Fitch Rates Johnson County, KS GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following Johnson County, KS obligations:

-- $35.7 million general obligation (GO) internal improvement bonds, series 2016A;

-- $11.2 million general obligation (GO) refunding bonds, series 2016B.

The 2016A bonds are being issued to pay the cost of certain wastewater, countywide emergency communication system, and special benefit district improvements within the county. The series 2016B bonds are being issued to refund certain outstanding bonds. The bonds are scheduled to sell competitively on September 28.

Fitch also affirms the following ratings of Johnson County:

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

-- $274.2 million outstanding unlimited tax general obligation (ULTGO) bonds, series 2009B, 2009C, 2010B, 2010C, 2010D, 2010E, 2011A, 2012A, 2012B, 2013A, 2014A, 2014B, 2015A, and 2015B at 'AAA';

-- $45.9 million Johnson County Public Building Commission (PBC) bonds, series 2010A, 2010B, 2010C, and 2010D at 'AA+'.

The Rating Outlook is Stable.

SECURITY

All ULTGO bonds are obligations of the county to which the full faith, credit and power of the county to levy unlimited ad valorem taxes are pledged; the ULTGO series 2010B&E bonds ad valorem tax pledge excludes the assessed valuations (AVs) of Olathe and Bonner Springs.

The PBC bonds are special limited obligations payable solely from lease payments made by the county from any legally available funds. The county's obligation is absolute and unconditional, not subject to appropriation, abatement, set-off or counterclaim.

KEY RATING DRIVERS

The 'AAA' IDR and GO ratings reflect the county's strong revenue and expenditure frameworks, low long-term liabilities, and expected ample financial flexibility through a typical economic cycle.

Economic Resource Base

Johnson County is located 12 miles southwest of Kansas City, providing residents with easy access to numerous employment opportunities throughout the metropolitan region. Population since 2000 is up 27% to approximately 580,000 in 2015, making the county the most populous in the state.

Revenue Framework: 'aa' factor assessment

Fitch expects the county's revenue to grow at a pace between inflation and GDP growth, while maintaining significant independent legal ability to raise revenue even after the implementation of a statewide property tax lid in 2018.

Expenditure Framework: 'aaa' factor assessment

The county's expenditures should grow at a rate generally in line with revenue growth. Flexibility is enhanced by low costs for servicing long-term liabilities and solid management control over labor outlays.

Long-Term Liability Burden: 'aaa' factor assessment

Johnson County's long-term liability burden, including pension liabilities and overall debt, are low relative to personal income. While future increases in net pension liabilities are possible, the overall assessment is likely to remain 'aaa'.

Operating Performance: 'aaa' factor assessment

The county has exceptionally strong gap closing capacity to manage through an economic downturn and maintains healthy reserve levels.

RATING SENSITIVITIES

Efficient Financial Management: The rating is sensitive to the maintenance of financial flexibility sufficient to address periods of economic weakness.

Tax Lid Implementation: The rating is sensitive to the county's retention of substantial control on the independent ability to increase revenues after implementation of the tax lid in 2018.

CREDIT PROFILE

The county's diverse local economy is characterized by high wealth and low unemployment. The county's economy further benefits from extensive employment opportunities throughout the Kansas City metropolitan statistical area (MSA). An improving housing market and strong ongoing development contributed to solid AV growth in recent years.

Revenue Framework

The county is largely reliant on property tax receipts, which comprised 45% of fiscal year (FY) 2015 general fund revenue. The county's other local taxes accounted for 17%. Charges for services (28%) and intergovernmental revenue (7%) and other revenue sources made up the remainder.

Fitch believes the county's general fund revenue may grow at a faster rate than historical trends (2.1% 10-year compound annual growth rate), due to projected growth in the sales tax revenues and increasing AV. The county projects near-term AV to increase at 4% annually, which follows growth between 5.9% and 7.4% over the last three years. Management also projects sales tax collections to continue growing at close to 3% per year.

The county should retain significant revenue-raising ability, even after the implementation of a statewide tax lid in 2018 which will limit the ability of cities and counties to increase property taxes beyond CPI growth without voter approval. Most public safety and debt service expenditures are exempt from the law, which should allow the county to retain capacity to adjust revenues for these key components of the general fund budget. The county also maintains some ability to adjust other locally controlled revenues and can issue bonds to pay for several capital-eligible general fund expenditures, in effect making these expenditures exempt from the tax lid.

Expenditure Framework

The county's main expenditure item is for public safety--at 51% of fiscal 2015 general fund expenditures. Approximately 31% is for general government and an additional 7% is for capital outlay.

The natural pace of spending growth should be in line with to marginally above the expected pace of revenue growth. The main driver of expenditure growth is for labor costs, with salaries expected to grow at approximately 3% annually.

The county has ample flexibility with its main expenditure items, and carrying costs (debt and retiree benefit contributions) make up a manageable 7% of governmental expenditures (FY 2015). The county also has budget flexibility to cut or delay spending on pay-as-you-go capital ($18 million or 7% of FY 2015 general fund spending), and maintains a notable degree of control over labor-related outlays.

Long-Term Liability Burden

The county's long-term liabilities are low, with the combined net pension liability and overall debt at approximately 7% of personal income. The long-term liability metric includes the county's participation in the multi-employer Kansas Public Employees Retirement System (KPERS) and the Kansas Police and Firemen's Retirement System (KP&F). The plans statutorily require the county to contribute an amount that is lower than the actuarially determined rate; this practice has contributed to a sizable gap between plan assets and liabilities which will increase in the future with no change in contribution practices. Fitch estimates the combined ratio of the fiduciary net position to total pension liability to be 47%, assuming a 7% discount rate. Of the long-term liability burden, 10% is direct debt of the county and 8% is the net pension liability. The remaining 82% is derived from overlapping debt, largely from various cities and school districts within the county. The county has very little tax-supported direct debt, as it historically has funded capital improvement needs on a pay-go basis.

Operating Performance

The county has maintained a substantial available fund balance throughout the recession and subsequent recovery relative to potential revenue declines depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn. Fitch expects that available general fund reserves (23.5% of expenditures in FY 2015) will remain above the 'aaa' reserve safety margin, even in a moderate unaddressed recessionary period, given the county's superior degree of inherent budget flexibility.

The county has made consistent efforts to maintain a high level of financial flexibility in the recent economic recovery, despite strategically spending down some of its sizable available fund balance on pay-go capital projects and keeping the tax levy rate constant. Management projects a surplus of approximately $1 million in FY 2016.

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/site/re/879478

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011982

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Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeremy Stull
Analyst
+1-646-582-4981
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeremy Stull
Analyst
+1-646-582-4981
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com