Fitch Rates Winston-Salem Special Obligation Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following special obligation bonds of the City of Winston-Salem, North Carolina (the city):

--Approximately $17.2 million special obligation bonds, series 2013.

The bonds are expected to sell on or about March 20th. Proceeds from the bond issuance will be used to pre-refund certain series of the city's outstanding special obligation bonds, as well as to finance capital projects related to the Wake Forest Innovation Quarter.

In addition, Fitch affirms the following ratings:

--$88.2 million unlimited tax general obligation (ULTGO) bonds at 'AAA';

--$49.4 million limited obligation bonds (LOBs), series 2010B and 2012A at 'AAA';

--$4.9 million special obligation bonds, series 2005 at 'AAA';

--$15.4 million COPs, 2006A at 'AA+';

--$19 million LOBs, series 2010A at 'AA+';

--$16.8 million COPs, series 2004A, 2004B and 2006B at 'AA'.

The Rating Outlook is Stable.

SECURITY

The special obligation bonds are secured by a portion of the city's sales and use taxes.

The ULTGOs are general obligations of the city to which its full faith and credit and unlimited taxing power are pledged.

The LOBs, series 2010B and 2012A, represent an absolute and unconditional contractual obligation of the city, not subject to annual appropriation.

The remaining COPs and LOBs are secured by lease payments, subject to annual appropriation, and a deed of trust against certain governmental assets of the city.

KEY RATING DRIVERS

SPECIAL OBLIGATION RATING: The 'AAA' rating on the special obligation bonds reflects the exceptional coverage provided by pledged sales tax revenues at 10.8 times (x) in fiscal 2012. Fitch expects coverage to remain at comparable levels given the city's lack of plans to further securitize these revenues.

'AAA' LOBs: Lease payments on the 'AAA'-rated LOBs are not subject to appropriation; they represent an absolute and unconditional obligation of the city payable from its general fund, and the city may levy taxes to meet its payment obligation subject to statutory limitations. There is ample margin under this limitation.

LOBS WITH APPROPRIATION RISK: The rating assigned to the other LOBs reflects appropriation risk in addition to the level of essentiality of the assets securing bondholder repayment.

HEALTHY FINANCIAL FLEXIBILITY: Robust reserves are buttressed by a liquid balance sheet. Financial management is strong, and budgeting practices are conservative.

SOUND ECONOMIC PROFILE: The city has become a regional hub for health care, higher education, and biotechnology, having diversified from its traditional concentration in manufacturing. Economic indicators trend slightly below state and national averages.

MANAGEABLE DEBT BURDEN: Overall debt levels are moderate, and principal payout is rapid. Costs related to debt service and retirement benefits consume a manageable share of annual spending.

SENSITIVITY

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The 'AAA' GO rating and Stable Outlook reflect Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The City of Winston-Salem, with a population of 232,385, is the seat of Forsyth County in northwestern North Carolina and is a major economic and commercial center in the state.

STRUCTURE OF THE 2013 SPECIAL OBLIGATION BONDS

The special obligation bonds are secured by revenues from a one-cent sales tax and three one-half-cent sales taxes. Pledged revenues totaled $29.5 million in fiscal 2012, a 10% increase over the prior year. Sales tax receipts for fiscal 2012 cover maximum annual debt service (MADS) on series 2002 senior bonds and the series 2005 bonds by 10.8 times (x). The current refunding will reduce MADS by almost $200,000, increasing coverage to over 11x.

The sales taxes are subject to amendment or repeal by the state or by county voters. Fitch believes this risk is remote given that the state recognizes that local governments rely on this source and the practical difficulties of effecting the required special election. Further mitigating the risk is the city's covenant under the indenture to amend the definition of pledged funds to include a source of revenues other than ad valorem taxes sufficient to cover MADS at least 2.0x if existing pledged funds do not reach this level. Additional bonds may be issued upon satisfaction of an anti-dilution test equal to 2.0x MADS.

MAINTENANCE OF STRONG RESERVES, HIGH LIQUIDITY

Reserve and liquidity levels remain ample, reflecting the city's strong financial position. For fiscal 2012, the general fund's unrestricted fund balance was $30.3 million (an ample 17.6% of spending). The restricted portion of the general fund balance includes a statutory reserve for stabilization of $13.9 million (8.1% of spending), which Fitch considers an available source for operations, if necessary. General fund cash and investments of $39.2 million in fiscal 2012 cover total liabilities 6.3x, or almost three months of operating expenses.

