NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Johnson County, Kansas (the county) unlimited tax general obligation (ULTGO) bonds:
--$43,565,000 internal improvement bonds, series 2013A.
The bonds are expected to be sold via competitive sale on Sept. 26. Proceeds will finance various wastewater improvements.
In addition, Fitch affirms the following ratings:
--$130 million outstanding ULTGO bonds at 'AAA';
--$54 million Johnson County Public Building Commission (PBC) bonds at 'AA+'.
The Rating Outlook is Stable.
All ULTGO bonds are secured by the county's full faith and credit general obligation and its ad valorem tax pledge, without limitation as to rate or amount; however, the ULTGO series 2010B&E bonds ad valorem tax pledge excludes the assessed valuations of Olathe and Bonner Springs.
The PBC bonds (rated 'AA+') are special limited obligations payable solely from lease payments made by Johnson County from any legally available funds. The county's obligation is absolute and unconditional, not subject to appropriation, abatement, set-off or counterclaim.
KEY RATING DRIVERS
ROBUST ECONOMY: The local economy is deep and diverse and benefits from extensive employment opportunities throughout the Kansas City metropolitan statistical area (MSA).
SUPERIOR SOCIOECONOMIC PROFILE: Residents display a superior socioeconomic profile with above-average wealth and educational attainment levels.
STRONG MANAGEMENT: Officials have demonstrated judicious financial management driven by conservative budgeting and adherence to prudent formal financial policies.
SUFFICIENT RESERVES AFTER PLANNED DRAWS: The county's financial flexibility should remain strong even after planned reduction of reserves for the next several years. The county's low tax rate provides additional flexibility.
LOW FIXED COST BURDEN: The county's fixed cost burden is low, helped by the county's practice of funding a substantial amount of its capital needs on a pay-as-you-go basis. Debt ratios are manageable and pension costs, though increasing, are still moderate. Other post-employment benefit (OPEB) liability is minimal.
RATING DIFFERENTIATION: The rating for the PBC bonds is one-notch lower than the ULTGO rating, reflecting the county's obligation to make PBC lease payments from available funds.
The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. Fitch expects such shifts to be unlikely.
Johnson County is advantageously located 12 miles southwest of the city of Kansas City, providing residents with easy access to numerous high quality employment opportunities throughout the metropolitan region. Population since 2000 is up 24%, to approximately 560,000 in 2012, making the county the most populous in the state.
ROBUST METRO-KANSAS CITY ECONOMY WITH LOW TAX RATES
The county is home to several Fortune 500 companies. The economy is deep and diverse, anchored by Sprint and Garmin (together employing roughly 11,000 people), healthcare, government, and engineering services. The county's 5.4% unemployment rate as of July 2013 was improved from the year prior (5.7%) and better than the state (6.2%) and national (7.7%) averages. The reduction in the rate came as the county's employment growth outpaced expansion in the labor force.
Wealth levels are above average, with 2011 county per capita income levels equaling 147% and 141% of the state and national averages, respectively. The county's residents are well-educated, with 51% achieving higher education as compared with the national average (27%).
The county's taxable assessed value (TAV) has held up through the recession, with a moderate loss of 8.6% over the past five years. Current year assessed valuation is slightly off (-0.4%) the year prior, driven partially by state changes in personal property valuation. County expectations are for flat to moderate increases in assessed valuation, which Fitch believes is reasonable given strong year-to-date activity in government fees and permits associated with new construction.
The county's tax rate has not changed in several years and is currently the lowest in the state at $17.70 per $1,000 of TAV, 32% lower than the second lowest county tax rate. Management does not expect to increase taxes in the near future, but has expressed willingness to do so if necessary. Property taxes make up approximately 28% of budgeted fiscal 2014 general fund revenues, followed by sales and use tax revenues at 22% and charges for services at 13%.
PLANNED FUND BALANCE DRAWS SUPPLEMENT PAYGO
The county maintains a high degree of financial flexibility despite its plan to gradually draw down general fund balance to policy levels. General fund balance draws in 2011 and 2012 represented 2.8% and 2.1% of general fund spending, respectively. Despite the draw, 2012 unrestricted general fund balance increased slightly, to a solid 28.6% of spending. The 2012 results reflected a favorable budgetary variance, driven by strong performance from sales and use taxes, up 7.8% over budget, conservative budgeting of expenditures and realization of savings from a voluntary retirement incentive program implemented in 2011.
For 2013, the county budgeted a $16.2 million use of fund balance (5.5% of projected spending, cash-basis) and included a manageable 2.5% merit pool increase. Year-to-date figures suggest the draw may be more moderate at $9.5 million or 3.2% of 2013 estimated spending. The positive year-to-date budgetary variance is driven by a significant increase in mortgage registration fees. Additionally, the county expects to realize continued budget upside from conservative budgeting of open positions; however, the county ceased its formal open position review process earlier this year, which is likely to decrease future budget variances from such efforts.
These uses of fund balance for capital spending augment the county's healthy use of pay-as-you-go financing of its capital needs, collectively representing 11% of general fund spending in 2012.
The county continues to project use of fund balance for capital needs in its multi-year projections. Relative to this, the county has recently increased its formal fund balance policy to a 20% to 25% target. The 2014 budget includes a $10 million use of fund balance; multi-year projections show smaller draws and fund balances in line with the revised fund balance policy. Fitch believes management will take the necessary measures to ensure sound financial management and preserve sufficient reserves and overall financial flexibility.
MANAGEABLE DEBT AND PENSION BURDEN
The overall net debt burden is manageable at $4,235 per capita or 4% of full market value, with the majority of debt attributable to overlapping school districts. Direct debt is a nominal $441 per capita or 0.4% of full market value. The county has minimal plans for non-self-supporting debt in the near future.
The county participates in two state sponsored defined benefit pension plans and a defined contribution plan for its employees. The county's statutorily-based annual contributions are moderately low at $16.5 million or 4.1% of governmental fund spending in 2012. The annual required contribution (ARC) was fully funded for both uniform and municipal employee pension plans in 2012, although the statutory payment was less than the ARC in prior years.
The municipal and uniform plans are poorly funded at 60% and 66%, respectively, or a weaker estimated 54% and 60%, respectively, using a 7% rate of return assumption. Recent legislative changes will increase contribution rates and introduce a new tier of employees. Reforms will escalate incrementally the county's maximum ARC from 8.79% of payroll in 2013 to a more elevated but still manageable 14.19% of payroll in 2018 (an approximate 60% increase).
The county's OPEB liability is limited to an implicit rate subsidy for retirees, funded on a pay-go basis, resulting in a very low unfunded liability of less than 0.1% of market value.
The county's cost of carry for debt service, pension, and OPEB accounted for a low 10.8% of governmental spending in 2012.
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
U.S. Local Government Tax-Supported Rating Criteria