Fitch Rates Winston-Salem, NC's GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following Winston Salem, NC bonds:

--$3.6 million general obligation (GO) bonds, series 2016A (tax-exempt);

--$49.6 million GO bonds, series 2016B (tax-exempt);

--$6.5 million GO bonds, series 2016C (taxable);

--$14.3 million GO refunding bonds, series 2016D (tax-exempt).

Bond proceeds will fund various capital projects and provide first-time home buyer assistance (Series 2016C). Bond proceeds from series D will refund existing obligations of the city. The bonds are expected to sell through competitive sale on March 15.

In addition, Fitch affirms the following ratings:

--$74.6 million unlimited tax general obligation (ULTGO) bonds at 'AAA';

--$15.2 million limited obligation bonds (LOBs), series 2012A at 'AAA';

--$13 million special obligation bonds, series 2013 at 'AAA';

--$105.9 million LOBs, series 2010A, 2013A&B and 2014 B&C at 'AA+';

--$18.4 million certificates of participation (COPs), series 2006 A&B at 'AA+'.

The Rating Outlook is Stable.

Security

The ULTGOs are supported by the city's full faith and credit and unlimited taxing power.

The LOBs series 2012A represent an absolute and unconditional contractual obligation of the city, not subject to annual appropriation.

The special obligation bonds are payable from a portion of the city's sales and use taxes.

The remaining LOBs and COPs are payable from lease payments, subject to annual appropriation, and a deed of trust against certain governmental assets of the city.

KEY RATING DRIVERS

HEALTHY FINANCIAL POSITION: Financial management is strong, budgeting practices are conservative and the city maintains robust and liquid reserves.

SOUND ECONOMIC PROFILE: The city is a regional hub for health care, higher education, and biotechnology, which add diversification to its traditional manufacturing concentration. Wealth indicators trend slightly below state and national averages.

MANAGEABLE DEBT BURDEN: Overall debt levels are moderate, and direct principal payout is rapid. Costs related to debt service and retirement benefits consume a sizable share of annual spending; however, the rapid debt payout largely offsets this concern.

'AAA' LOBs: Lease payments on the 'AAA' rated 2012A LOBs are not subject to appropriation; they represent an absolute and unconditional obligation of the city payable from its general fund, and the city may levy taxes to meet its payment obligation subject to statutory limitations. There is ample margin under this limitation.

SPECIAL OBLIGATION RATING: The 'AAA' rating on the special obligation bonds reflects the exceptional coverage provided by pledged sales tax revenues at 7.6x in fiscal 2015. Additional bonds may be issued upon satisfaction of an anti-dilution test equal to 2.0x maximum annual debt service (MADS). Currently, the city does not have any plans to issue additional bonds under this security.

RATING SENSITIVITIES

The rating is sensitive to unexpected and material shifts in the city's strong financial management practices and liquidity levels.

CREDIT PROFILE

The city of Winston-Salem, with an estimated 2014 population of 236,629, is the seat of Forsyth County in northwestern North Carolina and is a major economic and commercial center in the state.

MAINTENANCE OF STRONG RESERVES, HIGH LIQUIDITY

The city has long complied with its prudent unassigned fund balance policy of 12.5% of estimated general fund expenditures. The city has had operating surpluses or breakeven results in each of the past five fiscal years, with general fund balance growing from $43.4 million at the close of fiscal 2011 to $51.1 million at the close of 2015. Positive financial results have been achieved through prudent fiscal stewardship, evidenced by management's willingness to combine recurring revenue and expenditure actions as necessary to stabilize city finances.

Reserve and liquidity levels remain ample, reflecting the city's strong financial operations. For fiscal 2015, the general fund's unrestricted fund balance was $32.4 million, an ample 18.3% of spending. The restricted portion of the general fund balance includes a statutory reserve for stabilization of $17.4 million (9.7% of spending), which Fitch considers an available source for operations, if necessary. General fund cash and investments of $42 million in fiscal 2015 represents almost three months of operating expenses.

