Fitch Rates Pitt County, NC's $35.7MM LOBs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA' rating to the following Pitt County, NC (the county) limited obligation bonds (LOBs):

--$17.7 million LOBs, series 2016;

--$18.45 million limited obligation refunding bonds, series 2017.

The bonds are expected to sell competitively on June 29, 2016. Proceeds from the series 2016 LOBs will be used to fund various school improvement projects. Proceeds from the limited obligation refunding bonds, series 2017 will be used to refund the series 2007 certificates of participates for debt service savings.

In addition, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AA+';

--$19.2 million general obligation bonds at 'AA+';

--$80.3 million limited obligation bonds (LOBs) at 'AA';

--$61.1 million certificates of participation (COPs) at 'AA'.

SECURITY

Payment on the LOBs and COPs is subject to annual appropriation, and deeds of trust provide security interest in essential government assets.

The GO bonds constitute a general obligation of the county, backed by a pledge of the full faith and credit of the county.

KEY RATING DRIVERS

The county's stable economic base, supporting historically strong operating performance and a solid revenue framework, coupled with conservative liability management and spending flexibility support the 'AA+' IDR.

Economic Resource Base

Located 90 miles east of Raleigh, Pitt County is experiencing slow but steady growth in its retail, commercial, healthcare, and education sectors. Population has increased 0.9% (CAGR) between 2010 and 2015.

Revenue Framework: 'aa' factor assessment

The county has strong revenue-raising control given the current property tax rate is less than half the cap. However, declines in assessed value over the past decade, have resulted in stagnant revenues.

Expenditure Framework: 'aa' factor assessment

Expenditures have grown along the lines of revenues, and Fitch expects that trend to continue. The county's expenditure flexibility benefits from moderate carrying costs and the favorable workforce environment in North Carolina.

Long-Term Liability Burden: 'aaa' factor assessment

The county's overall debt and pension liability is low as a percentage of personal income at 4.1%.

Operating Performance: 'aaa' factor assessment

The county's historical operating performance is resilient. Reserves remained ample during and after the recession. Given the county's revenue and expenditure flexibility and strong reserves, the county is poised to perform exceptionally well in an economic downturn.

RATING SENSITIVITIES

Continued Strong Financial Operations: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The county's employment base is diversified with services, hospitality, healthcare and wholesale/retail trade each accounting for at least 10% of total employment. The employment base has shown solid growth over the past five years. However, the unemployment rate remained unchanged at 5.4% as of April 2016 compared to the prior year, which is above the state and national averages for the month.

Major employers include Vidant Medical Center (6,895 employees), East Carolina University (5,564 employees), Patheon (a pharmaceutical manufacturing company with 900 employees) and NACCO (a truck manufacturer with 1,000 employees). Several of the county's largest employers continue to expand their operations with additional reported investments and added jobs. Patheon is currently undergoing a $159 million expansion project that is expected to generate 488 new jobs when completed by 2019.

Revenue Framework

The revenue base is dominated by property and sales tax taxes at about 58% and 12%, respectively, of fiscal 2015 general fund revenues. The county's general fund revenues have grown at a compound annual growth rate of 1.5% over the past 10 years, below the growth rate for U.S. GDP and inflation. Fitch expects the trend of slow revenue growth to continue. Although a number of the county's major employees are expanding, (most notably Vidant Medical Center and East Carolina University) the expansion of these facilities will not add to the tax base given their tax-exempt status. After keeping the tax rate unchanged for many years, the county increased the tax rate in fiscal 2013 to offset a declining taxable base.

The county's tax base is reassessed every four years. After substantial increases in fiscal 2008 and 2009 following reassessment of the taxable base, assessed value has declined in four of the past six years (2010 - 2015), which includes another reassessment effective fiscal 2013. Zillow data on home values indicate future property value trends are likely to be robust. Home values are approximately 95% of pre-recession levels and AV is approximately 99%. Expansion at the Vidant Medical Center and East Carolina University is supported by a road project being connecting the two county anchors, which is expected to further facilitate residential and commercial growth.

The county maintains healthy capacity under the statutory operating property tax cap of $1.50 per $100 of assessed value given the fiscal 2016 tax rate of $.68.

Expenditure Framework

The county maintains healthy expenditure flexibility with affordable spending associated with fixed carrying costs. The natural pace of spending growth is likely to be in line with revenue trends.

Given the county's slow but steady population growth, the pace of growth in main expenditures is expected to remain manageable and in line with expected revenue trends.

The county's largest expenditure category is education at roughly 32% of general fund outlays, followed by public safety at 24%. In North Carolina counties are responsible for the funding of school capital and maintenance projects while the state funds salaries, but in most cases counties provide a supplement for teachers' salaries. Student enrollment has increased only 3% in total over the past decade and according to the most recent capital improvement plan future school related capital plans are affordable. There are no staffing level requirements or mandates for any public safety programs, affording the county ample flexibility.

Carrying costs associated with debt service, actuarially determined pension payments and other postemployment benefits (OPEB) actual contributions total 14.3%, almost entirely attributable to debt service (11.5%). Amortization is average at 57% in 10 years.

Long-Term Liability Burden

Debt levels are low at 4.1% of total personal income. Debt levels are expected to remain low because of the county's affordable debt issuance plans. The vast majority of overall debt is issued by the county. The adopted fiscal 2017 to 2020 five-year capital improvement plan (CIP) totals approximately $81.5 million, of which $61.9 is expected to be debt-funded compared to outstanding direct debt of $255 million after this issue. Proposed borrowings focus primarily on capital projects for Pitt Community College and Pitt County Schools. The additional debt is not expected to materially impact the debt profile.

County employees participate in the Local Government Employees Retirement System (LGERS) administrated by the state. The county's portion of LGERS is funded at 100% based on a Fitch-adjusted 7% return assumption. The county also participates in the Law Enforcement Officers' Special Separation Allowance plan. The county has been funding the plan on a pay-go basis. The funded ratio is just 8% but the unfunded liability is minimal ($3 million). The county funds OPEB on a pay-go basis, but, the unfunded liability is less than 1% of personal income

Operating Performance

An unaddressed moderate economic decline scenario as depicted by the Fitch Analytical Sensitivity Tool shows an operating reserve cushion that Fitch judges to be well above the level needed for a 'aaa' financial resilience assessment given the county's high revenue and spending control. Fitch expects that in the event of such an actual revenue decline the county would maintain reserves well above the minimum reserve safety margin needed to maintain a 'aaa' assessment.

The county proved its financial resilience and strong budget management through the most recent recession by reducing position through attrition and vacancies, deferring capital spending and freezing merit increases among other measures.

The unrestricted general fund balance of $29.9 million was a healthy 22% of spending at year-end 2015, which is above the county's goal of 18%-20%. The county's reserve required by state statute, which is primarily to offset accounts receivable, is an additional source of financial flexibility and totaled $9.2 million at fiscal year-end 2015. In sum, available reserves totaled 28.8% of spending.

Year-to-date, general fund operating results show a $3 million operating surplus (2% of fiscal 2016 budget) despite a $2 million budgeted use of fund balance. Positive operating variances are reportedly reflective of more vacant positions, higher sales tax receipts, and a higher reimbursement from federal grants than budgeted. Fitch believes this is evidence of conservative budgeting.

The fiscal 2017 adopted budget increases the tax rate to $.686 per $100 of assessed value from $.680 to fund additional debt service associated with the 2015 general obligation bond issuance and includes a $5.8 million fund balance appropriation. The 5.7% budget increase funds 20 new staff positions and increased capital appropriations to county schools and the community college.

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

In addition to the sources of information identified in Fitch's 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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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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com