Fitch Affirms Fulton County, Georgia's GOs at 'AA'; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has affirmed the 'AA' rating on the following general obligation (GO) bonds of Fulton County, Georgia (the county):

--$22,130,000 GO library bonds, series 2010A (tax-exempt);

--$133,210,000 GO library bonds, series 2010B (taxable Build America Bonds).

Fitch also affirms the following ratings:

Fulton County Building Authority

--$580,000 revenue refunding bonds (human resources and governmental facilities project), series 2002A at 'AA';

--$6,975,000 revenue refunding bonds (judicial center facilities project), series 2002B at 'AA';

Fulton County Facilities Corp.

--$88,455,000 million certificates of participation (COPs), series 2009, at 'AA-'.

The Rating Outlook remains Negative.

SECURITY

The GO library bonds are a general obligation of the county backed by the levy of ad valorem taxes without limitation as to rate or amount.

The building authority bonds are secured by lease payments from the county, absolute and unconditional in nature and backed by the county's covenant to levy ad valorem taxes without limitation as to rate or amount.

The COPs issued by the facilities corporation are secured by rental payments made by the county subject to annual appropriation, and a leasehold interest in various governmental facilities.

KEY RATING DRIVERS

ADEQUATE FINANCIAL POSITION: The county's financial profile includes marginally satisfactory reserve levels, targeting a one-month or 8.3% fund balance position, a property tax-dependent revenue base with good growth prospects based on population and economic projections, and conservative budgeting practices that typically produce favorable results relative to the budget.

NEGATIVE FINANCIAL TREND: Rating concerns center on the county's significant dependence on fund balance since 2010 to support operations and challenges associated with its ability to restore balance to a budget with a projected gap of $32 million or roughly 5% of spending on a cash basis in 2014.

WILLINGNESS TO RAISE REVENUE VIEWED FAVORABLY: The county adopted an ordinance repealing House Bill 604 (HB 604) and subsequently levied and collected a special district tax rate increase without legislative challenge. The adopted 2014 budget includes a sizable 15% general fund tax increase, the first since 1991. The tax increase provides a much needed boost to a revenue base weakened by assessed value declines but fails to fully resolve a sizable general fund budget gap.

STABLE ECONOMY: The county's economic profile is highlighted by its participation in the Atlanta metropolitan statistical area (MSA). Economic diversification, a growing population, above-average income metrics, and educated labor force are viewed favorably.

LOW DEBT: Debt metrics are expected to remain low. Debt, pension, and other post-employment benefit (OPEB) costs consume a manageable share of the budget. The county's pension funding is weak but the plan is closed and the size of the unfunded actuarial accrued liability (UAAL) is manageable.

BUILDING AUTHORITY RATING: The strength of the county covenant to levy an unlimited ad valorem tax sufficient to make lease payments, and the absolute and unconditional payment obligation under the lease yields a rating of 'AA' equal to the county's GO rating.

CERTIFICATES OF PARTICIPATION: The rating on the facilities corporation COPs is notched down from the GO rating reflecting risk to annual appropriation and Fitch's view of the county's strong incentive to appropriate based on the essentiality of the leased assets.

RATING SENSITIVITY

BUDGET BALANCE: Maintenance of the rating is sensitive to the county's ability to take significant action presumed necessary to adopt a general fund budget in 2015 that is at or very close to structural balance and preserves a fund balance position already on the low side compared to other 'AA' counties rated by Fitch.

CREDIT PROFILE

COUNTY PLAN TO DRAW DOWN RESERVES

The county's unrestricted fund balance position had reached a high mark of $150.2 million or a strong 28.1% of operating expenditures and transfers out in 2010, having generally been maintained at a lower 15% to 20% of spending over the preceding decade. The county has since incurred audited operating deficits (after transfers) of $21.7 million in 2011 and $39.6 million in 2012 with additional fund balance utilization expected in both 2013 and 2014 which would lower the unrestricted fund balance to roughly equal its one-month or 8.3% policy level.

The county has relied on fund balance in conjunction with expenditure cuts to help offset the impact of a decline in property taxes, the leading source of revenue for the general fund budget. The general fund revenue base fell from $611.2 million in 2009 to $525.5 million in 2012, as the county opted to hold its tax rate constant despite a 21% decline in its tax base from 2008 - 2012. The tax base finally stabilized with very modest 0.3% growth reported in 2013.

ADOPTED 2014 BUDGET INCLUDES TAX INCREASE BUT FAILS TO SOLVE BUDGET GAP

The adopted 2014 budget represents a $53.6 million or 9.4% increase from 2013. Of particular importance is the fact that the budget increases the general fund tax rate for the first time since 1991 by 1.57 mills or 15% generating $51.8 million in revenue. As the tax rate is dedicated to support various spending initiatives the 2014 budgeted deficit remains substantial at $40.6 million or 6.5% of the $625.4 million spending plan. The budgeted year-end fund balance of $44 million or 7% is lower than the county fund balance policy, but management forecasts an improvement in the year-end reserve position to $52.9 million or 8.5% due to an increase in prior year tax collections and debt service savings. Over time management has proven to be careful stewards of the budget, typically achieving revenue and expenditure results that fare better than the forecast.

Growth in the 2014 budget is driven by an $11.3 million increase in the county's contribution to Grady Hospital. The annual increase partially restores a an $18.6 million cut in the 2013 budget associated with a one-year deferral of debt service costs on the hospital authority's revenue certificates due to debt refinancing. The budget will also fund a 3% cost-of-living increase to all employees, the first in seven years, at a cost of $8.3 million, and allocates an additional $5.5 million to convert certain temporary positions to full-time status. Pay-as-you-go capital spending is also increased $4.2 million.

PROPERTY TAX INCREASE LIKELY NECESSARY TO BALANCE 2015 BUDGET

Property taxes represent 80% of budgeted revenue in 2014 and will likely play an important role as the county plans to return the budget to balance in 2015. The county's operating tax rate remains comparable to several of its neighboring municipalities, including DeKalb County and the City of Atlanta following the current year increase. Absent an additional tax rate increase in 2015 significant spending cuts will likely focus on social and public health programs, including contributions to Grady Hospital. The general fund contribution to hospital operations is entirely discretionary, and not subject to statutory or other maintenance of effort requirements but can be difficult to implement politically.

In 2013 the state legislature enacted HB 604 suspending Fulton County's ability to assess a millage rate above the roll-back or revenue neutral rate through Jan. 1, 2015. The bill also imposed more stringent voting requirements on the county board of commissioners to adopt any increase thereafter. The county subsequently repealed HB 604 pursuant to the home rule powers granted to counties under Article 9 of the Georgia Constitution. The repeal ordinance was filed with and acknowledged by the secretary of state, and the county then levied and collected a tax increase for the South Fulton taxing district governmental fund. At this time Fitch is not aware of any threatened or pending litigation challenging the county's repeal of HB 604, however, any future action of the legislature that serves to limit the county's budgetary autonomy or flexibility would be viewed as have a negative impact on credit quality.

LOW DEBT LEVELS

The county's practices of pay-go financing for capital projects and rapid debt amortization continue to keep debt levels low. Overall debt, which includes the overlapping municipalities and various authorities, is equal to 0.8% of market value or $1,035 per capita. At this time, no additional borrowings plans exist however the county does not prepare a formal multi-year capital improvement plan (CIP) - a practice fairly standard among highly rated local governments. Risk inherent in the absence of a CIP is further highlighted by the county's strong population growth that generally places demand on infrastructure and maintenance needs.

PENSION FUNDING A MANAGEABLE PRESSURE

The county administers a single-employer defined benefit pension plan with a funded ratio as of December 31, 2013 equal to 73%. The UAAL of $435.1 million represents a modest 0.3% of the market value of the county's tax base. The county assumes a 7.8% rate of return. Fitch estimates a funded ratio of 67.1% assuming a 7% return. Importantly, the county closed its defined benefit pension plan to new employees in 1999 in favor of a 401(a) defined contribution plan. The cost of funding pension, bonded indebtedness, and the pay-go amount for OPEB consumes about 12% of spending, a level considered low to moderate by Fitch, however, there are concerns about the increased pension burden placed on a budget that is structurally imbalanced. The pension ARC for the current year is $55.3 million compared to $33.8 million in 2008. Actual contributions to the pension plan have not always fully equaled the ARC, although the 2014 budgeted contribution exceeds the ARC by $2 million. The county's OPEB UAAL is elevated at $1.5 billion as of the most recent valuation date or 1.2% of market value, reflecting a relatively high subsidy from the county toward the premium cost for retiree health care coverage.

FAVORABLE ECONOMIC PROFILE

Fulton County is situated at the core of the Atlanta MSA, the ninth largest employment base in the U.S. with approximately 2.5 million non-farm jobs. The county serves as a corporate headquarters for large employers including Coca-Cola, AT&T, Home Depot, and Delta Air Lines and lies in close proximity to Hartsfield-Jackson International Airport (Hartsfield), the world's busiest airport. Despite its diversity the county experienced a very steep job loss during the recession relative to the state and the nation and a slower recovery to date. The December 2013 unemployment of 7.5% remains somewhat elevated relative to the state and nation and its improvement from the December 2012 rate of 9.2% largely reflects a contraction of the labor force.

However, the near-term outlook is fairly positive. Total non-farm employment for the Atlanta MSA is forecast to grow by a strong 3.1% annually through 2015 according to IHS. New stadiums for the National Football League's Atlanta Falcons and Major League Baseball's Atlanta Braves should benefit the important construction sector over the next several years. The regional housing market is showing signs of improved health with solid growth in home prices. Population expansion should help buoy this momentum. The county's population has increased at a very solid annual growth rate of 1.5% since 2000 to 984,293 residents in 2013. Global Insight forecasts population gains of 1.5% per year through 2018 for the Atlanta MSA. County income metrics are generally favorable, although a poverty rate above the national norm suggests an income dichotomy exists.

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, and IHS Global Insight.

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=826651

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com