Fitch Rates Raleigh, NC's GOs 'AAA' and LOBs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns ratings to the city of Raleigh, North Carolina general obligation (GO) bonds and limited obligation bonds (LOBs) as follows:

--$102.2 million GO refunding bonds, series 2016A, 'AAA';

--$16.2 million GO refunding bonds, series 2016B, (taxable) 'AAA';

--$6 million GO housing bonds, series 2016C, (taxable) 'AAA';

--$45.5 million LOBs, series 2016, 'AA+'.

The GO refunding bonds are scheduled for competitive sale on Feb. 16 and negotiate sale on Feb. 17. The GO bonds will refund various series of outstanding bonds for debt service savings. The series 2016C GO bonds are scheduled for competitive sale on Feb. 16. Proceeds will pay for renovating and constructing housing projects. The LOB proceeds will refund certain installment financing obligation of the city, and finance certain fire station improvements and improvements to the city's performing arts center. The LOBS are scheduled to sell on Feb. 10 through negotiated sale.

In addition, Fitch affirms the following ratings:

--$324.7 million GO bonds at 'AAA';

--$151.4 million limited obligation bonds (LOBs) series 2010A, 2010B, 2013, 2014A and 2014B at 'AA+';

--$2.9 million capital improvement COPs, series 2005C at 'AA+';

--$76.6 million downtown improvement COPs, series 2004A and 2007 at 'AA';

--$181 million downtown improvement certificates of participation (COPS), series 2005B-1 and 2005B-2 at 'AA'. In addition, a long-term underlying rating of 'AA' is assigned to the 2005B bank bonds corresponding to the series B-1 and 2 bonds.

--$33 million variable-rate demand limited obligation revenue bonds, series 2009 at 'AA+/F1+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the city's full faith and credit and unlimited tax pledge.

The COPs and LOBs are secured by annual payments made by the city subject to appropriation and a deed of trust on certain governmental property.

KEY RATING DRIVERS

SOUND RESERVES AND BUDGETARY FLEXIBILITY: The city's financial profile is bolstered by conservative budget assumptions and regular performance monitoring that consistently generates results that outperform budgeted expectations and are in line with the formal 14% general unassigned fund balance policy.

MODERATELY HIGH DEBT BURDEN: Debt ratios are expected to remain stable, given average amortization and affordable future capital needs and debt issuance plans.

ROBUST ECONOMY: The diversified economy benefits from an extensive government, university and healthcare presence and proximity to the Research Triangle Park (RTP), in addition to an extensive transportation network. Economic indicators are strong, including low unemployment, above-average income indicators, and a highly educated labor pool.

APPROPRIATION DEBT: The ratings on the LOBs and COPs reflect the appropriation risk inherent in the installment payments to be made by the city to the trustee, the level of essentiality of the respective leased assets to governmental operations, and the general creditworthiness of the city of Raleigh. The 'AA+' ratings reflect a high level of essentiality, in Fitch's estimation, while the 'AA' rating on the downtown improvement COPs reflects the non-essential nature of the leased assets.

AMPLE LIQUIDITY: The 'F1+' rating principally reflects the long-term credit quality of the city and sufficient period of time following a tender and failed remarketing to access the capital markets and provide takeout proceeds.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health which tempers exposure to a moderately high debt position. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.

CREDIT PROFILE

Raleigh is located in Wake County (rated 'AAA' by Fitch) in the north central portion of the state. Population increased a notable 46% between 2000 and 2010 and a more moderate 8.9% since 2010.

ROBUST ECONOMY, STRONG FUTURE

Raleigh is located adjacent to the successful RTP, which serves as an important economic engine. The city has a highly skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, healthcare, and other professional services. Strong population growth, an expanding technology and medicine niche, and a surging professional and businesses service sector bode for a strong future.

Metro area job growth is expected in biotech industries, all aspects of service producing enterprises and high tech manufacturing. Global Insights expects the growth leaders will be professional/business services and education/healthcare sectors, with average annual payroll growth of 3.6% and 2.1%, respectively, from 2015 through 2020. Combined, these two sectors account for just over 30% of Raleigh's total employment.

The economy remained relatively stable through the economic downturn and an unemployment rate of 4.3% as of November 2015 is well below the state (5.3%) and national (4.8%) averages. Wealth levels are above the state average.

