Fitch Rates Greenville County, SC Hospitality Tax COPs 'AA+'; Upgrades Outstanding Hospitality Tax

NEW YORK--()--Fitch Ratings has assigned a 'AA+' rating to the following bonds of Greenville County, South Carolina:

-- $8.2 million hospitality tax certificates of participation (COPs) series 2016.

In addition, Fitch has upgraded the rating on approximately $39.6 million of outstanding hospitality tax COPs to 'AA+' from 'AA-'.

Fitch Ratings also has affirmed the following ratings of the county:

-- Approximately $82.3 million of outstanding GO bonds at 'AAA';

-- Approximately $3.7 million of outstanding refunding COPs University Center Public Facilities Corp. (SC) (university center project) at 'AA+';

-- The county's Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable.

The series 2016 COPs are scheduled for negotiated sale on October 26. Proceeds will be used to refund a portion of outstanding series 2010 COPs for debt service savings.

SECURITY

The hospitality tax COPs have a first lien on lease rental payments by the county, payable from the proceeds of a 2% county hospitality tax and, if these are not sufficient, the county's share of state accommodations taxes net of prior allocations. The hospitality tax is not subject to appropriation although the accommodations tax must be appropriated to pay debt service. A debt service reserve fund (DSRF) and a leasehold interest in certain tourism-related properties provide additional security.

The GO bonds are supported by the full faith and credit and unlimited taxing power of the county.

The university center COPs are payable from lease rental payments by the county, subject to annual appropriation. Rental payments are payable from any legally available source of the county. Bondholders are additionally secured by a surety-funded DSRF equal to 50% of maximum annual debt service (MADS), and a leasehold interest in facilities providing educational and laboratory space for Greenville Technical College and other regional institutions of higher learning.

KEY RATING DRIVERS

Hospitality Tax Upgrade: The upgrade of the hospitality tax bonds to 'AA+' reflects application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. The revised criteria introduce scenario analysis to the consideration of revenue volatility and the strength of debt service coverage. The bonds benefit from solid coverage, consistent strong performance since launch of the tax, and good prospects for continued growth.

The 'AAA' IDR and GO ratings for the county are based on its superior financial management and modest long-term liability burden of debt and pensions. The county's flexible revenue structure and solid ability to control spending, in conjunction with reserve funding, support Fitch's expectation for exceptionally strong financial resilience through downturns. Robust population and job growth are expected to fuel strong gains in the revenue base. The county's long-term liability burden is composed primarily by debt of the overlapping school district and is expected to decline due the rapid principal amortization of both the school district and county's debt and limited new money debt plans of both entities.

Appropriation Risk: The university center project COPs rating is one notch below the county's IDR , reflecting the risk of annual appropriation.

Economic Resource Base

The county encompasses 792 square miles in the northwestern Piedmont section of South Carolina along the North Carolina border. The city of Greenville (GOs rated 'AAA'/Stable Outlook) is the county seat and sixth largest city in the state. The county has experienced robust population growth over the past two decades, increasing by over 40% between 1990 and 2010 to over 450,000. The U.S. Bureau of the Census estimates the county's 2015 population at 491,863. Recent population growth remains brisk outpacing both the state and nation.

Revenue Framework: 'aaa' factor assessment

Fitch expects long term revenue growth to exceed the pace of national economic output and inflation due to rapid population gains and continued expansion of the local economy. While state law provides some limits on annual increases in property tax millage, the county retains considerable flexibility to adjust fees and charges.

Expenditure Framework: 'aa' factor assessment

County spending growth is projected to be consistent with or slightly above the pace of revenue growth in the absence of policy action. Management's considerable spending flexibility is supported by its ability to control labor terms and moderate carrying costs.

Long-Term Liability Burden: 'aaa' factor assessment

The county's long-term liability burden is low, with most of the liability consisting of debt of the overlapping school district. The burden is expected to decline going forward given rapid principal amortization of the school district and the county's debt, affordable capital needs and limited issuance plans.

Operating Performance: 'aaa' factor assessment

The county's consistently very high levels of reserves are the result of conservative budgeting and prudent financial practices. Fitch expects management to utilize its significant revenue and expenditure flexibility to maintain reserves at high levels throughout the economic cycle.

RATING SENSITIVITIES

Modest Liability Burden: The rating is sensitive to the county's maintenance of a low level of liabilities, including manageable debt and pension costs. A significant increase in these obligations would be considered a negative credit development.

