Fitch Affirms Greensboro, NC's GOs, IDR and Special Obligations at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Greensboro, NC (the city) ratings:

--$149.7 million outstanding general obligation (GO) bonds at 'AAA';

--$3.6 million special obligation bonds series 2005 at 'AAA';

--Issuer Default Rating (IDR) at 'AAA'.

In addition, in connection with Fitch's revised criteria released in April 2016, Fitch has upgraded the ratings on the following bonds to 'AA+' from 'AA':

--$24.5 million limited obligation bonds (LOBs) series 2014;

--$6.2 million certificates of participation (COPs) series 2010.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from the city's unlimited taxing authority.

The special obligation bonds are payable from the city's portion of the proceeds of two 0.5% sales and use taxes (Articles 40 and 42) levied and distributed by Guilford County (the county).

The LOBs are payable from payments made by the city subject to annual appropriation. In the event of non-payment, the trustee is able to foreclose on the mortgaged property. The city's obligation under the trust agreement is secured by a deed of trust from the city to the trustee, granting a first lien on the mortgaged property, the coliseum. In the event of non-payment, the trustee is able to foreclose on the mortgaged property.

The COPs are payable from lease payments made by the city subject to annual appropriation. The city's obligation under the trust agreement is secured by a deed of trust from the city to the trustee for the benefit of the Greensboro Center City Corporation, granting a first lien on the mortgaged property, an aquatics center. In the event of non-payment, the trustee is able to foreclose on the mortgaged property.

The revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt; the COPs and LOBs do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR and therefore are upgraded to one notch below the IDR.

KEY RATING DRIVERS

The city's strong and diverse economic resource underpins strong financial management results. Ample expenditure and revenue flexibility, coupled with manageable long-term liabilities, support the 'AAA' overall rating.

Economic Resource Base

Greensboro is located in Guilford County (GO Bonds rated 'AAA'/Stable) and is both the largest city and the county seat. The estimated 2014 population was 282,586. Population and employment growth have outpaced regional, state and national rates in recent years.

Revenue Framework: 'aa' factor assessment

Property taxes comprise about 54% of the city's general fund revenues and the city benefits from strong revenue raising flexibility, given that the current property tax rate is less than half of the statutory limit. Steady assessed value growth, through new construction and appreciation, has yielded natural revenue growth.

Expenditure Framework: 'aa' factor assessment

The city maintains solid expenditure flexibility due to moderate carrying costs, management's ability to implement expenditure controls throughout the year, and the lack of collective bargaining. Fitch expects expenditures to grow roughly in line with revenues on average.

Long-Term Liability Burden: 'aaa' factor assessment

The city's combined burden of overall debt and pension liability is low relative to its resource base. The above average exposure to variable-rate debt remains manageable in the context of the city's financial flexibility.

Operating Performance: 'aaa' factor assessment

The city has very strong gap-closing capacity through revenue and expenditure flexibility as well as reserve levels. Fitch expects reserves to remain ample relative to the city's budget flexibility and low revenue volatility.

RATING SENSITIVITIES

Strong Financial Fundamentals: The rating is sensitive to shifts in the city's historically strong financial and managerial practices.

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 plans.

CREDIT PROFILE

Greensboro serves as a regional employment and entertainment center. The local economy is diverse, with health care, government and education serving as stable anchors, and traditional manufacturing transitioning to more high-tech operations rounding out the economy. Wealth levels are in line to slightly below regional and national averages, reflecting a large student population.

Revenue Framework

Property taxes make up over half of general fund revenues with the county-levied sales tax the second largest source. Assessed values remained relatively flat following the recession with recent growth between 1% and 2%, roughly in-line with inflation levels. A recently expanded sales tax base provides additional revenue growth prospects in the near-term.

Solid historical growth of general fund revenues exceeds CPI and slightly lags GDP growth.

The city maintains healthy revenue raising capacity as its fiscal 2016 tax was $0.6325 relative to the statutory cap of $1.50 per $100 of assessed value.

Expenditure Framework

The city maintains cost control measures, including the ability to institute hiring freezes and control head counts, which provide it with solid expenditure flexibility.

Fitch expects expenditures to grow roughly in line with revenue growth.

Public safety constitutes a majority of general fund spending, but the lack of collective bargaining and limited demands for service expansion temper its possibility for unmanageable growth. Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions are manageable at 14.1% of fiscal 2015 general fund spending.

Long-Term Liability Burden

The city's long-term liability burden, including overall debt and the Fitch-adjusted net pension liability, is moderately low at 9% of personal income. The city has notable exposure to variable-rate debt at more than 30% of direct debt. Planned fiscal 2017 issuance of fixed-rate debt for refinancing will bring the city's variable-rate position within their policy goal of 20% - 25% of direct debt. The city's strong financial flexibility and credit market access largely offset concerns about its variable rate exposure.

City employees participate in the Local Government Employees Retirement System (LGERS) administered by the state. The city's portion of LGERS is fully funded based on a Fitch-adjusted 7% return assumption. The city also participates in the Law Enforcement Officers' Special Separation Allowance plan. The plan is 27% funded with an unfunded liability of a minimal $16.8 million or less than 1% of personal income. OPEB unfunded liability is $74.9 million or roughly 1% of personal income.

Operating Performance

Given the city's superior budget flexibility and low revenue volatility, the city's available fund balance of $65.2 million, or 25.5% of spending is judged to be consistent with the reserve safety margin for a 'aaa' assessment. Through the most recent downturn the city maintained comfortable reserve levels and Fitch expects that future prudent management practices would yield similar results.

The city has achieved positive operations in three out of the past four years and routinely finishes the fiscal year positive relative to budget. Active budget management during times of economic recovery allowed the city to fully fund its pension ARC and pre-fund portions of its OPEB liability.

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004693

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Contacts

Fitch Ratings
Primary Analyst
Jeremy Stull
Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jeremy Stull
Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com