NEW YORK--()--Fitch Ratings has assigned the following ratings to Mecklenburg County, North Carolina (the county) general obligation (GO) bonds and limited obligation bonds (LOBs):
--$122 million GO refunding bonds, series 2013A 'AAA';
--$100 million GO public improvement bonds, series 2013B 'AAA';
--$15 million LOBs, series 2013 'AA+'.
Proceeds of the series 2013A bonds will be used to refund the 2003B and 2004B variable rate GO bonds, 2005A&C GO bonds, 2007A GO bonds, and 2008A&B GO bonds for debt service savings and to reduce the county's variable rate exposure.
Proceeds of the series 2013B bonds will be used to provide approximately $10 million for park and recreational facilities, approximately $80 million for school facilities and approximately $10 million for community college facilities.
Proceeds of the taxable LOBs, series 2013 will be used to refund a portion of the 2008B certificates of participation (COPs; Bryton Development Project).
The GO refunding bonds, series 2013A are scheduled to price on Jan. 10, 2013. The GO bonds, series 2013B are scheduled to price on Feb. 5, 2013. The LOBs are scheduled to price on Jan. 24, 2013.
In addition, Fitch affirms the following ratings:
--$1.39 billion GO bonds at 'AAA';
--$455.8 million COPs and LOBs at 'AA+';
--$113.9 million variable-rate GO refunding bonds, series 2009D at 'AAA/Fl+';
--$12.2 million series 2011 special obligation (SO) bonds at 'AA+'.
The Rating Outlook is Stable.
The general obligations of the county are secured by a pledge of the faith and credit and unlimited taxing power of the county.
The LOBs and COPs are payable from lease rental payments made by the county, subject to annual appropriation. The LOBs and COPs are additionally secured by a deed of trust granting a lien of record on essential government assets.
The SO bonds are secured by a gross pledge of the residential solid waste fee levied on each equivalent residential unit within the county limits. If the principal and interest accounts are not funded by Dec. 10 of each fiscal year, the county pledges to deposit with the trustee the required amounts from any other legally available funds other than proceeds of any tax that the county levies.
KEY RATING DRIVERS
Robust Economy: Mecklenburg County's economy benefits from a substantial financial sector and associated professional services. A growing presence in the energy sector complements a diverse employment base that includes high technology and healthcare. Prospects for continued economic expansion are excellent.
Improved Debt Profile: Proactive financial management has begun to temper a historically high debt burden and intends to limit future debt in conformance with the newly instituted debt affordability policy. The county has also significantly reduced its variable rate exposure.
Strong Operating Performance: Prudent fiscal management bolstered by strong revenue growth has yielded two conservative years of operating surpluses strengthening unrestricted reserves.
Covenant Obligation Debt: The 'AA+' rating on the SOs are notched down from the GOs, reflecting the county's covenant to pay debt service from any legally available funds other than proceeds of any tax. The obligation is not subject to termination, and is cumulative to the extent not paid.
Appropriation Lien on Essential Assets: The LOBs and COPs ratings are notched down from the GOs reflecting risk to annual appropriation, and a lien on essential government assets.
Short-Term Rating Rationale: The 'F1+' rating on the series 2009D 'Windows Debt' GO bonds is largely derived from the county's long-term rating and demonstrated access to the capital markets. Fitch also considers the county's consistently strong liquidity which could be used in case market access was restricted during the 180-day remarketing window, and sufficiently documented asset liquidation procedures.
Mecklenburg County is located in south central North Carolina on the South Carolina border. The county encompasses an area of 546 square miles and with a population of 944,373 it is the most populated county in North Carolina.
CONSIDERABLE ECONOMIC BASE
Mecklenburg County's robust economy provides consistent credit strength, buttressed by financial and professional services that are supplemented by a growing presence in energy production, tourism, high-technology manufacturing, and health and education. Anchored by the city of Charlotte (GO rated 'AAA', Stable Outlook by Fitch), with a transportation infrastructure supported by Charlotte-Douglas International Airport (revenue bonds rated 'A+', Stable Outlook by Fitch), the diverse economy contains the second largest financial center in the U.S. and more than 264 of the Fortune 500 companies. The economy continues to diversify and expand with over a $1 billion in capital investment year-to-date for calendar 2012.
The strong employment base has helped fuel the county's rapid population growth to 919,628, representing a 2.8% average annual increase since the 2010 census, well above the nationwide 1% average annual growth during that period. Estimated 2011 population of 944,373 represents strong growth of 2.7% year-over-year. Wealth levels are above state and national averages. The October 2012 unemployment rate of 8.7% is still high relative to the U.S. rate of 7.5% but has declined significantly from the 10.4% of the previous year and is currently below the state rate of 8.8% for the first time since 2008.
STRONG FISCAL MANAGEMENT MARKED BY AMPLE RESERVE LEVELS
Historical financial operations are characterized by prudent fiscal management marked by maintenance of sound reserves. During fiscal 2011, the county reduced expenditures to replenish reserve levels after a $50 million cumulative operating deficit between fiscal 2008 and 2010. Operations after transfers in fiscal 2011 resulted in a net surplus of $41.7 million (3.4% of spending). The unrestricted general fund balance increased to $273.9 million or an ample 22.1% of spending. When factoring in the state required fund balance reservations for certain receivables, to be comparable with fund balance presentation in other states, reserves equaled 30% of spending.