Reduced Hospitality Tax Coverage: A material deterioration in Fitch's expectations for hospitality tax revenues resulting in reduced expectations for debt service coverage could lead to negative rating action for the hospitality tax COPs.

CREDIT PROFILE

The county benefits from its location along Interstate 85 between Charlotte, North Carolina and Atlanta, Georgia and is the economic center for a nine-county region. The region's economy has diversified from its former manufacturing base to one with a broad mix of services and products. Leading sectors of economic activity include professional and business services, trade, healthcare, education, government and tourism. The two top employers are the county school district and Greenville Health System, one of the largest health systems in the state, with combined employment of about 21,000.

Since 2010, county job growth has exceeded both state and national employment trends pushing the county's unemployment rate below both the state and national benchmarks. County wealth indices exceed state benchmarks but fall short of the national averages.

Capital investment activity continues to be significant totaling a reported $253 million through year-to-date 2016. This is further reflected in generally rising building permit valuations, both in the commercial and residential sectors. In addition, the inland port operated by the South Carolina Ports Authority in the county provides direct access to the Port of Charleston. The presence of the inland port and extensive expansion of the Port of Charleston are expected to foster additional development within the county.

Manufacturing remains an important component of the local economy, accounting for approximately 15% of Greenville-Anderson-Mauldin metropolitan statistical area (Greenville MSA) labor force.

Manufactured products include industrial robots, electronic components, automotive products, gas turbines and pharmaceuticals. Major manufacturers include auto manufacturer BMW, located in nearby Spartanburg, Michelin North America, and General Electric. Recently, GE opened its Advanced Manufacturing Works in the county to develop new manufacturing processes and build new prototypes for its various businesses. Since 2010, manufacturing jobs in the Greenville MSA have increased steadily.

Revenue Framework

Property tax revenues are the largest source of revenue for the general fund comprising about 60% of total revenues in fiscal 2016. These revenues have increased over the past five years benefitting from tax base growth. Property taxes are budgeted to increase by 2.1% in fiscal 2017 and projected to rise by 5% and 4% in fiscals 2018 and 2019, respectively. County office revenue is the second largest revenue source accounting for about 20% of fiscal 2016 general fund revenues. These revenues consist of fees and charges for county services and are projected to rise modestly over the next two or three years.

Ten-year growth in general fund revenues from fiscal 2004 through fiscal 2014 averaged 2.7% annually, which is under national GDP growth but above inflation. Given the increase in economic activity since 2010 including significant capital investment and rapid population gains, Fitch expects general fund revenue growth to meet or exceed U.S. economic performance going forward. The county is projecting over 3% annual growth in revenues through fiscal 2019.

The state limits millage increases for operating purposes to CPI plus the rate of population growth. Unused levy capacity may be carried over for three years. These limits may be overridden by a two-thirds majority vote of the county council but only if a deficiency exists from the previous year, there has been a catastrophic event or a loss of a taxpayer representing 10% or more of revenues, or to comply with a court decree. However, the county does retain considerable flexibility in raising fees and service charges as needed.

Expenditure Framework

The county provides a wide array of services including law enforcement, emergency medical services, detention center operations, court operations, infrastructure maintenance and repair, and operation of parks and recreational facilities, among other activities. Public safety activities constitute about 58% of total county general fund spending. Public safety is expected to grow over the next several years but retain a similar share of overall general fund spending.

County spending needs are projected to rise relatively rapidly as population continues to experience above average growth. However, due to conservative budgeting practices, Fitch expects that county spending growth will remain consistent with projected strong revenue growth trends.

Despite running a relatively lean operation, the county has considerable spending flexibility due to gradual but steady growth in personnel and strong control over headcount and labor terms. Options available to management include not filling open positions, limiting overtime and restricting operations to essential services.

Expenditure flexibility is further enhanced by moderate carrying costs of debt service, pension contributions and OPEBs (about 16% of governmental spending), especially given rapid amortization of the county's debt.

Long-Term Liability Burden

The county's long-term liability of debt and pensions is relatively modest at 10% of personal income. Overlapping debt of the Greenville County School District constitutes the majority of total liabilities. Fitch expects this liability to decline in the future given rapid amortization of the school district's bonds and modest new money debt expected, as well as projected continued growth in personal income. The county's existing debt is also rapidly amortized with over 80% of principal is scheduled for retirement within the next ten years, and limited plans for future issuance. The five-year capital improvement plan is affordable, totaling $121 million including roads.

The county provides pension benefits to its employees through the South Carolina Retirement System (SCRS) and the South Carolina Police Officer Retirement System (PORS), both of which are state administered cost-sharing multiple employer retirement systems. Plan participants pay 100% of their share of the annual actuarially required contribution (ARC). Based on valuations as of June 30, 2014, the county's proportionate share of the net pension liability for SCRS and PORS was reported at 59.9% and 67.5% respectively (or an estimated 56.8% and 64.0% at an assumed rate of return for 7.0%). Existing funding levels suggest contribution requirements are likely to rise over time. The county's proportionate share of the plans' net pension liabilities totals $179.7 million or a low 1.3% of personal income.

Other post-employment benefits (OPEB) including retiree medical care are provided to retirees through one of three county-subsidized medical plans. The county's OPEB costs are funded on a pay-go basis.

Operating Performance

Management budgets very conservatively and has consistently maintained available reserves above 35% of spending ($54 million, 38% of spending, at fiscal 2015 year-end). The county's fund balance target requires unassigned general fund balance to be maintained between 25% and 35% of revenues.

Fitch expects the county to maintain reserves at very high levels through a moderate downturn given its inherent budget flexibility, conservative practices and historically low revenue volatility. The county's solid financial position is further supported by continued full funding of pension requirements as mandated by the two state pension plans in which the county participates.

Unaudited results for fiscal 2016 show a modest $2.1 million general fund deficit primarily due to approximately $2 million of planned transfers from the general fund for capital items. This would bring available reserves down to a still-robust 36% of spending.

The fiscal 2017 general fund budget represents a 3.9% increase from the fiscal 2016 budget reflecting salary increases and higher spending for health insurance and added positions. A $6.7 million operating deficit is projected, which would reduce available general fund reserves to about 30% of spending. Projections for fiscals 2018 and 2019 indicate general fund surpluses of $2.6 million and $5.4 million, respectively.

Hospitality Tax Continues to Grow

The hospitality tax has been collected pursuant to county ordinance since April 1, 2007 at a uniform rate of 2% on the sales of prepared meals and beverages, including alcoholic beverages, beer, and wine in the unincorporated portion of the county. Approximately 70% of the county's total population resides in unincorporated areas. The hospitality tax ordinance terminates on the later of Dec. 12, 2026 or the payment of the last maturing obligation being paid from the hospitality tax.

Hospitality taxes increased steadily through the recession, suffering their only drop-off in collections in fiscal 2010, a relatively minor 0.6% annual loss. Subsequent collections for the five following fiscal years have rebounded with solid gains ranging from 1.6% to 6.2%. Coverage of MADS by fiscal 2016 hospitality tax revenues is strong at 2.2x.

Three-month year-to-date collections of the hospitality tax in fiscal 2017 are up slightly over the same collection period in fiscal 2016. The county's share of state accommodations tax revenues, also available to pay debt service, adds only about 5% to 6% to total available revenues. Prospects for ongoing strong growth in pledged hospitality tax revenues are favorable given robust trends in population and employment.

To evaluate the sensitivity of the hospitality tax to cyclical decline, Fitch considers both revenue sensitivity results from the Fitch Analytical Sensitivity Tool (FAST), using the same 1% decline in national GDP scenario that supports assessments in the IDR framework, and the largest decline in revenues over the period covered by the revenue sensitivity analysis. The 10-year pledged revenue history, which includes estimates for the years before the tax was in place, would suggest that revenues would continue to increase in a moderate national downturn; in such cases, Fitch considers a minimum 1% decline stress scenario. The largest actual cumulative decline in historical revenues was a modest 0.6% decline in fiscal year 2008.

Based on fiscal 2016 debt service coverage, Fitch estimates the structure could tolerate a 53% drop in revenue, a very high cushion given the stability of the revenue stream in recent years. Assuming leverage to the 1.5x ABT, the scenario results remain very strong. Fitch notes that given the limited history of the hospitality tax in the county, future performance could show more economic sensitivity than has been seen in recent results.

Management has indicated that it has no intention of further leverage of the revenue stream. Hospitality tax revenues in excess of debt service are used to fund pay-as-you-go tourist-related projects.

University COPS

The university center project COPS were used to fund facilities for the University Center, a consortium of higher education institutions including Greenville Technical College, Clemson University and the University of South Carolina designed to increase access to educational opportunities to area residents. Property under the master lease subject to surrender if the county fails to appropriate lease payments for debt service includes classroom and laboratory facilities which house University Center operations.

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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Contacts

Fitch Ratings, Inc.
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com