benefits to retired employees who have at least 15 years tenure and were hired before July 1, 2010. Positively, for fiscal 2011 the city contributed 100% of the ARC for a payment of $5.6 million (3.4% of spending) and continues to budget 100% ARC payments. The COPs issued in 1992 to fund the pension plan were also used to fully fund the OPEB liability that year. Subsequent GASB changes weakened the funded ratio, which is now 40%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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