Fiscal 2012 ended with a substantial $86 million general fund operating surplus after transfers out. General fund expenditures in fiscal 2012 were a notable $99.6 million under budget. During fiscal 2012 the county terminated its relationship with Carolinas Healthcare for the provision of indigent care and behavioral health services, effective for fiscal 2012. The termination yielded budgetary savings in fiscal 2012 of $40 million. The county will assume responsibility for providing public health services beginning in fiscal 2014. Also, spending for detention and court services was $9.3 million under budget. Contributing to the positive variances is the county's practice of conservative budgeting. Actual revenues came in 3% over budget due to increases in property and sales tax receipts.
The unrestricted general fund balance increased to $381.9 million or an ample 26.5% of spending. When factoring in state required reservations, reserves equaled $458.3 million or 45% of spending.
Property and sales tax revenues as well as lottery proceeds allocated for the repayment of debt service are now accounted for in a separate debt service fund. The county's fund balance goal is to accumulate reserves equal to two years' of non-property tax revenue. The unrestricted debt service fund balance at the end of fiscal 2012, inclusive of state required reservations for receivables, equalled $31.4 million or 7.2% of spending.
The fiscal 2013 adopted budget, which is 3.4% more than the prior year's budget, includes a $14 million fund balance appropriation to pay for one-time expenses for facility maintenance and technology infrastructure and reduces the tax rate by $.0244 to $0.7922 cents per $100 of assessed value. The budget also includes compensation and benefit increases for government employees totaling $12.1 million or approximately 0.8% of budget. Year-to-date operations are in-line with budget.
OVERALL DEBT BURDEN IS MODERATE
The county's debt levels are expected to remain moderate and within the county's internal guidelines. Direct debt ratios at 1.7% of assessed value (AV) and $2,076 per capita are well within policy guidelines which restrict debt to AV to 2% and debt per capita to $2,000. Overall debt levels are moderate at $3,973 per capita and 3.2% of AV and within the county's policy of $4,000 per capita and 4% of AV.
Debt amortization is above average at about 75% retiring in 10 years, in compliance with conservative county policy of 64%. The county has reduced its variable-rate debt exposure from a high of 46% to a manageable 15% in just four years. The county's revised debt guidelines is more conservative and limits variable-rate debt exposure to 20% compared to the previous policy of 35%.
As part of a restructured capital planning process, the county instituted more stringent debt affordability guidelines. It intends to restrict future capital projects to those that can be financed within the calculated debt capacity and available pay-as-you-go capital funds.
Debt issued within policy parameters will result in debt service payments equal to between 17% and 19% of the budget over the next five years. Although Fitch views this percentage as high, it notes that it is consistent with historical levels, which have not in the past hampered financial flexibility. Future debt issuance plans will adhere to debt policies and approximate $100 million annually. The county is committed to annual pay-as-you-go financing amounts equal to three cents of the tax rate and a portion of excess fund balance in the debt service fund.
Long-term obligations associated with pensions and other post-employment benefit (OPEB) are limited. The county contributes 100% of its ARC to the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS), which totaled just 1.1% of general fund spending. The overall plan is extremely well funded at 99.5% as of the most recent valuation date or 96.9% after adjusting the discount rate to 7%. Additionally, the county contributes to various supplemental retirement plans with a total 2012 cost of $6.16 million.
After reaching a funded ratio of 100% in 2008, the county cut back OPEB funding to the pay-go amount beginning in 2011. For fiscal 2012, the county contributed $15.7 million or 1.2% of 2012 spending. OPEB has been closed to employees hired after July 1, 2010. The county is committed to developing a funding strategy for OPEB.
COVENANT TO FUND SOs IS STRONG
While bondholders benefit from strong coverage from gross revenues collected on the property tax bill, the 'AA+' rating solely reflects the county's covenant to fund debt service payments. Solid waste system operations yield satisfactory coverage on a net basis of approximately 1.5 times in fiscal 2012.
Within 10 days after the end of each month, the county will deposit with the trustee gross solid waste fee revenues into the interest account, an amount equal to the interest payable on the bonds on the next two interest payment dates, and into the principal account, an amount equal to the principal due on the next Jan. 1. The county's obligation to make such deposits shall cease for each fiscal year when the principal and interest accounts have been funded as described above. If the principal and interest accounts are not funded as described above by Dec. 10 of each fiscal year, the county covenants that by that date it will cause to be deposited with the Trustee the required amounts from any other legally available funds other than proceeds of any tax that the county levies.
WINDOWS DEBT RATING REFLECTS AN EXCEPTIONAL GENERAL CREDIT PROFILE
The assignment of the 'F1+' rating reflects Fitch's belief that given the county's 'AAA' credit quality and demonstrated access to capital markets through frequent GO issuance, the county will be able to refund the bonds during a windows period. In addition, the county's strong cash position provides a potential source of repayment in a failed remarketing scenario.
Upon an investor tender notice, the bonds are subject to a remarketing window. The remarketing agent has one month to find another buyer at the existing spread or at a higher spread acceptable to the county. If neither is completed, the funding window begins. Within the six-month funding window, the county has the option at any time to: refund or redeem the bonds, convert to another mode under the bond resolution (such as weekly with LOC), or remarket in the windows mode at a new spread.
If no option is exercised during the funding window, the bonds are subject to mandatory tender. A failure to pay the tender price of the bonds on a mandatory tender date will constitute an event of default under the bond resolution.
In the unlikely scenario that tenders would need to be paid with cash on hand, the county has maintained strong average daily portfolio balances. Short-term investments with a maturity of one month or less have provided coverage ranging from 1.01x to 4.03 over the year ending November 2012.
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