Fitch Rates Hennepin County, MN's GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following Hennepin County, MN debt:

--$104.3 million general obligation (GO) bonds, series 2016A.

The bonds will finance a portion of the Hennepin County Medical Center Ambulatory Outpatient Specialty Center. The bonds are scheduled to sell on June 23rd via competition.

Additionally, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AAA';
--$34.7 million Hennepin County Regional Railroad Authority limited tax GO bonds, series 2010A at 'AAA';
--$826 million in outstanding GO debt at 'AAA';
--Up to $200 million GO commercial paper (CP) certificates at 'F1+'.

The Rating Outlook is Stable.

SECURITY
The GO bonds are backed by the county's full faith and credit and unlimited taxing power. The CP certificates are a GO of the county for which its full faith and credit and unlimited taxing power are pledged; however the county many not use for the payment of the certificates any funds which are appropriated for other purposes by law or resolution or indenture. The HCRRA bonds are limited tax obligations payable from the levy of ad valorem taxes on all taxable property in Hennepin County not to exceed 0.04835% of the county's property market value.

KEY RATING DRIVERS

The 'AAA' GO and IDR ratings reflect the county's strong gap-closing capacity, including an unlimited legal ability to independently increase revenues, solid reserves, a low long term liability burden, and a strong and growing economic resource base.

The 'AAA' rating on the HCRRA bonds reflects the strength of debt service coverage from the levy of a limited ad valorem tax millage, equal to more than 20x maximum annual debt service (MADS) if levied at the maximum rate.

The 'F1+' rating on the CP certificates is based on the IDR and GO rating of the county and strong 4.2x coverage of the maximum potential liquidity requirement from available liquid resources.

Economic Resource Base
Hennepin County is positioned within the Minneapolis-St. Paul metropolitan area. The area economy is broad and diverse and home to several large corporate headquarters including United Health Group, Target, Best Buys and U.S. Bancorp. The county's wealth levels are above state and national medians and the county has seen solid population growth over the past 10 years.

Revenue Framework: 'aaa' factor assessment
The county has strong revenue flexibility given its independent legal ability to increase property taxes without limitation. Revenue growth has exceeded the rate of inflation and U.S. economic output, and is expected to continue to remain strong given ongoing development and growth in the property tax base.

Expenditure Framework: 'aa' factor assessment
Solid revenue growth and moderate increases in the cost of services provided should lead the pace of spending growth to be more or less aligned with revenues over time. Carrying costs related to debt and retiree benefits are moderate.

Long-Term Liability Burden: 'aaa' factor assessment
The long term liability burden is low at 4.7% of personal income. The county's capital improvement plan is expected to add $646 million in new debt from 2016 through 2020, but Fitch believes debt levels will remain modest as the county has a history of paying debt at an accelerated rate.

Operating Performance: 'aaa' factor assessment
Fitch expects the county will maintain a satisfactory financial cushion over time and through periods of economic decline based on its high reserves, superior budget flexibility, and history of conservative management practices.

RATING SENSITIVITIES
Sensitive to Revenue Growth: The IDR and GO ratings are sensitive to the county's strong revenue raising ability, expenditure flexibility and strong financial position. The HCRRA bond rating is sensitive to declines in debt service coverage driven by changes in the limited ad valorem revenues.

CREDIT PROFILE

The local economy is large and diverse and includes several significant sectors that provide a strong employment based including healthcare, manufacturing, financial services, technology and financial services. Unemployment rates have historically been below state and national rates and the county has seen annual job growth since 2011. Tax base growth is expected to remain healthy given extensive construction activity occurring within the area.

Revenue Framework
Revenue growth within the county has been strong, and the county has significant legal ability to raise revenues.

General fund revenues have increased above the rate of inflation and U.S. economic output in the last 10 years. A component of this growth reflects policy action by management and accounting changes, but Fitch believes revenue growth will continue to exceed the rate of inflations given the positive trends in the economy, population, and tax base.

