Fitch Affirms Hospital Authority of Hall County, GA 2010B Certificates at `AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following rating on The Hospital Authority of Hall County and the City of Gainesville (Northeast Georgia Health System, Inc.), GA:

--$250 million revenue anticipation certificates series 2010B at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The series 2010B certificates are secured by a pledge of Northeast Georgia Health System's (NGHS) gross revenues. To the extent that these funds are insufficient, the county is obligated pursuant to an inter-local contract to provide for the payment of debt service on the certificates.

The obligation of the county to make payments under the contract constitutes a general obligation (GO) of the county. The county has agreed to levy an annual tax, subject to a statutory limit of seven mills, to provide sufficient funds to make all payments required under the contract.

KEY RATING DRIVERS

COUNTY GO PLEDGE: The 'AA-' rating on the certificates reflects the GO pledge of the county to support debt service on the certificates if Hospital Authority revenues, derived from NGHS payments, are insufficient.

IMPROVED FINANCES: Following a trend of operating deficits, the county saw positive results in fiscal 2010 through 2012. Preliminary figures for fiscal year 2013 show balanced operations and increased reserves.

LIMITED ECONOMY; TAX BASE DECLINES LESSEN: The county's taxable assessed value (TAV) saw annual declines in the last three fiscal years, but the decline has lessened in fiscal 2014. The county expects growth in the next year. The county's unemployment rate remains below state and national rates, as does per capita income.

LOW DIRECT DEBT; WEAK PENSION FUNDING: Overall debt levels and carrying costs, including required pension payments, other post-employment benefits (OPEB) and debt service, are low. County pension funded levels are low and the county has been underfunding its annual required contribution in recent years.

SOUND HOSPITAL CREDIT PROFILE: The 'AA-' rating on the bonds incorporates Northeast Georgia Health System's 'A' revenue bond rating, reflecting NGHS's consistently strong operating cash flow, solid financial cushion, a high debt burden, large capital program and leading market position. Fitch expects that certificate debt service will be supported by NGHS's operations.

RATING SENSITIVITIES

The county's history of maintaining adequate reserves while addressing operating and capital needs indicates continued rating stability. A return to reserve draws for budget balance could pressure the rating. Low pension funding is also a credit concern and continued weakening could pressure the rating.

CREDIT PROFILE

Hall County is located in northeast Georgia approximately 50 miles from Atlanta. The county's 2012 population, 185,416, represents an increase of 33% from 2000.

IMPROVED FINANCES

Following general fund operating deficits in fiscal years 2008 and 2009, the county implemented expenditure cuts and some revenue enhancements to return to operating surpluses in fiscal years 2010 through 2012. The fiscal year 2012 general fund unrestricted balance was $14.3 million or 17.1% of spending. This represented a significant improvement from $8.7 million (9.5%) in fiscal year 2011. Recent year expenditure reductions included elimination of staff, department-wide cost reductions, and furloughs, but also included under-funding of pension fund contributions.

Unaudited figures for fiscal year 2013 indicate essentially balanced general fund operating results, which combined with one-time revenues from the sale of a county jail facility (about $7.2 million), result in an expected total general fund balance of $22.9 million, or 27% of spending. The fiscal year 2014 budget includes a fund balance draw-down of about $4.1 million. However, current county estimates indicate a reduced potential draw-down of about $1.5 million, due to better than budgeted revenues, including the new vehicle title ad valorem tax, and lower than budgeted spending. The county has a trend of actual results outperforming budgeted expectations. The county's fund balance policy was recently revised to require maintenance of an unrestricted balance at 10% to 20% of spending, vs. the prior policy of 5% to 15%. Fitch believes this reserve range is satisfactory for the county's needs.

Weakened sales tax revenues stabilized in fiscal year 2011 and saw strong growth in fiscal year 2012 (11%). Sales tax revenues for part of fiscal year 2013 and fully in fiscal year 2014 were negatively affected by state legislation that eliminated sales tax on vehicle sales effective March 2013. Preliminary collections for fiscal year 2014 of combined TAVT and sales tax revenues are showing strong growth vs. prior year sales tax collections.

ASSESSED VALUE DECLINES LESSEN

Assessed values grew rapidly over the past decade until annual declines began in fiscal year 2011. TAV decreased by about 14% from fiscal year 2010 to fiscal year 2013. After two years of annual 6% declines, the TAV decline lessened to 1.5% in fiscal year 2014. The county is expecting growth in the next year due to ongoing development and a revaluation of county properties.

