NEW YORK--()--Fitch Ratings has assigned a rating of 'AA-' to the following limited obligation bonds (LOBs) issued by Dare County, North Carolina (the county):
--$28.7 million refunding LOBs, series 2013A.
The LOBs are scheduled for sale by negotiation on March 27.
Proceeds of the series 2013A bonds will refund a portion of outstanding series 2005 certificates of participation (COPs) for debt service savings.
In addition, Fitch affirms the following ratings:
--$0.3 million general obligation (GO) bonds at 'AA';
--$129.3 million COPs (various series) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are general obligations of the county secured by a pledge of its full faith and credit and unlimited taxing power.
The LOBs and COPs are payable from funds subject to appropriation by the county board of commissioners, and by a respective deed of trust granting a lien on certain project sites and improvements. If a default occurs the trustee can direct the foreclosure on the mortgaged property and apply the proceeds to the payment of amounts due to bondholders.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Dare County's history of prudent financial management and reserve levels serve to mitigate its operational exposure to volatility of tourism related revenues and risk to storm damage.
PROPERTY TAX FLEXIBLITY: Property taxes account for about half of general fund revenues. The county's tax rate is among the lowest in the state, enhancing overall financial flexibility and providing an outlet to offset potential downturns in less stable sources.
MANAGEABLE DEBT POSITION: Debt levels remain affordable, existing debt is rapidly repaid, and future capital needs and borrowing plans are modest.
TOURISM AND MAJOR STORM RISK: Economic activity is highly concentrated in tourism and related activities. The majority of developable land within the county is located on a barrier island exposing an additional vulnerability to storm damage; the attractiveness of the region has served to encourage rebuilding efforts following past storms.
APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and the LOBs and COPs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholder's recourse to an event of non-appropriation or default; such risk is somewhat diminished by the deed of trust granted on essential public schools.
DIMINISHED RESERVES: Maintenance of large reserve balances offset concerns regarding the cyclical nature of the county's tourist-based economy and susceptibility to event risk. A significant reduction in reserve levels could lead to negative rating action.
AFFLUENT, TOURISM-DEPENDENT TAX BASE
Dare County is located along the northeastern North Carolina coast and contains most of the popular barrier island known as the Outer Banks. According to the North Carolina Department of Commerce more than 11,260 jobs in the county are directly attributable to travel and tourism (or nearly 60% of the county's average annual employment).
Local economic indicators for 2012 were positive. Occupancy tax and food and beverage tax receipts were up by 0.6% and 3.2%, respectively while fiscal 2012 local sales tax collections increased 3% over the prior fiscal year. Building permit values and land transfer collections also displayed notable gains with year over year growth of 26% and 10%, respectively. Home sales are well-above prior year levels, according to the Outer Banks Association of Realtors.
Despite the pick-up in economic activity, employment levels have lagged in 2012 with jobs down by 0.9% from 2011. Officials attribute the lackluster job trends early in the year to the lingering effects of Hurricane Irene, which hit the county in August 2011 producing extensive flooding and halting business activity on Hatteras Island for six weeks. The employment picture did improve towards the end of the year with December 2012 employment levels up 1.4% year over year.
Employment is seasonal and varies greatly over the year, typical of tourist-based economies. The contrast between the county's December 2012 unemployment rate of 16% contrasts and its much more moderate July 2012 rate of 8.2% is representative of the county's historical trends.
The tax base includes approximately 12,000 vacation homes and condominiums and 3,000 hotel or motel rooms, which accommodate an average seasonal population of 150,000 compared to the year-end Census figure of less than 34,000. Income indicators are above those of the state and nation.
Seasonal visitors contribute a good deal of wealth to the economy, perhaps best evidenced in the county's retail sales per capita which is more than three times the state average. Property values within the county's resort communities are high; the average sales price for a single family house within the county in fiscal 2012 was $324,000, according to the county property assessor.
RESERVES A FAVORABLE RATING CONSIDERATION
Historically strong reserve levels, which Fitch considers prudent to compensate for the financial unpredictability in an area dependent on tourism and susceptible to major storms, have moderated some in recent years but remain sound.
In fiscal 2012, the general fund produced a small net surplus of $359,000 or 0.3% of spending. The county had originally budgeted a $2 million general fund operating deficit but expenditures came in significantly below budget. Despite the positive results, fiscal 2012 unrestricted fund balance fell from $17.2 million in fiscal 2011 to $16.3 million, representing 16.8% of general fund spending.
The decline in fiscal 2012 unrestricted balances is attributable in part to the transfer of certain available reserves into the restricted stabilization fund. State law requires the stabilization fund to be classified as a restricted reserve although Fitch considers this fund to be an available resource. In fiscal 2012, the stabilization reserve totaled $10.8 million, which when added to unrestricted general fund balance brings available reserves up to $27.1 million or an ample 28% of expenditures.
SURPLUS OPERATIONS PROJECTED FOR FISCAL 2013
The adopted fiscal 2013 general fund budget totals $100.9 million, a modest increase of 1.2% from the year prior. The budget appropriated approximately $2.7 million in existing fund balance, about the same as last year's revised budget. Management is currently projecting a small end of the year general fund surplus as spending trends below budget and revenues benefit from the one-time receipt of EMS fees as a result of outsourcing collections. The county's conservative forecasting and timely budget revisions on the expenditure side have typically offset recent revenue shortfalls due to the economy (Fitch notes that actual spending has averaged approximately 95% of the budget during the prior six fiscal periods).
The county's fund balance policy targets an unassigned fund balance equal to 19% to 21% of operating expenditures (Fitch commonly measures reserves against operating expenditures and transfers out). The fiscal 2012 unassigned general fund balance of $12.6 million or 13% of spending is well below the target. With the projected fiscal 2013 surplus and reductions in stabilization fund requirements, officials expect that fiscal 2014 operating results will make significant progress towards meeting the target. Fitch believes that the county's strong management team will maintain ample levels of reserves and liquidity.
PROPERTY TAXES PROVE STABLE
Property taxes fund slightly less than 50% of the fiscal 2013 general fund budget. The fiscal 2013 property tax rate remained at $0.28 per $100 of assessed value (AV) for the third straight year. The property tax rate is the second lowest county tax rate in the state, and well below the statutory cap of $1.50 per $100 AV. The tax base has expanded at a very modest pace averaging 0.6% per year between fiscal years 2007 - 2013.
For fiscal 2014, the tax base declined by about 30% due to revaluation, the first in eight years. A sizable reduction in values was expected given previously high sales-to-assessment ratios reported by the NC Department of Revenue and large reductions in residential values since the last revaluation in 2005. The county intends to mitigate the impact on revenue by raising the tax rate either to a revenue-neutral $0.41 per $100 AV or possibly even higher to cover increases in employee salaries.
Current tax collections remain exceptional at 99% in fiscal 2012. There are no major taxpayers, but the tax base is exposed to concentration within the real estate sector. Residential properties, including condos, account for 88% of fiscal 2014 total taxable value.
MANAGABLE DEBT BURDEN
Overall debt is low relative to market value (1.1%) and moderately high on a per capita basis ($4,568), a trend not inconsistent in communities with high proportions of second homes. Projected fiscal 2014 debt service of $16.7 million approximates an above-average 16% to 17% of spending. Overall, the debt service burden is manageable given the rapid pay-out of existing debt (over 70% in 10 years), limited future capital needs with modest borrowing plans and reasonably affordable long-term liabilities for pension and other post-employment benefits (OPEB).
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 additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, 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