SURPLUS FISCAL 2016 RESULTS EXPECTED

The fiscal 2016 $182 million general fund budget is a 1.7% increase over fiscal 2015. The budget includes a $2 million fund balance appropriation for nonrecurring items, which is in line with the previous year's appropriation. The millage rate increased 2.5 cents to $0.565 per $100 assessed value (AV) for debt payments on the voter-approved bonds. The increase in the budget is funded by a 1.5% increase in real property values, an 8% sales tax collection increase and an 11.8% increase in the utilities franchise fee. The budget provides a modest market pay adjustment in an effort to move employees closer to market rates, and replacement of vehicles and equipment.

The city is projecting to close the year with better than budget operations. The projected year-end operating results reflect a $2.1 million net operating surplus. The city is experiencing positive variances in fuel costs, utilities franchise sales tax, sales tax, and growth in residential housing which has increased permit and license revenues.

The city's tax rate is low relative to the statutory cap ($1.5 per $100 AV) and competitive regionally, enhancing future budget flexibility. In the past, management has used hiring freezes, employee pay increase deferrals, and capital equipment replacement deferrals to curb spending. If needed, management would implement such measures again.

CONTINUED DIVERSIFICATION OF LOCAL ECONOMY

Healthcare services, biotechnology, and higher education drive the local economy. Wake Forest Baptist Health (WFBH) and Novant hospitals are the second- and fourth-largest hospitals in the state, respectively, and are the city's top employers, with over 20,000 employees in aggregate. The Wake Forest Innovation Quarter (WFIQ), located in downtown Winston-Salem on 200 acres, is a mixed-use center and hub for innovation in biomedical and material sciences and information technology. WFIQ is home to more than 50 companies, four leading institutions (including Wake Forest University departments), almost 3,000 workers and 2,000 students. The average annual payroll is $149 million. Wake Forest, Winston-Salem State University, NC School of Arts, and Forsyth Technical Community College are all located within city limits and have a combined total enrollment exceeding 20,000 students.

In addition, manufacturing continues to play a significant role in the economy (11% of employment) even though it is no longer the city's primary source of jobs. Reynolds American, Inc. has a long history in the city and is currently the largest manufacturer, employing around 3,000 workers.

MIXED ECONOMIC INDICATORS, BUT DOWNTOWN DEVELOPMENT HOLDS PROMISE

Economic indicators for the city are mixed. The city's December 2015 unemployment rate of 4.9% is comparable to the nation and outperforms the state. Wealth indicators are approximately 18%-24% below those of the U.S.

AVs have seen some fluctuation in recent years. Following a revaluation in 2013 and state exclusion of proprietary software from the taxbase, AV declined by 8.8% in 2014. Values increased by less than 1% in 2015 and preliminary 2016 figures show a 2% increase to $20.36 billion. According to Zillow, homes values have increased over the past year. Home values remain at about 91% of 2007 values.

MODERATE DEBT LEVELS, MANAGEABLE CARRYING COSTS

Overall debt levels are moderate ($2,721 per capita and 3.2% of market value), including the sizable overlapping debt of Forsyth County (more than half of the total burden). The city's outstanding direct debt consists predominately of LOBs, COPs and GOs. Debt payout is rapid at 64% in 10 years. The city does have a modest amount of variable rate debt outstanding ($40.8 million of about 14% of outstanding debt) which is private placed with no out option, thus eliminating the need for liquidity support.

The city's future debt plans for general government purposes are limited. The city plans to issue approximately $20 million in LOBs through a private placement for equipment during the spring of 2016.

OPEB liabilities do not represent a significant cost pressure. At the close of fiscal 2015 the UAAL was reported at $49.6 million and the funded ratio was 49%.

General employees are members of the North Carolina Local Government Employees' Retirement System (NCLGERS), and police officers are members of the city's Winston-Salem Police Officers' Retirement Fund (WSPORF). The state plan is well funded and in 2013 the city issued debt to stabilize its local WSPORF plan. According to fiscal 2015 actuarial results the plan is 82% funded after adjusting the rate of return to 7% from 7.25%. The WSPORF plan was closed to police officers hired after Dec. 31, 2013.

Fiscal 2015 carrying costs related to debt service and retirement benefits were a sizable 21.6% of governmental spending. However, debt service alone consumes about 13.8% of governmental spending, and given the rapid debt payout, offsets concerns about the moderately high carrying costs.

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

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 in 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 the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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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Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
or
Committee Chairperson:
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
or
Committee Chairperson:
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com