NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to Union County, New Jersey's (the county) $100 million general obligation (GO) bonds of 2012 and an 'F1+' to $60 million bond anticipation notes (BANs). The 2012 bonds consist of:
--$62.2 million general improvement bonds;
--$23.19 million county vocational-technical school bonds;
--$10.4 million redevelopment bonds;
--$2.4 million county college bonds (series A);
--$1.9 million county college bonds (series B).
Bond proceeds will be used to currently refund $100 million of outstanding BANs due July 1, 2012 that financed general improvement and various projects at the county vocational-technical schools, and the county college. The bonds will sell competitively on June 19th.
In addition, Fitch downgrades the following ratings to 'AA+' from 'AAA':
--$320.6 million GO bonds;
--$20.8 million Union County Utilities Authority, solid waste bonds, county deficiency agreement, series 1998;
--$35.6 million Union County Improvement Authority, county guaranteed revenue bonds, series 2009 and 2010B (Oakwood Plaza-Elizabeth Project).
The Rating Outlook is revised to Negative from Stable.
SECURITY
The GO bonds are direct and general obligations of the county for which its full faith and credit and unlimited taxing authority are pledged.
The Utilities Authority and Improvement Authority bonds are secured by certain revenues of the county solid waste system and developer loan repayments, respectively, and a deficiency agreement, whereby the county unconditionally and irrevocably guarantees payment of the bonds. Pursuant to the agreement, the county pledges its full faith and credit and its ad valorem tax, without limitation as to rate or amount.
KEY RATING DRIVERS
REDUCED FINANCIAL FLEXIBILITY: The rating downgrade to 'AA+' from 'AAA' reflects continued instability in the county's financial performance, resulting in a low current fund balance and financial flexibility inconsistent with the 'AAA' rating category.
FINANCIAL PRESSURES EXPECTED TO CONTINUE: Assignment of the Negative Outlook reflects Fitch's concern regarding the county's ability to regain structural balance given operating losses at the county hospital, uncertainty regarding unsettled labor contracts and the ability to implement various budget reduction measures, and constrained revenue raising capacity due to the property tax cap.
RECENT BUDGETARY ACTIONS VIEWED FAVORABLY: Under the guidance of a new finance director, the county adopted a fiscal 2012 budget which implements tax revenue increases to the full extent permissible, and imposes significant reductions in personnel that reduces, but does not fully eliminate, the current fund budgetary imbalance.
HEALTHY ECONOMY: The diverse local economy benefits from Union County's extensive multi-modal transportation network and its proximity to New York City.
LOW DEBT LEVELS: Overall debt levels are manageable even when including self-supporting contingent obligations; debt amortization is rapid and capital needs are modest with limited additional debt plans.
ADEQUATE MARKET ACCESS: The 'F1+' short-term rating reflects the overall credit strength of the county and Fitch's belief that the county will have adequate access to the capital markets.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO ACHIEVE STRUCTUAL BALANCE: The county's inability to achieve and maintain balanced operations could lead to further downward rating pressure.
CREDIT PROFILE
BROAD AND DIVERSE ECONOMY
Union County is advantageously located 20 miles south of New York City contributing to the presence of major corporate employers in the pharmaceutical, technology, petrochemical, and health care industry.
The transportation sector is also strong, leveraging the county's extensive infrastructure assets including commuter rail service, numerous major road systems, Newark International Airport, and the Port of Elizabeth, which is the largest port on the east coast.
The county's unemployment rate tends to track very close to that of the U.S., but has recovered at a slower rate since the end of the recession remaining somewhat elevated at 9.6% as of March 2012. The recent merger of the county's two largest private employers, Merck and Schering-Plough, will likely lead to job cuts, but specific details have not been announced.
Per capita and median household income levels are roughly on par with the state and 125%-130% above the national average. The county has several communities with very elevated wealth and educational attainment levels.
WEAKENED RESERVE LEVELS
The county's reserve levels and overall financial flexibility continued to weaken with operating deficits (after transfers) posted in four of the prior six fiscal periods. The 2011 operating deficit (based on unaudited statements) of $3.9 million (or 1% of spending) lowered the current fund balance to $17.9 million or a narrow 3.6% of spending. Expressed as a percentage of spending, the current fund balance is at its lowest point dating back to at least 1997.
Despite the weakened current fund position, Fitch notes continued satisfactory balance sheet liquidity, with cash and investments at the close of 2011 still providing more than 3x coverage of total liabilities.
HOSPITAL OPERATIONS DRAIN COUNTY RESOURCES
Recent operating deficits are attributed to management's aggressive revenue projections at the county hospital (Runnells Specialized Hospital of Union County), and weak revenue receipts from the county clerk and sheriff offices due to the inability to conduct sheriff sales. Operating losses at the hospital totaled $4.6 million for 2010 and $11 million for 2011, mainly due to a decline in revenue from the state and federal aid and an increase in fringe benefit costs. Absent the support to the hospital to offset these losses the county would have had positive or flat operations.
REVENUE GROWTH CHALLENGES
The county could be challenged to increase revenues in future years due to state-imposed tax caps, which is somewhat offset by the fact that the county receives 100% of collections providing a stable and predictable revenue stream. The 2012 property tax levy was increased by the maximum amount permitted under the applicable caps.
ADDITIONAL RESERVE USE FORECAST IN 2012
The 2012 introduced budget includes a $16 million fund balance appropriation, which is $2.7 million lower than the prior year. According to management significant layoffs (10% of staff - first layoff since 2008) made during the year as well as privatization of several functions at the hospital should generate significant expenditure savings and additional revenues but the cuts to expenditures will not be sufficient to fully replenish the appropriation.
Management is projecting a $3 million reduction of fund balance, which would lower the current fund balance to $14.9 million or 3% of budgeted spending. The 2012 budget was the first enacted by the new finance director who is focused on conservative long range budgeting and restoring fund balance to the informal policy level of 5% of spending. In Fitch's view, the ability of the county to restore budgetary balance and to stabilize fiscal resources is a key component to regaining rating stability.
FAVORABLE DEBT PROFILE
The county's debt profile continues to be a credit strength. Direct debt ratios are low at $839 per capita and 0.7% of true value assuming self-sufficiency of contingent obligations and $1,339 per capita and 1.1% of true value assuming full county support of the contingent obligations backed by a county deficiency agreement.
Debt is paid rapidly, with 70% amortized within 10 years. The county's additional debt plans are modest at approximately $25 million annually which approximates the annual amount amortized.
The county participates in two state-run pension systems for employees and public safety. The county made its required payments to these systems in 2011, with the unaudited contributions totaling $27.36 million or 5.5% of expenditures. Pension contributions are expected to modestly increase in 2012.
Other post-employment benefit (OPEB) costs are manageable and the county has established a trust ($7.9 million balance), which Fitch considers positive. Due to the county's fiscal imbalance, it will not make a contribution to the trust in 2012. The county plans to resume funding in 2013.
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 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.
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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