The county tax base is diverse with the top taxpayer (Wrigley Manufacturing Company) at 1.1% of TAV and the top 10 (largest related to utilities, communications, manufacturing, and agriculture sectors) comprising 3.9% in fiscal year 2012. Property tax millage rates have been held steady at 6.25 in recent years, resulting in declining property tax revenues in recent years.

LIMITED ECONOMY; UNEMPLOYMENT IS BELOW AVERAGE

County unemployment rates have historically been below state averages. The October 2013 unemployment rate (6.6%) remains lower than comparable state (8.0%) and national (7.0%) rates. The county's economy, historically manufacturing and agricultural based, has benefited from continuing medical and health sector growth, anchored by NGHS, which is the largest employer (about 5,000 employees). Other leading employers include poultry farms and food processing.

MODEST DEBT LEVELS

Overall county debt remains low with the majority of the local capital needs funded by revenues from a voter-approved 1% special local option sales tax (SPLOST). The fiscal year 2012 county debt burden, exclusive of the contingent NGHS debt which is expected to be self-supporting, is low at $1,516 per capita and 1.7% of market value and amortization (about 55% maturing in ten years) is mid-range. No additional tax-supported debt issuance is expected in the near-term. Overall county fiscal year 2012 carrying costs including debt service, pension ARC and OPEB actual payment are low at about 7% of governmental spending.

In 2012, the county approved $200 million of additional NGHS debt on parity with the series 2010B certificates. Of this, about $40 million has been issued under a short-term 'draw down' bond structure, which NGHS expects to refinance with long term bonds at or before maturity in December 2016.

The current SPLOST VI was approved by 62% of county voters in 2009 and is currently projected to generate about $152 million (down from $240 initially estimated) through 2015, when it expires. While collections are far less than initially projected, revenues will fund the majority of the county's identified needs and keep county debt levels low.

The county's retirement plans include an Association of County Commissioners of Georgia (ACCG) multi-employer defined benefit plan which was closed to new employees in 1998 and an ACCG defined contribution plan. The defined benefit pension funded level is very low at 40.4% as of January 1, 2011 or 37.3% using Fitch's more conservative 7% discount rate. Since fiscal year 2010, the county has been contributing less than 100% of the actuarially required contribution (ARC), on average about 69% in recent years, to provide budget relief. The county has indicated that the ARC was fully funded in fiscal year 2013 and that the fiscal year 2014 budget provides for full ARC funding.

CERTIFICATES BACKED BY COUNTY PROPERTY TAXES, IF NEEDED

As authorized under Georgia Hospital Law, the county, pursuant to an intergovernmental agreement, is required to levy up to seven-mills to pay debt service on the certificates if authority revenues are insufficient. In addition to the requirement to exercise its limited taxing authority, the county's obligation to pay debt service, when notified, is required to be made from any legally available county funds five days prior to the debt service due date, adequate time to ensure timely payment. This offsets concerns regarding the practicality of levying and collecting the tax in time to make debt service payments. Further, the series 2010B certificates benefit from a cash funded debt service reserve equal to maximum annual debt service (MADS) on the certificates.

The county's fiscal year 2014 TAV of about $6 billion generates about $42 million for seven mills, which covers maximum annual debt service (MADS) on the series 2010B certificates 2.3 times (x). The county has never levied any of the seven-mills for debt service. In 2012, the county approved extending the seven-mill pledge to an additional $200 million of NGHS debt issuance. Of this, about $40 million has been issued under a short-term 'draw down' bond structure, which is expected to be refinanced with long term bonds at or before maturity in December 2016. While Fitch expects current and additional debt service to be covered by NGHS revenues, revenues from the county's seven mill back-up should be sufficient to cover total debt service needs.

STABLE HOSPITAL CREDIT

The 'A' rating on NGHS's series 2010A revenue bonds reflects its history of strong operational profitability, good market position and strong liquidity relative to expenses. Fitch's credit concerns include a heavy debt burden and future capital plans which could stress liquidity and/or debt metrics. For additional details, please refer to 'Fitch Affirms Northeast Georgia Health System's Revs at 'A'; Outlook Stable' dated Dec. 9, 2013, and available at 'www.fitchratings.com'.

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).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811845

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-0514
Analytical Consultant
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Mike Rinaldi, +1-212-908-0833
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

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-0514
Analytical Consultant
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Mike Rinaldi, +1-212-908-0833
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