Fitch Rates Wake County, NC's GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns a rating of 'AAA' to the following general obligation (GO) bonds of Wake County, North Carolina (the county):

--$345.24 million GO public improvement bonds, series 2014.

The bonds are scheduled to sell competitively on Aug. 19th. Proceeds will fund school and library capital projects.

In addition, Fitch affirms the following ratings:

--$1.66 billion of outstanding GO bonds at 'AAA';

--$297.2 million of outstanding limited obligation bonds (LOBs) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of the county, secured by its full faith and credit and unlimited taxing power.

The LOBs are payable from funds subject to appropriation by the county board of commissioners. The LOBs are additionally secured by a deed of trust granting a lien on certain project sites and improvements. If a default occurs the trustee can direct the foreclosure on the mortgaged property and apply the proceeds to the payment of amounts due to LOB owners.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Wake County continues to budget and forecast conservatively, and adhere to policies and goals that provide a framework for producing generally stable operating results and maintaining a healthy level of balance sheet resources.

EXCEPTIONAL ECONOMIC PROFILE: Wake County comprises a portion of one of the fastest growing metropolitan areas in the nation. Economic activity is driven by the region's university presence and significant number of research and technology firms that provide employment for a well-educated workforce.

PRUDENT FINANCIAL PLANNING: Modeling of long-term debt issuance and the operating funds helps ensure compliance with the county's conservative policies. Debt service costs are above average, as is typical for an area with strong growth, but the costs are manageable.

MANAGEABLE LONG-TERM OBLIGATIONS: Debt service costs are above average, typical for an area with strong growth, but are manageable. Costs related to pensions and other post-employment benefits (OPEB) are modest and do not pressure the credit.

APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and LOBs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholders' recourse in an event of non-appropriation or default.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Wake County is located in northeast central North Carolina and is part of the Research Triangle metropolitan region, which encompasses the cities of Raleigh and Durham, the towns of Cary and Chapel Hill, and their surrounding suburban areas. The county has an estimated 2013 population of 974,289, making it North Carolina's second most populated county.

STRONG FINANCIAL POSITION

Financial operations historically have been characterized by maintenance of healthy reserves, prudent multiyear planning, and a conservative approach to budget development. Fiscal 2013 general fund revenues showed continued growth in local tax revenues. Property tax revenue improved by 1.6% on the year (reflecting modest growth in taxable assessed value), while sales taxes performed strongly, increasing $6.8 million. This 5.3% year-over-year gain in sales tax revenues underscored strengthening economic conditions. Total revenues and expenditures declined due to the divestiture of mental health programs and commensurate loss of state revenues.

Both general fund revenues and expenditures performed favorably to budget, resulting in a fiscal 2013 net operating surplus after transfers of $20.6 million. The unrestricted general fund balance of $184.8 million was a healthy 14.4% of spending. The county's reserve required by state statute, which is primarily to offset accounts receivable, is another source of financial flexibility in addition to the unrestricted general fund balance. This reserve totaled $60.4 million at fiscal year-end 2013, or 6.4% of spending.

The county also maintains reserves in its debt service fund, which had a total fund balance of $169.1 million at the close of fiscal 2013, representing 71% of debt service expenditures. Although these reserves are intended to be used to pay future years' debt service, they could be moved back into the general fund for any purpose at the discretion of the county commission.

The county's operating fund balance policy is to maintain a total general fund and debt service fund balance of at least 30% of total revenues. Fiscal 2014 projections indicate a modest use of $16.2 million of combined reserves, with year end balances of 34.5% of current year revenues, in compliance with the county's policies.

Budgeted fiscal 2015 general fund appropriations are up 2.8% over the prior year's budget and include a 2.75% increase in salaries. The general fund budget includes a modest $5.3 million appropriation of fund balance. Revenue growth includes $55.7 million from a 4.4 cent (per $100 of assessed valuation) property tax to support debt service and pay-go financing for the county's capital plan. The county's multiyear financial plan indicates this tax increase should be adequate to support borrowing, although small property tax increases are planned as new school buildings come on line.

BALANCED AND STEADILY EXPANDING ECONOMY

Wake County is among the nation's fastest growing counties. Raleigh serves as both the county seat and the state capital. The large government sector fosters economic stability and helped minimize the impact of the recession on overall employment. Over the past 10 years unemployment rates have outperformed the state and nation. The June 2014 rate was 5.3%, and employment growth for the past year was a robust 3.8%.

The county is home to a portion of the Research Triangle Park (RTP), which was founded to diversify the state's economic base and foster high technology jobs. RTP is located between three major research universities (Duke, University of NC and NC State) and the park includes 170 global companies including IBM, DuPont, Cisco Systems and Wells Fargo. The county hosts a total of six public and private institutions of higher education, the largest community college system in the state, and three acute care hospital systems.

The professional and business services sector represents a high 20% of the regional Core Based Statistical Area (CBSA) employment, and employment in this sector exhibited strong 4% growth over the past year. The well-educated labor force is a feature in attracting corporate expansions as 48% of county residents have a bachelor's degree, compared to 29% nationwide. The highly skilled employment base translates into favorable wealth levels; the county's median household income is 142% and 124% of the state and nation, respectively. The poverty rate is 10.9%, well below the national rate of 14.9%.

AFFORDABLE DEBT LEVELS

Overall debt ratios are moderate at 2.7% of market value and $3,479 on a per capita basis. Debt is rapidly amortized with 69% of GOs and LOBs maturing within 10 years. Variable rate obligations account for a manageable 8.7% of total direct debt. Each series of variable rate debt has a standby bond purchase agreement which expires in 2017. The debt profile does not have exposure to derivative products. Debt service accounts for a high 19.7% of fiscal 2013 governmental fund spending, partially reflecting rapid debt amortization and the rapid population growth. Moreover, counties in NC fund school building needs, including debt service, but school teaching and administration expenditures are reported in the school's audit.

The 2015-2021 capital plan totals $1.4 billion, and includes GO bond funding of $810 million for school projects and $95.75 million for community college needs, both approved by the voters. Primary and secondary school enrollment increased 13.7% over the past five years and the school system now has 1,119 portable classrooms. The expansions will not eliminate the need for the portables as enrollment growth is expected to continue, but as new schools are built the county intends to shift the units to areas of future residential development. Given the rapid retirement rate of existing principal, debt ratios should remain manageable. The county plans to fund 80% of the capital program with additional debt and 20% from a dedicated portion of the property tax levy and sales tax collections.

OTHER LONG-TERM LIABILITIES ARE EXPECTED TO REMAIN AFFORDABLE

Pension and OPEB liabilities continue to be low and well managed. The county contributes to four retirement plans, including the state's well-funded Local Government Employees' Retirement System (LGERS). The county's fiscal 2013 total contribution was a low 1% of governmental fund spending. The actuarially accrued unfunded OPEB liability is a minimal $221 million. The county pays its OPEB obligation on a pay-go basis and the cost is also low at less than 2% of spending. Total fiscal 2013 carrying costs (debt service, pension ARC and OPEB payments) was a manageable 21% governmental fund 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.

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=846814

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Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan, +1-212-908-0675
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg, +1-212-908-0731
Director
or
Committee Chairperson
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan, +1-212-908-0675
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg, +1-212-908-0731
Director
or
Committee Chairperson
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com