NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following city of Raleigh, North Carolina general obligation bonds (GOs):
--$15.3 million general obligation public improvement bonds, series 2014.
The bonds are scheduled for public bid on June 26. The bonds will fund parks and recreation and fire station facilities improvements.
In addition, Fitch affirms the following ratings:
--$305.2 million GOs at 'AAA';
--$74.7 million limited obligation bonds (LOBs) at 'AA+';
--$3.5 million capital improvement certificates of participation (COPs), series 2005C at 'AA+';
--$295.2 million downtown improvement COPs at 'AA';
--$33.7 million variable-rate demand limited obligation revenue bonds, series 2009 short-term rating (internal liquidity) at 'F1+'; long-term rating at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's full faith and credit and unlimited tax pledge.
The COPs and LOBs are secured by annual payments made by the city subject to annual appropriation and a deed of trust on certain governmental property.
KEY RATING DRIVERS
SOUND RESERVES AND BUDGETARY FLEXIBILITY: The city's financial profile is bolstered by conservative budget assumptions and regular performance monitoring that consistently generates results that outperform budgeted expectations and are in line with the formal 14% general fund balance policy.
MODERATE DEBT BURDEN: Debt ratios are expected to remain stable, given the rapid amortization and affordable future capital needs and debt issuance plans.
ROBUST ECONOMY: The economy benefits from an extensive government, university and healthcare presence and proximity to the Research Triangle Park (RTP), in addition to an extensive transportation network. Economic indicators are strong, including low unemployment above-average income indicators, and a highly educated labor pool.
APPROPRIATION DEBT: The ratings on the LOBs and COPs reflects the appropriation risk inherent in the installment payments to be made by the city to the trustee, the level of essentiality of the respective leased assets to governmental operations, and the general creditworthiness of the city of Raleigh. The 'AA+' ratings reflect a high level of essentiality, in Fitch's estimation, while the 'AA' rating on the downtown improvement COPs reflects the non-essential nature of the leased assets.
AMPLE LIQUIDITY: The 'F1+' rating principally reflects the long-term credit quality of the city and sufficient period of time following a tender and failed remarketing to access the capital markets and provide takeout proceeds.
Raleigh is located in Wake County (rated 'AAA' by Fitch) in the north central portion of the state. Population increased a notable 46% between 2000 and 2010 and 6.9% since 2010.
Raleigh is located adjacent to the successful RTP, which serves as an important economic engine. The city has a skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, healthcare, and other professional services. Population growth has been strong with over a 30% increase in each of the past two decades. The economy remained relatively stable through the economic downturn with a 4.3% unemployment rate as of April 2014, down from 5.7% a year prior and well below the state (6%) and national (5.9%) average. Wealth levels are above average.
SOUND RESERVE LEVELS
Fiscal 2013 ended with a continuation of positive operating results. The $5 million increase to the general fund balance (1.4% of spending) reflects favorable variances in both revenues and expenditures. The city conservatively budgets for full staffing and utilizes prudent revenue assumptions, enabling historically strong year end results. Sales tax collections showed a favorable 4.8% growth, well exceeding the budgeted growth of 1.3%. The unrestricted balance totaled $171.9 million, or an ample 47.1% of spending. In addition, the city's reserve by state statute, an offset to accounts receivable, totals $38.2 million or an additional 10.5% of spending.
STABLE OPERATIONS PROJECTED FOR FISCAL 2014
The fiscal 2014 budget was balanced with a $13 million appropriation of fund balance (3.6% of spending) and a flat tax rate. Better than budget operations are expected; and the city is estimating balanced operations with no use of reserves. Continued strong sales collections boost revenues. Property tax revenues are the city's largest revenue source at 53% of revenues followed by sales tax at 19%. Due to a change in the collection method of personal property taxes, the current year collection rate increased to a strong 99.1% in 2014.
The fiscal 2014 year-over-year budget increase is 5.5% and includes funding related to merit increases, the addition of 29 new positions, infrastructure and funding for employee training and development. Based on the city's historical financial performance operations are expected to remain positive and reserves ample.
CONTINUED REVENUE GROWTH EXPECTED IN FISCAL 2015
The fiscal 2015 budget shows continued favorable revenue growth. Consistent with previous years, the adopted budget includes a $13 million appropriation of general fund balance. A moderate 2.12 cent property tax rate increase to 40.38 for a transportation bond referendum passed in the fall of 2013 (1.12 cents) as well as for a street resurfacing program (1.0 cents). The administration is also proposing an increase in the solid waste fee as part of a multi-year effort to achieve self-sufficiency for the enterprise operation begun in fiscal 2013.
AFFORABLE DEBT PROFILE
Debt levels are moderate at 2.9% of market value, and debt service accounts for 11.7% of total governmental spending excluding capital. Amortization is rapid with 64% of GO debt retired in 10 years.
The current fiscal 2014 to 2018 five-year capital improvement plan (CIP) totals $645 million. Utilities account for the majority of the plan at 65%. The plan is 43% debt funded. The proposed fiscal 2015 to 2019 CIP increases to $890 million with utility and transportation projects accounting for the increase. The city plans to issue $67 million of LOBs in August 2014 to finance the construction of a critical public safety center. In the Fall of 2014 a $40 million GO issuance is planned, largely for transportation and housing projects. Additional borrowing planned for Spring 2015 includes $75 million of utility bonds and $77 million of GO transportation bonds. Given the rapid amortization of existing debt and the prospects for continued taxbase growth debt metrics should not be impacted by the planned borrowings.
The variable-rate 2009 LOBs were issued at an initial rate equal to the SIFMA index as of the date of delivery plus a fixed index spread (the first 'windows' rate) and will bear interest at the windows rate until adjusted to another interest rate (daily, weekly, long-term, etc.). All bonds in the window mode will not be subject to mandatory tender for purchase until 210 days following the tender notice. While in the windows mode upon tender there is a 30-day remarketing window which is followed by a 180-day funding period during which time the city may issue refunding bonds, remarket in the windows mode at a new spread, convert to another mode or another security type including third-party liquidity, or liquidate investments to provide for the purchase price of the bonds. The city's growing investment balances provide ample liquidity relative to the $33.7 million of windows debt. The LOBs have a bullet maturity with mandatory sinking fund payments, which the city has been making. The city confirms the bonds are still in windows mode with actual interest rates coming in below budget. The rating does not cover the potential conversion to another interest rate mode which would require a mandatory tender.
WELL-FUNDED PENSION AND OPEB COST
Pension and other post-employment benefits (OPEB) continue to be well managed. The city is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS). The overall plan is well funded at 94%, after adjusting the discount rate to 7%. The city also contributes to the defined benefit law enforcement separation allowance plan. The separation allowance plan is poorly funded at 11% but the total liability is small relative to the city's budget (less than 1%). For OPEB, the city has set up an irrevocable trust with actuarily valued assets of $18.7 million per the 2013 city audit, and 115% of the ARC was funded in fiscal 2013. Total carrying costs (debt service, pension requirements and OPEB contributions) were a manageable 19.3% of total fiscal 2013 governmental spending.
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, RealEstate Business Intelligence
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:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria