Fitch Rates Iredell County, NC's $56.47MM LOBs 'AA+'; Outlook Stable

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

--$56,470,000 limited obligation refunding bonds, series 2016

The bonds are scheduled for negotiated sale on Oct. 27. Bonds proceeds will be used to refund the series 2008 certificates of participation for debt service savings.

In addition, Fitch affirms the county's Issuer Default Rating (IDR) and approximately $99 million of outstanding GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The LOBs are payable from funds subject to appropriation by the county board of commissioners. They are additionally secured by a deed of trust granting a lien on the Mooresville Middle School.

The GO bonds are a general obligation of the county payable by its full faith, credit and unlimited taxing power.

KEY RATING DRIVERS

The 'AAA' IDR reflects the county's strong growth prospects, ample reserves, and broad budgetary tools. The rating on the LOBs is one notch below the IDR, reflecting appropriation risk.

Economic Resource Base

Iredell County is located in the Piedmont region of North Carolina, immediately north of Mecklenburg County. With a 2015 population of 169,866 the county's population has increased by an average annual rate of 1.3%

Revenue Framework: 'aaa' factor assessment

Revenues have been rising at a pace above U.S. GDP growth. The county has strong revenue raising flexibility as its current property tax rate is well within the statutory cap.

Expenditure Framework: 'aa' factor assessment

Expenditures have grown at about the pace of revenues, and Fitch expects that trend to continue. Moderate carrying costs and broad flexibility to manage labor-related costs allow the county solid leeway to adjust spending throughout economic cycles.

Long-Term Liability Burden: 'aaa' factor assessment

The combined burden of debt and unfunded pension liabilities is low in relation to personal income and should remain relatively stable over time based on modest future capital and issuance plans, rapid amortization and minimal pension liabilities.

Operating Performance: 'aaa' factor assessment

The county's superior budget flexibility and ample general fund balance position it to comfortably manage through economic downturns without diminishing its overall financial flexibility.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the county's continued strong financial flexibility and budget controls.

CREDIT PROFILE

Fitch believes that the county's proximity to Charlotte, accessibility of transportation as well as its competitive tax rate enhances its intermediate and long-term potential for expansion. The southern portion of the county has proven a desirable commuter suburb of Charlotte, particularly the area around Lake Norman.

The manufacturing sector is a key component of the local economy at 16% of county employment. Existing manufacturing companies continue to make investments in the county; ASMO (car parts manufacturer) will be investing $96.7 million over six years creating 83 new jobs and C.R. Onsrud, Inc. (machinery parts manufacturer) announced a $6 million expansion project that is expect to create 20 new jobs. Employment growth over the past four years has exceeded the state and nation. As of July 2016 the unemployment rate was 4.7%.

Revenue Framework

The county's revenue base is dominated by property and sales taxes at about 60% and 19%, respectively, of fiscal 2015 general fund revenues. Total general fund revenues are expected to increase given projected assessed value growth as a result of ongoing economic activity and home value appreciation.

The county's general fund revenue growth has trended above U.S. GDP growth, increasing at a 10-year CAGR of 4.4% through fiscal 2014. Revenue growth does include tax rate adjustments but would still be strong without them given gains in the county's assessable base due to new construction and appreciation. Revaluation occurred in 2015 with a 2% increase in valuation. Iredell County reassesses its tax base every four years, with the next revaluation beginning in 2019. According to the July 2016 Zillow report, home values are 105% of peak 2007 levels. Sales tax revenue growth has remained strong over the past five years and is projected to increase by 6% in fiscal 2016.

The county maintains a healthy capacity under the statutory property tax cap of $1.50 per $100 of assessed value with a fiscal 2017 tax rate of $0.5275.

Expenditure Framework

Fitch expects the natural pace of spending growth to remain below or in line with revenue growth. Moderately low carrying costs and broad flexibility to manage labor-related costs allow the county solid spending.

The county's largest expenditure category is education at roughly 31% of general fund outlays, followed by public safety at 20%. In North Carolina counties are responsible for the funding of school capital and current expenses which does include a supplement for teachers' salaries above the state allocation.

During fiscal 2010 and 2011 the county reduced current expenses to offset a weakened revenue environment due to economic conditions. Student enrollment has been flat, increasing by less than 1% over the past decade on an average annual basis. The county's capital improvement plan does include the issuance of additional debt over the next two fiscal years to fund the construction of a higher education facility and two middle schools, which may modestly impact carrying costs.

The county's expenditure flexibility is aided by a workforce environment that is favorable to management. Employment terms are not subject to collective bargaining. As such, management has independent control of compensation and work rules.

Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions total a manageable 16% of governmental spending, almost entirely attributable to debt service (15.4%). Amortization is rapid at 78% in 10 years. Carrying costs include contributions to the state's Local Governmental Employees' Retirement System (LGERS) as well as contributions to several supplemental plans.

Long-Term Liability Burden

Long-term liability levels are low at 4% 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 million, of which $59 million is expected to be debt-funded compared to outstanding direct debt of $238 million after this issue. Proposed borrowings focus primarily on capital projects for Mitchell Community College and Iredell County Schools. The additional debt is not expected to materially impact the long-term liability 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 net pension liability is minimal ($3.3 million). The county funds OPEB on a pay-go basis, but the unfunded liability is less than 1% of personal income

Operating Performance

Given the county's superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the county to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the county's 18% target -- a level of financial cushion far higher than is sufficient for a 'aaa' subfactor assessment. The unrestricted general fund balance of $42 million in fiscal 2015 was a high 26% of spending (excluding transfers out for capital and bond proceeds). The county's reserve required by state statute, which is primarily to offset accounts receivable, is an additional source of financial flexibility and increases the total available fund balance to $59.8 million or 37%.

In addition to general fund reserves the county maintains several capital projects funds, funded with transfers from the general fund. The county did increase the tax rate in fiscal 2012 and 2016 to fund future capital projects. The county plans to fund a jail expansion and the construction of a new public safety campus using these reserves. This reduces the need to issue debt and keep debt servicing costs low. As of fiscal year-end 2015 the balance was $18.3 million.

The county proved its financial resilience and strong budget management through the most recent recession by implementing furlough days for most employees except public safety, repurposing positions and maintaining vacancies among other measures. Fitch expects the county to make similar operational changes is needed during an economic downturn.

The fiscal 2016 budget was a notable 10.5% over the fiscal 2015 budget and included a tax rate increase to fund increasing debt service costs related to current and future bond issuance and cash funded capital spending. Preliminary general fund operating results show a $15.2 million operating surplus (9% of fiscal 2016 budget), which was mostly due to revenue growth resulting from the tax rate increase. Fitch believes this is evidence of conservative budgeting.

The fiscal 2017 adopted budget maintained the tax rate to $.5275 per $100 of assessed value. The 5.7% budget increase funds 17 new staff positions, a performance increase up to 3% and a 2% salary scale adjustment.

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/site/re/879478

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Fitch Ratings
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Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
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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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com