Fitch Rates Cabarrus County, NC LOBs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following limited obligation bonds (LOBs) to be issued by Cabarrus County, North Carolina:

--$87.9 million in LOBs (County of Cabarrus, North Carolina installment financing contract) series 2016.

The bonds are expected to sell on or about March 10 via negotiated sale. Proceeds will be used to fund the cost of constructing and equipping a new elementary school and two new middle schools.

In addition, Fitch has affirmed the following ratings:

--$72.8 million in outstanding general obligation bonds (GOs) series 2004, 2006, and 2013 at 'AA+';

--$233.3 million in outstanding certificates of participation (COPs) series 2007, 2008A, 2008B, 2008C and 2009, and LOBs, series 2011B and 2011C at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by the county's full faith, credit, and unlimited taxing power.

The COPs and LOBs are payable from lease payments subject to annual appropriation by the county and a deed of trust granting owners of COPs and LOBs a lien on various government assets.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Financial operations are characterized by a conservative approach to budget development, timely revenue and spending adjustments, and steady compliance with conservative reserve policies.

AFFORDABLE OVERALL DEBT PROFILE: Planned intermediate-term debt issuance may alter the county's currently low debt burden. Debt servicing costs are moderately high, largely owing to the county's aggressive amortization of outstanding debt with 90% of debt being retired in 10 years.

PROXIMITY TO DIVERSE LABOR MARKET: The county's close proximity to Charlotte has aided its diversification into other highly skilled industries from a traditionally agriculture and manufacturing based economy.

APPROPRIATION LIEN ON COUNTY ASSETS: The 'AA' rating on the COPs and LOBs reflects the appropriation risk inherent in the installment payments to be made by the county to the trustee, the generally essential nature of the respective leased assets, and the overall creditworthiness of the county.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: Deviation from conservative budgeting practices and failure to adhere to reserve policies could pressure this rating; historical evidence of sound financial management indicates that the likelihood of these changes is remote.

CREDIT PROFILE

Cabarrus County is located 18 miles northeast of Charlotte in the Piedmont region of North Carolina. The county continues to experience strong population growth to 192,103, as of 2014, a 7.8% since 2010. The county's rapid population growth is significantly higher than that of the state and national rates at 5.3% and 3.9%, respectively.

EXPANDING ECONOMIC PROFILE

The county's economy has traditionally focused on agriculture and textile manufacturing. More recently it has benefited from its proximity to the broad and growing Charlotte economy, which has allowed for expansion into distribution, biotechnology, entertainment, healthcare and retail.

Currently the Carolinas Medical Center and the North Carolina Research Campus make up over 5% of the employment base, indicating the continued growth of the healthcare and biotech industries in the county. The county is also home to two of the largest tourist attractions in the state, the 1.4 million square foot Concord Mills Mall, as well as the Charlotte Motor Speedway which hosts three NASCAR events each year.

Overall socioeconomic environment indicators are strong. The unemployment rate has remained steady at 4.9% for November of both 2014 and 2015. Median household income of $53,551 is above both state and national levels at $46,334 and $53,488, respectively.

STRONG FINANCIAL MANAGEMENT

Cabarrus County has a solid history of conservative budgeting, and its strong reserve levels are evidence of prudent financial management. The county has revenue flexibility, with property tax rates well below the state maximum of $1.50 per $100 AV.

Fiscal 2015 operating results bettered budget projections with an operating surplus of $10.5 million (5% of expenditures).

Transfers out were consistent with the county policy of transferring unassigned fund balance in excess of 15% of spending to capital reserves. After the transfers the unrestricted general fund balance totaled a healthy 30.8% of spending and equaled 37.3%, with the state's required reserve is included.

Year-to-date fiscal 2016 results indicate revenues are expected to finish positive relative to the budget (driven mainly by property tax revenues exceeding budgeted amounts by approximately $3 million), while expenditures are expected to come in approximately $2 million under budget. The county expects this to lead to an operating surplus that will increase fund balance by $5 million. Historically the county has exercised prudent budgeting practices and Fitch expects that reserve levels will continue to remain in compliance with the county's current policy.

The county has begun discussing the proposed 2017 budget. Currently the county does not anticipate increasing the property tax rate for fiscal 2017. There may be a slight increase in sales taxes and fees to increase revenues.

MODERATE DEBT PROFILE

After this issuance the county's debt levels will be moderate at $1,918 per capita and 1.8% of market value. Debt service costs are elevated at 19.2% of governmental fund spending, mainly due to educational debt, but not operating costs, are included in the county's governmental spending. The elevated debt service cost also reflects above-average amortization of outstanding principal, with 90.1% retired within 5 years. The fiscal 2016-2021 capital improvement plan includes future debt plans up to $150 million in borrowing for expansion of the court house, community college and other projects.

Following this issuance, debt service payments will increase by $7 million to approximately 22.3% of governmental fund spending. These increased debt service payments have been incorporated in to the fiscal year 2017 budget. The county anticipates that additional revenues to be generated from the increase in the tax base following the positive results of the current revaluation coupled with a stable tax rate will result in revenue increases sufficient to absorb additional debt service requirements. Fitch is confident that the county's strong financial management will allow the county to pay the increased debt service costs from the current and future issuance without placing stress on county finances.

Pension and other post-employment benefit (OPEB) liabilities continue to be a modest burden on the county's resources. The county contributes to two defined-benefit retirement plans, including the well-funded state Local Government Employees' Retirement System (LGERS). The state's pension plan is extremely well funded with an asset to liability ratio of 102.6%. The county also administers a supplementary retirement plan for law enforcement officers and other county employees. This supplementary fund is fully funded by the county. For fiscal 2015 the annual pension costs and OPEB pay-go contribution represented a low 2% of spending. The county's fiscal 2015 overall carrying costs for debt service, pensions and OPEB are a moderate 21.1% of governmental fund spending.

STRONG INCENTIVE TO APPROPRIATE

The COPs and LOBs are secured by lease payments made by the county pursuant to a deed of trust and a lien on mortgaged property subject to permitted encumbrances. Mortgaged property conveyed under the deed of trust includes the new middle school.

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, Lumesis, IHS, and Zillow Group.

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000091

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000091

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+1-646-582-4857
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+1-646-582-4857
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com