NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Wilmington, NC general obligation (GO) bonds:
--$2.9 million GO bonds, series 2016A;
--$6.8 million GO refunding bonds, series 2016B.
Bond proceeds will be used to pay for the capital costs of the city's downtown Riverwalk and to refund a portion of the city's GO refunded bonds, series 2008A and 2008B. The bonds are scheduled to sell via competitive bid on May 17.
In addition, Fitch affirms the following ratings:
--$20.9 million in GO bonds at 'AAA';
--$149.6 million in certificates of participation and limited obligation bonds at 'AA+';
--the city's Issuer Default Rating (IDR) at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable by the city's full faith, credit and unlimited taxing power.
KEY RATING DRIVERS
The rating reflects the city's continued robust financial profile benefitting from significant revenue and expenditure flexibility, and a strong operating performance. The city's long-term liability burden is moderately low and is expected to remain manageable, given its conservative debt management and affordable pension and other post-employment benefit (OPEB) liabilities.
Economic Resource Base: Located on the eastern coast of the state, the city serves as the county seat for New Hanover County. The city is on the Cape Fear River approximately 30 miles from the Atlantic Ocean and is home to the state's largest port. The city is the economic center for southeastern North Carolina. Business enterprises are diverse while a large government and healthcare presence enhances stability. The 2014 population of 113,657 is a 50% increase from 2000, outpacing the state and the nation. Income and poverty metrics lag the nation, partially reflecting the sizeable student population.
Revenue Framework: 'aaa' factor assessment
Revenue raising ability is strong as current rates are well below the statutory limit. Historical general fund revenue performance trails the national GDP, but exceeds the level of inflation, a trend that Fitch expects to continue.
Expenditure Framework: 'aa' factor assessment
Carrying costs are sizable. The city's ability to control labor and benefits is strong in the absence of collective bargaining.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch expects long-term liabilities to remain low given conservative debt management including average amortization.
Operating Performance: 'aaa' factor assessment
Reserve levels remain ample, with the city boosting reserves in each of the past five fiscal years, leaving the city positioned to perform well in an economic downturn.
RATING SENSITIVITIES
Continued Strong Financial Position: The rating is sensitive to fundamental credit characteristics including the maintenance of satisfactory reserves commensurate with Fitch's evaluation of overall flexibility and revenue stability.
Stable Long-Term Liability Burden: The rating is also sensitive to a significant increase in long-term liabilities relative to personal income, given planned debt issuance.
CREDIT PROFILE
The city serves as the economic center for southeastern North Carolina. Business enterprises are diverse while large government and healthcare presence enhances stability. The tax base shows little concentration with the top 10 taxpayers accounting for a low 4.7% of assessed value. Both employment and labor force growth are very strong, with professional and business services, financial activities, and information sectors posting sizeable percentage gains. Income metrics are below average, reflecting the sizeable student population. Poverty and median household income metrics lag the nation, partially reflecting the sizable higher education presence. Per capita income approximates the nation; however, wage and personal income growth over the past year substantially outpace the nation.
Revenue Framework
Historical general fund revenue growth trails the national GDP but slightly exceeds the level of inflation.
The city benefits from a stable and diverse revenue stream, with property tax and sales tax revenues accounting for over 50% and 20% of fiscal 2015 revenues, respectively. Property tax and sales tax revenues dipped slightly during the recession, but have since rebounded with positive annual growth occurring since fiscal 2011. Ongoing development projects provide favorable prospects for additional growth.
The city maintains ample capacity to raise revenues, with the fiscal 2016 tax rate of $0.485 per $100 of assessed value well below the statutory cap of $1.50.
Expenditure Framework
The city maintains healthy expenditure flexibility with affordable fixed carrying costs.
The city has proactively managed spending in line with revenue changes. The primary expenditure is for public safety, which accounts for over 50% of general fund expenditures.
Carrying costs, comprised of debt service, pension ARC/AD and OPEB actual contributions, are moderate at 22% of governmental spending. Carrying costs are mostly comprised of debt service and Fitch expects they will remain elevated to fund planned capital projects. However, the city dedicates a portion of the property tax rate to pay debt service and to fund a portion of projects on a pay-go basis. The city's carrying costs are somewhat offset by the significant expenditure flexibility derived from its control over its workforce costs. During the recession, the city eliminated positions, froze hiring and implemented healthcare care changes that shifted more costs to employees.
Long-Term Liability Burden
The city's long-term liability burden is low relative to personal income at 7.6%. The city's future borrowing needs are manageable. In fiscal 2013, the city implemented a strategy of dedicating $0.05 of the property tax rate for capital needs, with 80% for debt service and 20% for pay-as-you-go projects. In November 2014, voters approved $44 million in GO bonds for street, sidewalk and transportation improvements, with issuance occurring through 2023. In fiscal 2016, the city raised the property tax rate from $0.46 to $0.485 and applied $0.02 of the rate increase to debt service and the balance of $0.005 to the general fund. The city also anticipates issuing additional installment finance bonds for new projects which may result in an increase in outstanding direct debt.
City employees participate in the statewide Local Government Employees Retirement System. The city's portion of the pension plan is nearly 100% funded based on a Fitch adjusted 7% investment return. The city also administers a single employer defined benefit plan for its law enforcement officers, which is funded on a pay-go basis. This plan is currently only funded at 14%, although the unfunded liability is equal to $5.1 million, or a minimal 0.1% of personal income. The city also funds its OPEB on a pay-go basis, with an unfunded liability equal to a low 1% of personal income.
Operating Performance
The city's solid operating performance, demonstrates its significant revenue and expenditure flexibility which provided for a positive growth in reserves for each of the past five years. Fitch's scenario analysis highlights the financial resilience of the city, which would be expected to maintain strong reserve levels in the event of a moderate economic downturn.
The city has demonstrated prudent financial management with conservative budgeting, leaving finances positioned to perform well in an economic downturn. At the close of fiscal 2015, the city's unrestricted general fund balance totaled $42 million, equal to a strong 47% of spending. The city's fund balance policy requires a minimum unassigned fund balance equal to 15% to 20% of the current operating budget. In evaluating the city's overall financial flexibility, Fitch also gives credit to the statutory stabilization reserve, which totaled $12 million or an additional 13% of spending in fiscal 2015.
The city's adopted fiscal 2016 general fund budget of $94.7 million represents a 3.9% increase over the fiscal 2015 budget and includes a 2.2% increase in the property tax rate. A portion of the rate increase supports transportation construction costs. It also offsets the statewide elimination of the privilege (business) license fees, which results in the loss of $2.3 million in annual revenue beginning in fiscal 2016.
With regional economic recovery, property and sales taxes collections are coming in over budget, which together with budgetary expenditure savings is leading to a projected $1.9 million net operating deficit compared to a $3.2 million budgeted use of fund balance. However, if the year-to-date sales tax revenue growth rate continues throughout the balance of the fiscal year, an additional $1.3 million of revenue will be collected, reducing the use of reserves to approximately $600,000.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004049
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004049
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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