Fitch Rates Guilford County, NC's GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Guilford County, North Carolina's bonds:

--approximately $130 million general obligation (GO) public improvement refunding bonds, series 2012A at 'AAA';

--$17.15 million taxable GO qualified school construction bonds (QSCBs), series 2012B at 'AAA';

--approximately $25 million GO refunding bonds, series 2012C at 'AAA';

--$16.85 million limited obligation QSCBs at 'AA+', issued by Guilford County Public Facilities Corporation.

The bonds will sell via negotiation on or about February 29th.

In addition, Fitch affirms $776.3 million of outstanding county GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds constitute general obligations of the county, to which its full faith and credit and unlimited taxing power are pledged.

LOBs are secured by lease payments subject to annual appropriation, and a deed of trust against certain public school assets of the city.

KEY RATING DRIVERS

AA+ RATING ON LOBS: The rating assigned to the limited obligation bonds (LOBs) reflects appropriation risk and the essentiality assigned to public school assets securing bondholders.

STRONG FINANCIAL PROFILE: Financial management is sound, budgeting practices are conservative, and reserve levels are consistently healthy. Financial flexibility is ample.

ELEVATED DEBT BURDEN: Debt levels remain manageable but face ongoing pressure as the county addresses school and general government capital needs through the issuance of voter-approved GO debt.

DECREASING EXPOSURE TO VARIABLE-RATE DEBT: The county's exposure to variable-rate debt and derivatives continues to decline. The county's debt structure presents additional risks associated with the creditworthiness and performance of the counterparties to the county's various swaps and liquidity agreements and the relationship of variable rate indices (basis risk).

STABLE AND DIVERSE ECONOMY: The county's economic base is expanding through the use of incentives and promotion of its quality of life, educational opportunities, and excellent transportation infrastructure.

CREDIT PROFILE

The county's 'AAA' rating reflects its history of prudent financial management and conservative budgeting practices. In fiscal 2011, the general fund incurred a net deficit of $7.3 million or a relatively modest 1.3% of spending (operating expenditures and transfers out). The deficit resulted from a $6.8 million transfer out of the general fund for pay-as-you-go capital.

SOUND FINANCIAL MANAGEMENT AND HEALTHY RESERVE LEVELS

The county's financial resource base remains solid and in-line with historical levels with an unrestricted fund balance (the sum of assigned, unassigned and committed fund balances under GASB 54) of $80.7 million or 14.7% of spending. In addition, Fitch considers the county's reserve for state statute, which is primarily comprised of accounts receivable, a source of additional financial flexibility totaling $39.5 million or an additional 7.2% of spending.

The fiscal 2012 general fund budget is performing well based on five months of actual results. Tax revenues are out-performing budgeted expectations by approximately $10 million, and debt service expenditures project a positive variance of approximately $12.3 million. Due to these large positive variances, the county does not anticipate use of the $29.4 million reserve appropriation (5.1% of budgeted spending) and instead projects a modest increase to year-end fund balance. The county is projecting an unrestricted fund balance on par with that of fiscal 2011. The county maintains an 8% unrestricted fund balance policy.

The county's maintenance of financial flexibility is considered a credit strength. Property tax revenue accounts for almost 60% of total general fund revenue, reflecting a stable revenue base, and has increased over 4% on average over the last several fiscal periods. Fitch favorably notes the county's demonstrated willingness to increase tax rates in response to softening tax base growth and sales tax revenue, as well as increased debt service costs.

Modest expenditure cuts to date have provided the county with sufficient flexibility to cut spending in the future. According to the county, there is still room for additional savings or efficiencies that would maintain the general fund balance at or near the current level over the next several years without affecting service levels.