The city has remained in compliance with its prudent unrestricted fund balance policy of 10% of budgeted expenditures for at least the past six fiscal years. Since fiscal 2009, the city has augmented its unrestricted reserves from $21.4 million (12.4% of spending) to $30.3 million (17.6%). Recent positive financial results have been achieved through prudent fiscal stewardship, evidenced by management's willingness to combine recurring revenue and expenditure actions as necessary to stabilize city finances.

FISCAL 2013 BUDGET AND PROJECTIONS

The fiscal 2013 budget included a $3 million appropriation of reserves to pay down debt ($1 million) and to plug budget gaps ($1.4 million). Due to the conservative budgeting, the city now anticipates it will only realize a $500,000 draw down, which will not materially decrease the city's financial cushion and has the positive effect of reducing long-term liabilities.

The budget also included a millage rate increase to $4.91 per $1,000 AV from $4.75, which remains low relative to the statutory cap and competitive regionally. Spending cuts over the past several years have been relatively modest in nature, including hiring freezes, employee pay increase deferrals, and capital equipment replacement limits.

CONTINUED DIVERSIFICATION OF LOCAL ECONOMY

Healthcare services, biotechnology, and higher education drive the local economy. Wake Forest Baptist Health (WFBH) and Novant hospitals are the second and fourth largest hospitals in the state, respectively, and are the city's top employers, with over 20,000 employees in aggregate. The Wake Forest Innovation Quarter, located in downtown Winston-Salem on 200 acres, houses an estimated 39 private companies, as well as Wake Forest University departments. Wake Forest, Winston-Salem State University, NC School of Arts, and Forsyth Technical Community College are all located within city limits and have a total enrollment exceeding 20,000 students.

Manufacturing plays a significant role in the economy even though it is no longer the city's primary source of jobs. Reynolds American Inc. (RAI) is the city's largest taxpayer and maintains its headquarters in the city. In calendar 2012, the company closed its last manufacturing plant in the city; however, city management reports that the closure of the plant did not impact tax rolls.

MIXED ECONOMIC INDICATORS

Economic indicators for the city compare somewhat unfavorably to those of the nation. As of February 2013, the city's unemployment rate of 8.3% had improved over the year prior (8.8%) due to annual gains in the employment base and remained below the state's (9.5%) but still trended above the nation's (8.1%). Wealth indicators are on par with those of the state and on average approximately 10% below those of the U.S.

The city's tax base has experienced modest year-over-year declines of 0.8% and 0.3% in fiscal 2011 and 2012, respectively. The city experienced a modest increase of 0.6% in fiscal 2013. Forsyth County's next revaluation of real property is scheduled for fiscal 2014, and estimates from the county tax office show a potential 6% decrease in the value of real property. Fitch considers this estimate likely given continued declines through the most recent Case-Schillar.

MODERATE DEBT LEVELS, MANAGEABLE CARRYING COSTS

Overall debt levels are moderate ($2,754 per capita and 3% of market value) due to sizable overlapping debt of Forsyth County (60% of the total burden). The city's outstanding direct debt consists predominately of LOBs/COPs and GOs.

Historically, the city has issued variable-rate debt for short-term equipment deals. Variable-rate debt outstanding totals a manageable $16 million (7% of direct debt burden). All such variable-rate debt is privately placed with no put option, thus eliminating the need for liquidity support.

Annual carrying costs related to debt service and retirement benefits totaled $53.5 million or a sizable 23.7% of operational spending. Debt service accounted for the majority of these expenditures at $34.3 million (15.2%), followed by pension contributions and OPEB contributions at $12.5 million and $6.7 million, respectively.

General employees are members of the North Carolina Local Government Employees' Retirement System, and police officers are members of the city's Winston-Salem Police Officers' Retirement Fund (WSPORF). The city has paid 100% of its annual required contribution (ARC) to both plans for at least the past three fiscal years.

In 1992, the city funded WSPORF fully by issuing COPs, which are recorded as a liability in the city's post-employment trust fund. Since that time, WSPORF has fallen to a weak 61% funding level (using an adjusted 7% rate of return) with an unfunded liability of $47 million (0.2% of market value). Management is considering issuing $30-43 million in LOBs in fiscal 2014 to improve the plan's funding. Given the city's rapid rate of amortization and moderate debt levels, Fitch does not view these potential issuance plans with concern.

OPEB liabilities do not represent a significant cost pressure. The COPs issued in 1992 to fund the pension plan were also used to fully fund the OPEB liability that year. Subsequent GASB changes weakened the funded ratio, which is now 40%.

Additional information is available at 'www.fitchratings.com'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790575

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Contacts

Fitch Ratings
Primary Analyst
Ginny Glenn, +1-212-908-9130
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Ginny Glenn, +1-212-908-9130
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com