Fitch Rates Forsyth County, NC $48MM GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned the following ratings to Forsyth County, North Carolina's (the county) general obligation (GO) bonds:

--$13.6 million GO public improvement bonds series 2014 'AAA';

--$34 million GO library bonds series 2014 'AAA'.

The bonds are scheduled to be sold on October 14th and 15th via competition. Bond proceeds will fund capital projects for library facilities as well as for the general government, schools, and the community college.

In addition, Fitch affirms the following outstanding rating:

--$447.9 million GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by a pledge of the full faith and credit and taxing power of the county.

KEY RATING DRIVERS

AMPLE FINANCIAL FLEXIBILITY: Strong financial management and planning coupled with adherence to conservative reserve policies underscore healthy reserve levels and high liquidity.

DIVERSIFYING ECONOMIC BASE: Notable growth in technology, healthcare, and education is supplanting the county's traditional manufacturing base. Socio-economic metrics are around average.

GOOD TAX BASE PROSPECTS: Fitch believes that the county's attractive economic base supports solid long-term tax base growth despite a modest decline during the past revaluation.

MANAGEABLE DEBT BURDEN: Debt levels are moderate and long-term obligations do not pressure the credit. Above-average debt service costs have not hindered the county's financial flexibility and are mitigated by the debt service leveling plan.

RATING SENSITIVITIES

HEALTHY RESERVES: The rating incorporates the expectation that county reserve levels will remain healthy, even after planned intermediate and long-term drawdowns.

CREDIT PROFILE

Forsyth County, with an estimated 2013 population of 361,220, is located in the Piedmont region in central North Carolina. The county is home to the state's fourth largest city, Winston-Salem (GOs rated 'AAA' Stable Outlook by Fitch).

MEDICAL AND BIOTECHNOLOGY SECTOR BOOST ECONOMIC PROSPECTS

A significant medical and biotechnology presence within the county has positioned it as one of the state's major commercial and industrial centers. Education and health services represent a high 22.3% of the Core Based Statistical Area's (CBSA) employment, well above state and national metrics. The county has leveraged two major medical facilities (Wake Forest University Baptist Medical Center, employing approximately 12,837, and Novant Health, which employs 8,145 at three area hospitals) as well as a number of local universities to create the Wake Forest Innovation Quarter (WFIQ; formerly called Piedmont Triad Research Park).

Fitch is optimistic that the WFIQ's sound prospects will underscore sustained long-term growth. The tax base has shown resiliency since the recession, even with a manageable 8.2% reduction in the last revaluation. Fitch anticipates neutral or positive future performance.

MANUFACTURING, TOBACCO DECLINES HINDERED RECOVERY

The sector has superseded but not eliminated the economy's historical concentration in the volatile manufacturing, textiles, and tobacco industries. Reynolds American Inc. and HanesBrands, Inc. are two of the county's largest employers, at 3,000 and 2,500 employees, respectively. Both employers shed jobs in the past decade from a high of 5,930 and 6,000, respectively.

Fitch believes that these sectors contributed to the county's delayed emergence from the recession. The July 2014 6.7% unemployment rate has returned to its historical position below the national average, in contrast to the 8% rate of the prior year. The unemployment rate improved due to a labor force drop; employment is still weak, showing only a modest gain on a year-over-year basis. Income levels are slightly above the state's but below the national average. Fitch notes positively that the county's cost of living is below the national average.

AMPLE FINANCIAL FLEXIBILITY

Effective financial management and planning consistently yields ample reserves and financial flexibility. General fund results since at least fiscal 2007 have produced reserve levels above the county's prudent policy of 16% of the subsequent year's expenditures. Fitch expects continued healthy reserves even after planned drawdowns. Liquidity levels are consistently high.

County officials have stated that they intend to draw-down reserves to policy levels over the long-term. Current reserves include revenue generated by a tax increase directed towards future educational debt service obligations. Now that the debt has been issued, the county utilizes a portion of this money to pay annual debt service, thereby minimizing the impact upon the operating budget. Fitch believes that ultimately the county will maintain fund balance levels at the policy minimum, which given the county's overall risk profile, are consistent with the current rating.