GROWING ECONOMY

Guilford County is the most populous county in the Piedmont Triad region of North Carolina. The county encompasses two of the state's larger trade and population centers, the cities of High Point (GOs rated 'AA+' with a Stable Outlook by Fitch) and Greensboro (GOs rated 'AAA' with a Stable Outlook by Fitch). A weak manufacturing industry, historically based on textile manufacturing, has diminished the employment base of the county. The county's unemployment rate has increased since the onset of the recession as a number of employers have announced layoffs affecting up to several hundred employees at a clip.

However, Fitch views the prospects of the local economy as positive. The county's local economy continues to grow through investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and machinery products. Development of these sectors should add diversity and stability to the county's economic base. A good deal of growth is centered on the Piedmont Triad International Airport (PTIA) in Greensboro, where FedEx recently completed construction of its fifth national hub. The county notes that FedEx's presence has been recognized as an important consideration by several firms, including Honda Aircraft and Polo Ralph Lauren, that have recently decided to locate or expand within the county.

Fitch believes the county's education sector may also play a pivotal role in future growth. In particular, North Carolina Agricultural and Technical State University (NC A&T University) and The University of North Carolina at Greensboro (UNCG) were involved in the development of The Gateway University Research Park. This research campus features a joint school of nanoscience and nanoengineering that began offering advanced degree classes in fall 2010 and construction on the campus was completed December 2011.

Economic indicators for the county are average. As of December 2011, the county's unemployment rate of 9.8% was comparable to the state's (9.9%) but above the nation's (8.2%). Wealth indicators for the county are on par with state and national averages.

ABOVE-AVERAGE DEBT LEVELS AND HIGH EXPOSURE TO VARIABLE-RATE DEBT AND DERIVATIVES

Debt levels remain manageable but face pressure largely due to the funding of capital requirements related to Guilford County Schools and Guilford Technical Community College (GTCC). Following issuance, the county will have a total of $180.2 million in authorized unissued debt of which the county plans to issue $29.9 million community college bonds in calendar 2013. Additional school bonds are planned for calendars 2013 and 2014 based on updated cash flow data from the schools. The county projects annual debt service will peak in fiscal 2014 at an above-average 17% of spending (exceeding the county's 15% target).

The county's exposure to variable-rate debt and derivatives continues to decline, which Fitch views favorably. As of January 1, 2012, the county's fixed rate debt totaled 70.5% of total debt with unhedged variable and synthetic fixed rate debt no greater than 18.4% and 11.2%, respectively. Should the refundings occur as planned, fixed rate debt will increase to 79% of total debt (unhedged variable rate debt will be 5.5% and synthetic fixed debt will be 15.5%). According to the county it has taken advantage of the current low fixed-rate market and opportunities to achieve debt service savings, leading to a more conservative debt profile.

The county conservatively budgets its variable rate cost of interest, contributing to the favorable expenditure performance noted above. The county will continue to evaluate the use of variable-rate debt for future issuances. Fitch will monitor the county's variable-rate exposure to ensure it does not place undue pressure on the county's debt profile or on its financial flexibility.

LIMITED PENSION AND OPEB LIABILITIES

The county's pension liability is limited to its participation in the North Carolina Local Governmental Employees' Retirement System (LGERS) state plan and its own plan for law enforcement officers. The county's obligation to contribute to these plans and contribution amounts are established pursuant to state law and are funded on a pay-as-you-go basis through appropriations made in the general fund operating budget. The county fully funds its pension obligation on an annual basis with fiscal 2011 contributions totaling $8 million or 1.5% of spending, which Fitch considers a low cost pressure.

OPEB liabilities remain relatively low. Fitch does not consider the county's OPEB liability as exerting pressure on its finances given the relatively small size of the OPEB ARC. In fiscal 2011, the county contributed $7.3 million towards its OPEB costs, equal to 1.3% of total spending and 43% of the ARC ($16.8 million). Full funding of the fiscal 2011 ARC would consume 3.1% of spending. Notably, the county has established a trust to pre-fund its OPEB liability which Fitch views favorably. The fiscal 2012 budget provides $2 million to advance fund the county's OPEB obligation, as the county did in fiscal years 2010 and 2011.

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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