Fitch Affirms Carteret County, NC's $37MM GOs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings on the following bonds of Carteret County, NC (the county):

--$36.5 million general obligation (GO) bonds at 'AA+';

--$3.6 million limited obligation bonds (LOBs), series 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The county's GOs are payable by the county's pledge of its full faith, credit, and taxing power.

The county's LOBS are payable by installment payments, subject to annual appropriation, equal to debt service from the county to the County of Carteret Public Facilities Financing Corporation. Two school sites are mortgaged property used as lien collateral.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: Prudent financial management and healthy reserve levels serve to mitigate the risks associated with an economy concentrated in tourism and exposed to frequent storm damage. Spending cuts to date have been moderate, and the county's millage rate is low.

LIMITED LOCAL ECONOMY: Economic activity is highly concentrated in tourism and related activities but also benefits from government and health care sectors. Economic indicators trend on par with those of the state and nation.

MANAGEABLE DEBT BURDEN: Overall debt levels are low. Rapid amortization of principle further helps to accommodate potential additional debt issuance. Fitch expects annual carrying costs related to debt service and retirement benefits to remain manageable.

APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and the LOBs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholder's recourse to an event of non-appropriation or default. Such risk is somewhat diminished by the incentive to appropriate arising from a deed of trust granted for the benefit of bondholders on essential public schools.

RATING SENSITIVITIES

STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the county's ample financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Carteret County, with a 2013 population of 68,434, is located along the central portion of the North Carolina coast and contains the southern parts of the Outer Banks.

TOURISM-BASED ECONOMY, STABILIZING HOUSING MARKET

The county is a popular vacation area, benefitting from its coastal location. Second homes account for nearly two-thirds of residential property. Recent gains in the county's room occupancy and tourism development tax demonstrate solid growth in tourism. Occupancy tax receipts have grown annually for the past three fiscal years, with 8.7% natural growth (without the effect of a rate increase) realized in 2014. Fitch has not identified any indications that this trend will not continue in 2015.

Economic indicators for the county trend on par with national averages. As of December 2014, Carteret County's unemployment rate of 5.4% is on par with the nation's (5.4%) and state's (5.2%). Joblessness falls considerably during the high tourist season. Wealth indicators approximate state and national averages.

The tax base has been slow to stabilize since total assessed value (TAV) fell a notable 22% upon the reassessment effective in fiscal 2012. The most recent reassessment, which will be effective in the fiscal 2016 budget, decreased TAV by 5.3%, resulting in a cumulative 21% decline since the 2008 assessment (there were tepid gains between reassessments). Fitch notes that it is somewhat unusual to see a continued downturn at this point in the economic recovery. Positively, the county is prepared to raise millage rates to mitigate TAV losses and create a revenue neutral position.

HEALTHY FINANCIAL FLEXIBILITY

Conservative budgeting practices and prudent fiscal stewardship have resulted in structural balance and healthy reserve levels. The county has achieved net operating surpluses in five of the past six fiscal years, despite operating pressures due to the national recession.

Fiscal 2014 ended with a $7.1 million addition to reserves, equal to 9.7% of spending, augmenting unrestricted fund balance to $35.3 million (a robust 48% of spending). Adding the state-required reserve for receivables, which Fitch views as more conservative than the treatment of receivables in other states, available fund balance for fiscal 2014 amounted to $40.9 million or strong 55.6% of spending. Liquidity metrics are also strong, with fiscal 2014 cash and investments covering liabilities 16.2 times (x).

Spending cuts to date have been moderate, and flexibility also remains to raise recurring revenues. Over the past several years, the county has been able to avoid layoffs, furloughs, and reductions in capital spending by achieving savings through departmental reorganizations and the elimination of non-critical programs.

PRUDENT FISCAL 2015 BUDGET

The adopted fiscal 2015 budget incorporates a fund balance appropriation of $5 million, inclusive of a $3 million draw-down for pay-go capital spending on schools. The county anticipates only $2.5 million of the capital appropriation will be spent, with the year-end fund balance remaining flat. Actual results to date show improvement to budget, with positive variances in property and sales tax collections and expenditures under budget.

The millage rate, 29 cents per $100 of AV, increased to 30 cents per $100 of AV in fiscal 2015. A one cent increase to the millage generates an additional $1.5 million. With the increase the rates are highly competitive for the region and far below the state cap of $1.50, providing the county ample room to raise property tax revenues in the future.

LOW DEBT, CARRYING COST BURDEN

Overall county debt levels are low on both a per capita basis ($963) and as a percentage of market value (0.4% of MV). The county is considering future debt issuance of at least $12 million within the next two years for capital projects. Rapid amortization of outstanding principle (89.9% within 10 years) helps support the affordability of future debt issuance.

Annual carrying costs related to debt service and retirement benefits represent an affordable 12% of governmental spending. Debt service represents the majority of these expenditures, totaling $8.8 million or a moderate 10.4% of spending.

The county's $26.3 million fiscal 2015 through fiscal 2019 capital improvement plan (CIP) includes general operational needs. However, it does not incorporate the upcoming plans for future debt issuance or any other large capital projects. Fitch believes that a comprehensive CIP should detail all planned capital projects.

All full-time employees participate in a state-sponsored Local Governmental Employees' Retirement pension plan. The county fully funded its $1 million share of the fiscal 2014 ARC, representing a modest 1% of spending. The state plan is well-funded at around 97.1% when adjusted for Fitch's 7% annual rate of return. Other post-employment benefits (OPEB) are funded on a pay-as-you-go basis. As of December 2013, the unfunded actuarial accrued liability for OPEB totaled $6.1 million or a very low 0.04% of MV.

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, and the 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=981052

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Contacts

Fitch Ratings
Primary Analyst
Monica Guerra
Analyst
+1 646-582-4924
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Senior Director
+1 212-908-0731
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Monica Guerra
Analyst
+1 646-582-4924
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Senior Director
+1 212-908-0731
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com