SOUND FINANCIAL STRUCTURE

County finances benefit from an established property tax base, representing about 55.2% of fiscal 2013 revenues. Management's willingness to raise the millage after the recent AV decline to a tax rate slightly below revenue-neutral bodes well for the stability of this revenue source. Sales taxes (12.2% of revenues) have recovered from a low in fiscal 2010. Fitch notes that sales taxes were below budget in fiscal 2013 due to large refunds attributable to construction among the hospitals in the county. However, collections were above fiscal 2012 actuals.

Fitch believes that the county has a healthy amount of expenditure flexibility given that reductions implemented so far have been limited. Expenditure variability will lessen due to a recently adopted school funding formula.

RESERVE LEVELS EXPECTED TO REMAIN HEALTHY

The county concluded fiscal 2013 with a $4.7 million net deficit (after transfers) in the general fund, equal to 1.1% of spending excluding bond proceeds. Fitch notes positively that the county's capital spending equaled most of this deficit amount at $4.2 million. The county's assigned and unassigned fund balance exceeded its reserve policy level of 16% of budgeted expenditures in fiscal 2013. Fitch more commonly measures reserves as the unrestricted fund balance, the sum of committed, assigned, and unassigned balance per GASB 54. By that metric, unrestricted reserves equaled a high 29.8% of spending. The county's reserve for state statute, which is primarily to offset accounts receivable, is a source of further flexibility, equal to an additional 7.2% of spending.

The $399.8 million fiscal 2014 budget appropriated $15.8 million of fund balance, which is on par with the fiscal 2013 budget appropriation of $15.1 million. County management projects that the fiscal year will conclude with a $1.7 million operational surplus, to be offset by a $2.7 million use of reserves for the educational debt service leveling plan. Fitch notes that the county routinely does not utilize in full the appropriated fund balance.

The adopted fiscal 2015 budget represents a 1.3% increase from the prior year, despite an unchanged millage. Sales taxes are projected to increase by 3.7%. Fitch considers this conservative, although the variability of sales tax refunds has historically complicated the projections for this revenue stream. Fitch believes it is unlikely that the county will utilize its entire $15.3 million fund balance appropriation.

FAVORABLE DEBT BURDEN

Fitch believes that solid prospects for tax base and population growth coupled with the county's willingness to postpone debt issuances will allow it to maintain a consistent debt profile. Debt levels are expected to remain moderate, supported by continued population and assessed valuation growth. Overall debt equals 2.8% of market value and $2,464 per capita, and amortization is above average at 60.45% of principal retired within 10 years. Variable rate debt, which is unhedged, totals less than 10% of outstanding par, a level that Fitch believes is prudent for the rating category.

The county has published its first 5-year capital improvement plan (CIP), in contrast to its previous 10-year span. The fiscal 2015 - 2020 $88 million plan is much less than half of the last plan, which cost $474 million over ten years. The county attributes a large part of the reduction to its elimination of several projects that are no longer required or are outside the shorter time-frame. GO bonds, including the current issue, constitute nearly all of the proposed funding.

MANAGEMENT OF ABOVE-AVERAGE DEBT SERVICE COSTS

Fiscal 2013 debt service costs equaled an above-average 14.7% of expenditures. The county's recently instituted policy limits total annual debt service, less certain revenues restricted to debt service, to 15% of the budget. Fitch views the policy as somewhat liberal but to date the above-average debt service costs have not pressured county finances. The county's prudent debt service leveling plan somewhat offsets the high debt service costs, which includes the banking of tax receipts in advance of debt service payment and the use of lottery proceeds. County officials expect to draw down the $32.6 million fund over the next 15 years.

WELL-MANAGED LONG-TERM LIABILITIES

Post-employment long-term obligations do not pressure the credit. The majority of county employees participate in the well-funded North Carolina Local Government Employees' Retirement System, a cost-sharing multiple-employer plan. Fitch notes positively that the county's pension contributions fiscal 2013 equaled a minimal 1.4% of governmental spending.

The county funds about 83% of its other post-employment benefit annually required contribution. Actual payments equaled a low 1.1% of 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, and the Underwriter.

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=886235

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Contacts

Fitch Ratings
Primary Analyst
Barbara Ruth Rosenberg
Director
+1-212-908-0731
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Barbara Ruth Rosenberg
Director
+1-212-908-0731
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com