Fitch Affirms Mecklenburg County, NC's GOs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Mecklenburg County (the county) ratings:

--$1.1 billion general obligation (GO) bonds at 'AAA';

--$109.8 million variable-rate GO refunding bonds, series 2009D at 'AAA/Fl+';

--$405 million certificates of participation (COPs) and limited obligation bonds (LOBs) at 'AA+';

--$10.9 million series 2011 special obligation (SO) bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The general obligations of the county are secured by a pledge of the faith and credit and unlimited taxing power of the county.

The LOBs and COPs are payable from lease rental payments made by the county, subject to annual appropriation. The LOBs and COPs are additionally secured by a deed of trust granting a lien of record on essential government assets.

The SO bonds are secured by a gross pledge of the residential solid waste fee levied on each equivalent residential unit within the county limits. If the principal and interest accounts are not funded by December 10 of each fiscal year, the county pledges to deposit with the trustee the required amounts from any other legally available funds other than proceeds of any tax that the county levies.

KEY RATING DRIVERS

ROBUST ECONOMY: Mecklenburg County's economy benefits from a substantial financial sector and associated professional services. A growing presence in the energy sector complements a diverse employment base that includes high technology and healthcare. Prospects for continued economic expansion are excellent.

IMPROVED DEBT PROFILE: Proactive financial management has tempered an historically high debt burden and intends to limit future debt in conformance with debt affordability policies. The county has also significantly reduced its variable-rate exposure.

STRONG FINANCIAL PROFILE: The county's favorable financial operations and high reserves provide a cushion against unforeseen budgetary challenges or emergencies. The county's diverse revenue base is led by property taxes. While the tax rate is high it is well within the statutory cap.

COVENANT OBLIGATION DEBT: The 'AA+' rating on the SOs reflects the county's covenant to pay debt service from any legally available funds other than proceeds of any tax. The obligation is not subject to termination.

APPROPRIATION LIEN ON ESSENTIAL ASSETS: The LOBs and COPs ratings reflect the lesser commitment of an annual appropriation pledge, and a lien on essential government assets.

SHORT-TERM RATING RATIONALE: The 'F1+' rating on the series 2009D 'Windows Debt' GO bonds reflects the county's long-term rating and demonstrated access to the capital markets. Fitch also considers the county's consistently strong liquidity which could be used in the unlikely event that market access was restricted during the 180-day remarketing window, and sufficiently documented asset liquidation procedures.

RATING SENSITIVITIES

Shift in Fundamentals: 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

Mecklenburg County is located in south-central North Carolina on the South Carolina border. The county encompasses an area of 546 square miles. With a population of 990,977 it is the most populated county in North Carolina.

CONSIDERABLE ECONOMIC BASE

Mecklenburg County's robust economy provides consistent credit strength, buttressed by financial and professional services that are supplemented by a growing presence in energy production, tourism, high-technology manufacturing, and health and education. Anchored by the city of Charlotte (GOs rated 'AAA', Stable Outlook by Fitch), with a transportation infrastructure supported by Charlotte-Douglas International Airport (revenue bonds rated 'A+', Stable Outlook), the diverse economy contains the second largest financial center in the U.S. and more than 270 of the Fortune 500 companies. The economy continues to diversify and expand with over $616 million in capital investment year-to-date for calendar 2014.

The strong employment base has helped fuel the county's rapid population growth to 990,977, representing an 8% increase since the 2010 census, well above the nationwide 2% growth. Median household income is well above the state average and is on par with the national average. The September 2014 unemployment rate of 6.3% has declined significantly from the 7.5% of the previous year, reflecting sound employment base growth.

STRONG FISCAL MANAGEMENT MARKED BY AMPLE RESERVE LEVELS

Historical financial operations are characterized by prudent fiscal management marked by maintenance of sound reserves. During fiscal 2013, operations after transfers resulted in a net surplus of $64.5 million (4% of spending). After three consecutive operating surpluses, the unrestricted general and debt service fund balance increased to $453.76 million or an ample 29% of spending. When factoring in the state required fund balance restrictions for certain receivables to be comparable with fund balance presentation in other states, reserves equaled 35.2% of spending.

Unaudited fiscal 2014 results show similar positive operating variances with the unrestricted fund balance increasing to $557.2 million or 43.3% of general and debt service fund spending. Including the state required fund balance restriction the fund balance totals $675.4 million or 52.4%.