SOUND RESERVE LEVELS

For at least the past decade, general fund results have increased operating reserves. Fiscal 2015 closed with a $22.5 million operating surplus (5.8% of spending); both revenues and expenditures outperformed budget. The fiscal 2015 budget included a $13 million appropriation of fund balance, but the city conservatively budgets for full staffing and utilizes prudent revenue assumptions, enabling historically strong year end results. Sales tax collections showed strong 9% growth which is a reflection of the economic health of the city and the expansion of the sales tax base. The unrestricted balance totaled $191.5 million, or an ample 49.1% of spending, at year end. In addition, the city's reserve by state statute, an offset to accounts receivable, totals $51.2 million or an additional 13% of spending.

STABLE OPERATING PERFORMANCE EXPECTED IN FISCAL 2016

Consistent with previous years, the adopted 2016 budget, which is a 4.4% increase over 2015, includes a $13 million appropriation of general fund balance. The budget also includes a moderate 1.72 cent property tax rate increase to 42.10 for voter approved park bonds ($8.8 million). The budget increase includes increased costs associated with an average 2.9% employee merit increase and new or expanded facilities tied to growing service demands, including a newly organized development services department and added public safety programs. Based on the city's historical financial performance, operations are expected to remain positive and reserves ample.

PROPERTY TAX PROVIDES STABILITY

Property taxes are the county's largest operating revenue source at 54% of the fiscal 2015 total. The city's taxable assessed value (AV) has fully rebounded from a modest decline during the housing crisis and continues to expand. City management is projecting an 8% increase following a recently completed reassessment.

The county's property tax rate is average compared to similar-size neighboring communities at $0.40 per $100 of AV and is well below the statutory cap of $1.50. Collections are strong at over 99%.

AFFORABLE DEBT PROFILE

Debt levels are moderate at 3.1% of market value, and debt service accounts for 11% of total fiscal 2015 governmental spending. Amortization is average with 53% of all general obligation debt and LOBs/COPs retired in 10 years. The city's variable rate exposure (approximately $269 million of which $181 million is synthetically fixed with a BMA swap), excluding enterprise and self-supporting parking debt, is 34% of net direct debt.

The current fiscal 2016 to 2020 five-year capital improvement plan (CIP) totals $1.04 billion. Water and sewer enterprise projects (revenue bonds rated 'AAA'/Outlook Stable) account for the majority of the plan at 66%. The plan is 54% debt funded.

The city's near-term new money issuances include a possible $110 million water/sewer financing for capital needs during the summer or fall of 2016, the size of which is unknown at this time, and an estimated $32 million equipment financing (a bi-annual program) subject to final council approval. Given the average amortization of existing debt and the prospects for continued tax base growth, debt metrics should not be impacted by the planned borrowings.

WINDOWS DEBT

The variable-rate 2009 LOBs were issued at an initial rate equal to the SIFMA index as of the date of delivery plus a fixed index spread (the first 'windows' rate) and bear interest at the windows rate until adjusted to another interest rate mode (daily, weekly, long-term, etc.). Bonds in the window mode will not be subject to mandatory tender for purchase until 210 days following the tender notice.

While in the windows mode upon tender there is a 30-day remarketing window which is followed by a 180-day funding period during which the city may issue refunding bonds, remarket in the windows mode at a new spread, convert to another mode or another security type including third-party liquidity, or liquidate investments to provide for the purchase price of the bonds. The city's growing investment balances provide ample liquidity relative to the $33.2 million of windows debt. Moreover, the 'F1+' rating reflects Fitch's belief that given the city's 'AAA' credit quality and demonstrated access to debt markets through frequent GO issuance, the city would be able to access capital to fund any tender during the windows period. The LOBs have a bullet maturity (June 1, 2034) with mandatory sinking fund payments. The city confirms the bonds are still in windows mode with actual interest rates coming in below budget. The rating does not cover the potential conversion to another interest rate mode which would require a mandatory tender.

WELL-FUNDED PENSION AND OPEB COST

Pension and other post-employment benefits (OPEB) continue to be well managed. The city is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS). The city's fiduciary net position of the system's total pension liability is 102.6% funded. For OPEB, the city has set up an irrevocable trust. The unfunded liability as of the December 2014 valuation was $140 million, which represents a very low 0.3% of the taxable value of real property. Total carrying costs (debt service, pension requirements and OPEB contributions) were a manageable 17.7% of total fiscal 2014 governmental spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998848

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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
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
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
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com