Fitch Rates Wake County, NC'S $190MM GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following Wake County, NC general obligation bonds (GOs):

--$190 million general obligation refunding bonds, series 2016.

Bonds proceeds will be used to refund the series 2003 B&C GOs bonds and 2007 A&B GOs for debt service savings, which will eliminate all of the county's outstanding variable-rate debt. The bonds are scheduled for sale on October 18 via competitive bid.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of the county, payable from its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

Analytical Conclusion: The county's strong economic base, historically strong operating performance and a solid revenue framework, coupled with conservative liability management and spending flexibility, all support the 'AAA' rating.

Economic Resource Base

Wake County is located in northeast central North Carolina and is part of the Research Triangle Park (RTP) metropolitan region, which encompasses the cities of Raleigh and Durham, and the towns of Cary and Chapel Hill. The county has an estimated 2015 population of 1,024,198, making it North Carolina's second most populated county.

Revenue Framework: 'aaa' factor assessment

The county has strong revenue flexibility given that the current property tax rate is less than half the cap. Also, strong assessed value (AV) appreciation has generated natural revenue growth and Fitch expects this trend to continue given solid economic prospects.

Expenditure Framework: 'aa' factor assessment

The county has significant control over spending, including the power to dictate terms of labor given the absence of collective bargaining. Additional flexibility can be found in pay-go spending and employee vacancies.

Long-Term Liability Burden: 'aaa' factor assessment

The county's overall debt position coupled with its pension liability is low as a percentage of personal income. The county prudently manages its long-term liability burden with conservative debt policies.

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 Position: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Wake's large government sector fosters economic stability and helped minimize the impact of the recession on overall employment. Additionally, the county is home to a portion of the Research Triangle Park (RTP). RTP is located between three major research universities (Duke, University of North Carolina and North Carolina State), and includes 170 global companies including IBM, DuPont, Cisco Systems and Wells Fargo, which has attracted a highly skilled employment base which translates into favorable wealth levels. Unemployment rates have outperformed the state and nation.

Median home values shows full recovery from the economic downturn. Values are currently above peak levels and strong growth is projected according to Zillow Group data.

Revenue Framework

The revenue base is dominated by property and sales tax taxes at 70% and 15%, respectively, of fiscal 2015 general fund revenues. During the recession, total revenues declined in just one year, by 2%, due to sales tax performance. Revenues have recovered solidly.

After keeping the tax rate unchanged for over a decade, the county increased the tax rate in fiscal 2015 to offset debt service cost increases and in fiscal 2016 to fund school spending increases. Due to strong taxable AV growth (6.3%) following the most recent reassessment, the county reduced the tax rate for fiscal 2017. Tax rate increases coupled with growth due to development has created strong revenue growth prospects.

The city maintains healthy capacity under the statutory cap of $1.50 per $100 of AV given the fiscal 2017 tax rate of $.6005.

Expenditure Framework

The county maintains healthy expenditures flexibility with affordable spending associated with fixed carrying costs.

Management has proactively maintained spending growth in-line with revenue fluctuations.

During the recession, in response to weakened sales tax receipts, the county held the contribution to schools flat, reduced capital spending, made mid-year budget adjustments and implemented a hiring freeze, among other expenditure reduction measures.

Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions total 19.6%, almost entirely attributable to debt service. High debt servicing costs are offset by a rapid amortization rate of 76% in 10 years.

Long-Term Liability Burden

Debt levels are low with overall debt totaling 2.2% of market value. Given the county's rapid amortization rate of 76% in 10 years, planned additional debt is not expected to impact debt ratios.

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 only been funding the plan on a pay-go basis. The funded ratio is just 6% but the unfunded liability is minimal at less than 1% of personal income. The county funds OPEB on a pay-go basis; however, the unfunded liability is also less than 1% of personal income.

Operating Performance

An unaddressed moderate economic decline scenario 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 superior revenue and spending control. Moreover, Fitch expects that in the event of such an actual revenue decline the county would maintain reserves at an even higher level. The county proved its financial resilience and strong budget management through the most recent recession by making mid-year budget adjustments, reducing cash-funded capital projects, implementing a hiring freeze and reducing staff among other measures.

The unrestricted general fund balance of $171 million was a healthy 16% of spending at year-end 2015. The county's reserve required by state statute, which is primarily to offset accounts receivable, is an additional source of financial flexibility and totaled $72 million at fiscal year-end 2015. Finally, the county maintains accessible reserves in the debt service fund that totaled a substantial $86.7 million. In sum, available reserves totaled 30.9% of spending.

Unaudited general fund operating results for fiscal 2016 show a $28.3 million operating surplus (2.5% of estimated fiscal 2016 spending). This would result in a fiscal year-end general fund balance of $272.96 million or 24% of 2016 estimated spending. Additionally, the debt service fund has an estimated $92 million of available reserves. In sum, available reserves total 32% of spending.

The fiscal 2017 general fund budget is a 4% increase over fiscal 2016. The largest increase is a $24.3 million increase in education funding. The budget reduces the tax rate and appropriates $1.2 million of fund balance (1% of the budget). Given the county's strong historical financial performance supported by conservative fiscal policies, Fitch expects fiscal 2017 will show similar results to fiscal 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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012622

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
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
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com