The fiscal 2015 budget is a 4% increase over fiscal 2014 budget. The budget keeps the tax rate unchanged and includes a $35 million fund balance appropriation to fund various capital projects.

OVERALL DEBT BURDEN IS MODERATE

The county's debt levels are expected to remain moderate and within the county's internal guidelines. Direct debt ratios at 1.3% of assessed value (AV) and $1,470 per capita are well within policy guidelines which restrict debt-to-AV to 2% and debt per capita to $2,000. Overall debt levels are moderate at $3,835 per capita and 3.4% of AV and within the county's policy of $4,000 per capita and 4% of AV.

Debt amortization is high at about 80% retiring in 10 years, in compliance with conservative county policy of 64%. With rapid amortization debt service costs for fiscal 2014 were high at 15% of total governmental spending.

The county has reduced its variable-rate debt exposure from a high of 46% of total debt to a manageable 15% in the last four years. The county's revised debt guidelines are more conservative and limit variable-rate debt exposure to 20% compared to the previous policy of 35%.

The 2015-2019 capital improvement plan totals $914 million. The majority of the plan funds education related projects. The plan will be funded with future debt issuances of about $100 million annually, pay-as-you-go financing equal to three cents of the tax rate, and a portion of excess fund balance in the debt service fund.

Long-term obligations associated with pensions and other post-employment benefits (OPEB) are limited. The county contributes 100% of its ARC to the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS), which totaled just 1.2% of fiscal 2014 total governmental spending. The overall plan is well funded at 97% after adjusting the discount rate to 7%. Additionally, the county contributes to various supplemental retirement plans with a total 2014 cost of $1.6 million.

After reaching a funded ratio of 100% in 2008, the county cut back OPEB funding to the pay-go amount beginning in 2011. For fiscal 2014, the county contributed $16.6 million or 1.1% of 2014 spending. As of 2013, the unfunded actuarial accrued liability was $335.5 million or less than 1% of AV. Overall carrying costs for debt service, pension and OPEB were affordable at 17.5% of spending in fiscal 2014, in large part due to modest retiree benefit costs.

COVENANT TO FUND SOs IS STRONG

While bondholders benefit from strong coverage from gross revenues collected on the property tax bill, the 'AA+' rating solely reflects the county's covenant to fund debt service payments from available non-tax sources. Non-tax sources of $12 million provided 10x coverage of maximum annual debt service during fiscal 2014. Solid waste system operations yield satisfactory coverage on a net basis of approximately 2.4x according to unaudited fiscal 2014 results.

Within 10 days after the end of each month, the county will deposit with the Trustee gross solid waste fee revenues into the interest account, an amount equal to the interest payable on the bonds on the next two interest payment dates (January 1 and July 1), and into the principal account, an amount equal to the principal due on the next January 1. If the principal and interest accounts are not fully funded by December 10 of each fiscal year, the county covenants that by that date it will cause to be deposited with the Trustee the required amounts from any legally available funds other than proceeds of any tax that the county levies.

WINDOWS DEBT RATING REFLECTS AN EXCEPTIONAL GENERAL CREDIT PROFILE

The assignment of the 'F1+' rating reflects Fitch's belief that given the county's 'AAA' credit quality and demonstrated access to capital markets through frequent GO issuance, the county would be able to refund the bonds during a windows period. In addition, the county's strong cash position provides a potential source of repayment in a failed remarketing scenario.

Upon an investor tender notice, the bonds are subject to a remarketing window. The remarketing agent has one month to find another buyer at the existing spread or at a higher spread acceptable to the county. If neither is completed, the funding window begins. Within the six-month funding window, the county has the option at any time to: refund or redeem the bonds, convert to another mode under the bond resolution (such as weekly with letter of credit), or remarket in the windows mode at a new spread.

If no option is exercised during the funding window, the bonds are subject to mandatory tender. A failure to pay the tender price of the bonds on a mandatory tender date will constitute an event of default under the bond resolution.

In the unlikely scenario that tenders would need to be paid with cash on hand, the county has maintained strong average daily portfolio balances. Short-term investments with a maturity of one month or less have provided coverage ranging from 0.46x to 3.3x over the year ending October 2014. If funds from short-term investments were insufficient during a mandatory redemption period the county would liquidate other investments to provide funding

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:

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=939395

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com