Fitch Rates King County, WA's $105.2MM LTGOs 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AA+' rating to the following King County, Washington new debt issuances:

--$28.6 million limited tax general obligation (LTGO) bonds, 2015, series B;

--$25.8 million LTGO bonds, 2015, series C;

--$50.8 million LTGO bonds, 2015, series D.

The series B and C bonds are scheduled to price via competitive bid on Sept. 21, 2015. Proceeds will be used to finance various capital projects and to refund outstanding debt for interest savings.

The series D bonds are scheduled to price via competitive bid on Oct. 19, 2015. Proceeds will be used to finance various solid waste capital projects and to refund outstanding debt for interest savings.

In addition, Fitch affirms the following ratings:

--$113.3 million outstanding unlimited tax GO (ULTGO) bonds at 'AAA';

--$1.6 billion outstanding LTGO bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, supported by an irrevocable full faith, credit, and resources pledge to levy an ad valorem tax sufficient (together with all other legally available monies) to pay debt service. The county's pledge on LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction, and a rate cap of $1.80 per $1,000 of taxable assessed value (TAV).

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: General fund balances and cash levels remain healthy, and the county's strong financial position is supported by long-term planning and robust financial management policies.

RESILIENT ECONOMY: King County retains a sound economic base due to its role as a regional economic center and above-average wealth and income levels. The local economy has performed strongly over the last several years with steady growth in employment levels and home prices.

POTENTIAL STRUCTURAL IMBALANCE: The county will be challenged to maintain structural balance over the longer term due to ongoing cost pressures and constraints on revenue growth. Recent efforts to address this imbalance through efficiency measures have shown positive results but could prove difficult to maintain on a permanent basis.

MANAGEABLE LIABILITIES: Overall debt levels are low to moderate and liabilities for retiree benefits are manageable. Carrying costs for debt service, pensions, and other post-employment benefits (OPEBs) are low.

RATING SENSITIVITIES

BALANCED OPERATIONS: The rating is sensitive to the county's ability to maintain balanced operations despite revenue constraints. A material decline in the county's financial flexibility and reserves relative to historical and policy levels, while not anticipated, could pressure the current rating and/or Outlook.

CREDIT PROFILE

SOUND FINANCIAL POSITION

The county's financial position remains sound, with strong liquidity and healthy reserves. General fund budgets are balanced and the county typically records operating surpluses. Rising expenditures for public safety contributed to an operating deficit of 1.7% after transfers in 2014, lowering unrestricted fund balance to a still healthy 13.9% ($101.1 million) of general fund spending. The county maintains a policy target for undesignated year-end budgetary fund balance at 6.5% of certain general fund revenues ($35.3 million in 2014), in addition to a $20.1 million rainy day reserve, and continues to meet these goals.

General fund tax revenues have performed strongly in recent years, rising at a 4.3% compound annual growth rate between 2010 and 2014. Total general fund revenues and transfers in increased by 2.1% per year over this same period, matching growth in expenditures and transfers out of 2.1%.

The county's 2015-2016 biennial budget is balanced and management reports break-even results for the year to date.

TAX LIMITS CHALLENGE FUTURE BALANCE

General fund revenues are constrained, despite recent gains, by statutory limits on property tax revenue growth. The property tax levy in Washington State is generally restricted to 101% of prior year levels plus revenues from new construction, limiting growth for the county's major source of funding. Property tax accounted for 45% of total general fund revenues in 2014.

Management continues to address this challenge through ongoing expenditure controls and efforts to gain voter approval for dedicated property tax levies to support specific spending requirements, such as parks or human services. In addition, county budgets regularly address substantial gaps between funding sources and needs through targeted spending reductions. The county has also had notable success in reducing annual expenditure growth through increased efficiency.

Management's efforts to match expenditure and revenue growth have been successful in recent years, but ongoing structural balance may prove difficult to maintain in the absence of revenue reforms.

DIVERSE ECONOMIC BASE

King County benefits from a diverse economy and tax base that encompasses 29% of the state's population. Major private employers include Boeing, Microsoft, and Amazon and the regional economy is also supported by a substantial military presence. The county includes the Pacific Northwest's largest city, Seattle, and serves as a regional economic center. Wealth and income levels are well above national averages, and property values are high at approximately $202,000 per capita.

King County performed better than many regions nationally in the last recession and has experienced steady employment gains since 2010. The county unemployment rate of 3.7% in May 2015 was well below the 5.3% national rate, and total employment levels are 7% higher than the pre-recession peak. July 2015 home values reported by Zillow.com increased by 8.2% compared to one year earlier and assessed values rose to record levels in 2015, overcoming losses experienced during the recession.

LOW DEBT; MANAGEABLE PENSIONS

The county's debt burden remains low with overall debt at 1.7% of TAV. Amortization is quicker than average with approximately 69% of direct debt repaid in 10 years. Pension liabilities are manageable and reflect historical strong funding levels for most state-sponsored plans. Other post-employment benefit liabilities are relatively minor as most retirees must pay for the cost of their participation in the county's group insurance plan. Carrying costs for debt and retirement benefits were low at approximately 10.5% of governmental expenditures in 2014.

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 and Zillow.com.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990353

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990353

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com