NEW YORK--()--Fitch Ratings has taken the following action on Beaufort County, South Carolina's bonds:
--Approximately $131 million general obligation (GO) bonds, series 2003, 2004, 2006, 2006B, 2007 and 2007B affirmed at 'AA'.
The Rating Outlook is Stable.
The county irrevocably pledges its full faith, credit, resources and ad valorem taxing power of the county, without limit as to rate or amount, for the repayment of the bonds.
KEY RATING DRIVERS
HEALTHY FINANCIAL POSITION: The county's financial position remains healthy, with strong unreserved balances in the general fund despite recent year drawdowns. Management has responded to fiscal challenges, including economic slowing and state-imposed property tax limitations with actions to align revenues and expenditures.
STRONG ECONOMIC INDICATORS: Despite concentration in tourism and military facilities, the county's economy remains strong, characterized by above-average income and wealth levels. Employment levels show positive trends and the county's unemployment rate continues to decline.
MODERATE- TO ABOVE-AVERAGE DEBT PROFILE: The county's overall indebtedness is moderate as a percentage of market value of real estate but above average compared to population and general fund spending. Debt amortization is average and future capital needs are manageable. Total expenditure levels associated with debt service, pension contributions, and other post-employment benefit (OPEB) payments are manageable.
STRONG ECONOMY WITH TOURISM AND MILITARY CONCENTRATION
Beaufort County is located on South Carolina's southeastern shore. The county consists of numerous islands, including the popular resort community of Hilton Head. County year-round population is approximately 165,000. Tourism and seasonal residents drive much of its economy, along with several large military facilities. The county's resident income levels remain healthy, with per capita and median household income levels that outperform the state and nation.
The local economy has performed well through the recession, though economic slowing did affect county finances, lowering assessed valuation and property taxes and negatively affecting the county's tourism sector. The significant military presence, including Parris Island Marine Corps Recruit Depot, the Marine Corps Air Station, and the U.S. Naval Hospital, has been stable. The Marine Corps Air Station is due to expand its operations by receiving the deployment of the F-35B joint strike fighter jets in 2013-2014. While the county's military sector was not significantly affected by the last base realignment initiative, potential exists for future military reorganization to affect operations. The outcome of federal budget negotiations could have a considerable impact on the county's economy, as there is the potential for broad mandated expenditure cuts that could significantly reduce military spending.
GOOD FINANCIAL POSITION DESPITE FISCAL CHALLENGES
County general fund balances have been strong in recent years, with total fund balances at over 20% of spending in fiscal years 2007 through 2009. To address revenue declines, balances were drawn down in fiscal year 2010, with the unreserved balances dropping from $18.8 million (19% of expenditures and transfers out) in fiscal year 2009 to $16.2 million (16%). The county's current financial position is still solid, with no significant drawdowns from prior year balances. Figures for fiscal year 2011 show an unrestricted fund balance (the sum of assigned, unassigned, and committed balances under GASB 54) of $15.9 million (16.5%), which is close to the prior year level. The total fiscal year 2012 general fund ending balance is estimated to increase to $21.5 million (22%) from $18.7 million (19%) in fiscal year 2011.
Recent housing market weakness has led to assessed value figures showing flat performance and declines. State property tax law changes have also affected valuations and general fund revenue in recent years. Enacted in 2007, Act 388 exempts owner-occupied homes from school district operating levies. This exemption created an incentive for the county's large numbers of second homeowners to register as owner-occupiers to reduce their tax liability. Since owner-occupied properties are assessed at a lower ratio to full value than second homeowners (4% rather than 6%), these switched registrations reduce the county's assessed valuation. Act 388 also limits growth in property taxes based on CPI and population growth, which somewhat limits the county's financial flexibility.
The county has responded to revenue shortfalls by enacting furloughs and hiring freezes, reducing capital spending, and using moderate amounts of reserves. The fiscal year 2012 budget reflects reductions in expenditures associated with transfers to outside agencies (largely higher education-related), and continued hiring freezes. Fiscal year 2012 revenues are estimated to be slightly higher than budget, while expenditures are estimated to be lower than budget by about $3 million. Fiscal year 2013 revenues are projected to be essentially flat (less than 1% growth) with a corresponding increase in budgeted expenditures, chiefly associated with cost of living increases. No drawdown of fund balance is expected.
MIXED DEBT PROFILE
The county's debt profile is mixed. Overall net indebtedness is moderate at 1.8% of market value including tax increment finance revenue debt (TIF). Annual debt service as a percentage of fiscal year 2011 general fund expenditures is above average at about 19%. Debt per capita is also above average at $5,219. The fiscal 2011 ratios are conservative, however, in that they reflect refunded debt still included in debt service figures. In addition, they do not reflect certain transfers in from other funds that support the debt. Management has indicated that going forward, financial reporting will be revised with regard to refunded debt, adjusting future debt service figures appropriately.
County debt amortizes at an average rate. The county has limited near-term debt issuance plans, including $4.8 million in general obligation bond anticipation notes and $6 million in notes related to a USDA loan planned for the current fiscal year. In addition, the county may refund outstanding debt for savings. The current year issuance, together with county funds on hand and federal grants and loans will provide funding for various capital projects. These include repairs to county court, administrative, law enforcement and detention facilities, and the construction of a library.
Pension costs were a manageable 5% of expenditures in 2011. The city provides pension benefits through state-administered plans and funds 100% of its required contribution. State retirement system funding levels were low at 65.5% for general employees and 74.5% for police as of the July 1, 2011 valuation. The county's OPEB costs are modest, with the fiscal year 2011 payment at 0.2% of expenditures. The plan was closed to new employees in 2008, in order to limit liability growth. Total debt service, required pension contribution and OPEB payment requirements were in the moderate range at about 24% of expenditures.
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. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria