NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Gastonia, North Carolina's (the city) bonds as follows:
--$31.7 million general obligation (GO) bonds at 'AA';
--$14.8 million limited obligation bonds (LOBs) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's pledge of its full faith, credit, and taxing power. The LOBs are payable from payments to be made by the city, subject to appropriation, pursuant to a Master Trust Agreement.
KEY RATING DRIVERS
HEALTHY FINANCIAL PROFILE: Ample reserve levels, sound liquidity, and overall notable financial flexibility underscore the city's prudent financial management.
LARGE, EXPANDING MANUFACTURING PRESENCE: The city continues to diversify its traditional textile and auto parts manufacturing base into high-tech plastics manufacturing through notable growth at the Gastonia Technology Park. The city further benefits from its proximity to downtown Charlotte (rated 'AAA', Outlook Stable by Fitch).
BELOW AVERAGE SOCIO-ECONOMIC METRICS: The city underperforms in resident wealth and employment metrics. Growth in these metrics has lagged the trends for the Charlotte metropolitan area, state, and nation.
MODERATE DEBT PROFILE: Overall debt levels are relatively low and amortization is rapid. Debt ratios are expected to remain stable given the lack of any future borrowing plans.
OTHER LONG-TERM OBLIGATIONS ARE MANAGEABLE: The unfunded liability related to other post-employment benefits (OPEB) is elevated and carrying costs related to debt service and retirement benefit contributions have demonstrated an upward trend but remain moderate.
APPROPRIATION RISK: The 'AA-' rating on the LOBs is one notch lower than the city's GO rating, reflecting risk to annual appropriation partially offset by a leasehold interest in governmental assets.
STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The city is located about 20 miles west of downtown Charlotte with a 2013 population of 73,209.
CONTINUED STRONG FINANCIAL PERFORMANCE
The city's solid financial position is characterized by conservative budgeting practices and robust reserve levels. The city consistently exceeds its fund balance policy which calls for unrestricted general fund balance between 12%-15% of expenditures. The city posted $13.7 million in unrestricted fund balance in fiscal 2013, a strong 24.9% of general fund spending. Including reserves required by state statute, the available balance is very strong at 35.3% of spending.
The city reduced spending in response to negative revenue variances. These cuts, which have included a hiring freeze for noncritical positions and deferred capital spending, are largely discretionary, giving the city a sound level of expenditure flexibility going forward.
City projections show an addition of $3.2 million - $4.1 million to available general fund balance in fiscal 2014, despite budgeting for a $1.4 million appropriation of reserves. These projections appear to be reasonable given that expenditures for all city departments came in well under what was originally budgeted (as a result of the continued hiring freeze) and that revenues came in well above what was originally budgeted (as a result of a change in the billing and collection process for motor vehicle ad valorem taxes).
The city's adopted fiscal 2015 budget is balanced with a general fund balance appropriation of $1.4 million. Fitch believes that the city should be able to recover most, if not all, of the appropriation given several conservative revenue assumptions in the fiscal 2015 budget, a continued hiring freeze, and a historic trend of actual operating results coming in under-budget.
Property taxes are the city's primary revenue source at 48%. The city's tax base has remained relatively stable, increasing modestly on an average annual basis by 1%. In North Carolina property is reassessed up to every eight years, the city's tax base will be revalued in fall 2014, with any effect of the revaluation impacting the fiscal 2016 budget.
LIMITED ECONOMY; LARGE MANUFACTURING PRESENCE
The city's local economy is somewhat limited, historically heavily driven by textile and auto parts manufacturing. The city has widened its economic base to higher-tech manufacturing in recent years, with a greater focus on performance-quality plastics. The growth has largely been centered around the Gastonia Technology Park, which has attracted five new manufacturers to the city and created at least 450 new jobs. The city also benefits from its proximity and direct highway access to downtown Charlotte.
Wealth levels are below average. The city's median household income is about 75% and 85% of the national and state medians, respectively. The city's individual poverty rate of 20.9% notably exceeds both the state (16.1%) and national (14.3%) levels.
In June 2014, the city's unemployment rate declined to 6.7% from 9.1% a year prior. This change was largely driven by a 2.1% increase in employment and a .5% decrease in the labor force over the same time period. The city's unemployment rate is now just below average compared to those of the state and nation. The city's population has grown at a rate that is comparable to the national average, but lags the rapid growth rates seen in the Charlotte MSA and the state.
MODERATE DEBT PROFILE
Overall debt levels of $1,853 per capita and 2.6% of market value are low to moderate. The rate at which the city amortizes debt is rapid with 63% of principal retired within 10 years. The city's near-term capital needs are largely related to and funded by the water and sewer system; no tax-supported debt is expected over the next few years.
The city contributes to the state-wide Local Governmental Employees' Retirement System (LGERS), a cost-sharing multiple-employer defined benefit pension plan that was over 97% funded (when adjusted for Fitch's more conservative 7% discount rate) at the most recent Dec. 31, 2012 valuation. As is common in North Carolina, the city administers a small single-employer (SE) defined benefit pension plan that provides supplemental retirement benefits for law enforcement and fire fighters which provides benefits on a pay-go basis. The SE plan was 0% funded as of fiscal yearend 2013, but the unfunded liability of the plan was a low $11.4 million. The city's unfunded other post-employment benefits (OPEB) liability is equivalent to 0.9% of market value, and management does not plan to pre-fund the liability over the near term.
Carrying costs for debt service and retirement benefits were moderate at 20.1% of governmental expenditures in fiscal 2013. The carrying costs have seen an upward trajectory over the past several years, largely driven by peaking debt service payments and statutorily required pension contribution rate increases, but are not expected to pressure city finances.
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, and Zillow.
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