The county is not subject to a limit on its property tax rate or levy. It has the ability to adjust fees for providing a wide range of services including health services and solid waste, which provides additional revenue flexibility.

Expenditure Framework
General fund spending, which is largely driven by public safety functions, public works, and general administration services, has risen a modest 7% from fiscal 2011-2015.

The natural pace of expenditure growth is expected to remain to in line to marginally above revenue growth, reflecting expectations for moderate increases in the cost of services, headcount, and core service provision over time.

Carrying costs for debt, pension and other personal employee benefits (OPEB) are modest at 12% of governmental fund expenditures. Personnel wages and benefits are subject to collective bargaining and binding arbitration, but under state law the arbitration decision must take into consideration existing levels of governmental services and an analysis of the fiscal impact on the municipality. County officials report strong relations with labor unions, and has settled its largest contracts with moderate salary increases. The county anticipates manageable labor costs in the next several years due to a number of retirements of employees at the top of their salary range.

Expenditure flexibility is aided by the county's practice to annually appropriate contingencies within the budget which was 2% of fiscal 2016 general fund expenditures. An additional area of flexibility includes transfers from the general fund for one time capital expenditures. In fiscal 2015, the county transferred $18.7 million out of the general fund including $7.4 million for one-time capital expenditures. The county could minimize these transfers if additional expenditure reductions were necessary to fund operations.

Long-Term Liability Burden
The long term liability burden related to overall debt and the unfunded pension liability is a low 5.1% of personal income. The county's capital improvement plan is expected to add $646 million in new debt from 2016 through 2020, but Fitch believes debt levels will remain modest as the county has a history of paying debt at an accelerated rate.

The county has authorized a $200 million CP program to provide short-term financing for capital projects (tax-exempt) and working capital (taxable) supported by self-liquidity. The county maintains a strong level of unrestricted internal liquidity with minimum investment and cash balances in fiscal 2015 that provide 4.2x coverage of the maximum potential liquidity requirement, well above Fitch's 1.25x criteria threshold. Currently, the county has no CP balance outstanding.

The county has $34.7 million of HCRRA bonds that are limited tax obligation of the HCRRA, payable from ad valorem taxes on all taxable property in Hennepin County. The levy cannon exceed 0.04835% of the county property market value. The bonds were issued to fund improvements of the local rail service. The HCRRA covenants to levy taxes to fund debt service at 105% annually. The maximum tax rate provides very strong coverage of debt service of 21.5x MADS.

County employees participate in the state's Public Employees Retirement Association, a defined benefit multiple-employer retirement plan for public employees as well as police and fire. The county pays in full the annual required contribution (ARC), which in 2015 was $42.9 million and is expected to decrease in fiscal 2016. Funding of the state pension plan was 72.7% using Fitch's 7% discount rate assumption as of Dec. 31, 2015. Other post-employment benefits (OPEBs) are very low, and the county discontinued providing post-retirement healthcare benefits to new hires starting in 2008.

Operating Performance
Hennepin County has consistently maintained a healthy level of general fund reserves equal to no less than 17% of spending dating back well over a decade. The county's reserve balances combined with its superior level of budgetary flexibility translate to an exceptionally strong capacity to manage through economic downturns and related revenue volatility.

Available reserve balances have increased to 30.4% of general fund expenditures in fiscal 2015 from 17.3% in fiscal 2010 driven by four large general fund surpluses over the past five years. Management has a strong record of conservative budgeting and has increased tax rates as needed to ensure strong financial outcomes. The fiscal 2016 adopted general fund budget assumes a 3.4% increase in the county's general fund tax levy and a $24 million fund balance appropriation. The county appropriates fund balance on an annual basis however has historically replenish the appropriation given actual financial results that exceed budgeted expectations because management conservatively projects revenues and includes contingency funds to increase financial flexibility. In fiscal 2015 the county appropriated $25.8 million in fund balance but only utilized $2.3 million to fund one-time expenditures.

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
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
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
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com