Fitch Rates Greenville, SC's $13.5MM Public Facilities Corp. Rev Bonds 'AA+'

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following bonds of the Greenville, SC (the city) Public Facilities Corporation (PFC):

--$13,515,000 taxable installment purchase revenue bonds, series 2016.

The installment purchase bonds are expected to sell on or about Oct. 25 via negotiation. Bond proceeds will be used to fund the costs of acquiring, constructing, renovating and equipping the city's Verdae Fire Station facility and public works facility, improvements to Verdae Boulevard, and purchase of solid waste equipment and fire apparatus.

In addition, Fitch has affirmed the following ratings:

--$7.4 million city general obligation (GO) bonds, series 2012 at 'AAA';

--$18.27 million taxable installment purchase revenue bonds, series 2015 at 'AA+';

--the city's Issuer Default Rating (IDR) at 'AAA'.

SECURITY

The installment purchase bonds are limited obligations of the PFC as conduit issuer and are payable from installment payments by the city, subject to annual appropriation. The installment payments are equal to debt service and payable from any legally available source of the city.

The GO bonds constitute general obligations of the city, to which its full faith and credit and unlimited taxing authority are pledged.

KEY RATING DRIVERS

The 'AAA' IDR and GO ratings reflect the city's solid revenue growth from diverse revenue sources and independent ability to increase various fees and taxes as needed. Healthy fund balances from a history of strong operating performance add further to financial flexibility above what Fitch considers necessary for the rating category based on the city's superior inherent budget flexibility. Liabilities are low.

The 'AA+' rating of the installment purchase bonds, one notch below the IDR, reflects the annual appropriation risk. As the installment payments that secure the bonds are made, the city takes ownership in the project facility (the fire station) from the PFC proportional to the amount of total principal and interest payable on the bonds.

Economic Resource Base

The city serves as a regional retail and commercial hub, driven by its strategic location in upstate South Carolina between Charlotte, NC and Atlanta, GA. Greenville anchors the four-county Greenville-Anderson-Mauldin metropolitan statistical area (Greenville MSA). The 2015 population is estimated at 64,579.

Revenue Framework: 'aaa' factor assessment

The city's 'aaa' revenue framework reflects Fitch's expectations for solid general fund revenue growth driven by property tax and business license collections and a significant independent legal ability to raise revenues further without external approval.

Expenditure Framework: 'aa' factor assessment

Fixed costs of 18% of governmental spending produce solid expenditure flexibility. Layoffs were avoided during the recession and management would possess significant capacity in a downturn to adjust headcount, benefits and wages due to the state's workforce rules. The natural pace of spending growth is expected to be generally in line with that of revenues.

Long-Term Liability Burden: 'aaa' factor assessment

The modest long-term liability position is expected to remain low going forward given the city's current capital plans, lack of expected debt issuance from the city and minimal plans associated with the overlapping county and school district debt.

Operating Performance: 'aaa' factor assessment

The city has exceptionally strong gap closing capacity based on its superior budget flexibility and historically stable revenues. General fund reserves are consistently maintained above a conservative policy of 20% of the budget.

RATING SENSITIVITIES

EXPENDITURE FLEXIBILITY; DEBT BURDEN: The rating is sensitive to maintenance of solid expenditure flexibility and continued moderate carrying costs associated with a low long-term liability level.

CREDIT PROFILE

The city sits at the core of an employment and economic center serving a nine-county area along I-85 between Atlanta, GA and Charlotte, NC. Manufacturing remains an important component of the local economy, accounting for approximately 15% of Greenville MSA employment. Manufactured products are diverse, including automotive products, electrical components, gas turbines, industrial robots, and pharmaceuticals. Major manufacturers include auto manufacturer BMW, located in nearby Spartanburg, Michelin North America, and General Electric, which operates the world's largest gas turbine manufacturing plant just outside the city. In addition to the strong manufacturing base, the local economy has diversified to include a broad mix of business services, healthcare, government, tourism and educational activities.

Income metrics average similar to the national level, well ahead of both the county and the state; however, poverty estimates remain an elevated 20% of the population according to the U.S. Census, above both the state and nation. The unemployment rate continues to trend downward and is below the region, state and nation.

Revenue Framework

The two primary sources of general fund revenue are property tax and business license fees at about 45% and 35%, respectively.

General fund revenues have historically increased in line with the rate of inflation at 2.2% annually over the decade through 2014, during which time property tax rates have trended lower. Taxable assessed value over this period has increased faster, at a rate closer to national economic expansion. Assessed values averaged moderate annual growth throughout the recession with larger gains in fiscals 2015 and more notably in the county's five-year revaluation in fiscal 2016 which produced a significant 9.4% annual increase that included new growth. The tax base is projected by the city to maintain a modest growth trend over the near term, which Fitch believes is reasonable given the current economic activity, strength in the market for residential homes and growth in construction permit values.

The city's ad valorem revenue raising ability is broadly capped by the provisions of South Carolina's Act 388, which limits property tax rate increases to population growth plus inflation. The law provides for the carry-forward of unused millage increases for up to three years -- currently 13% in one-time increases is available to the city -- and allows exceptions in limited circumstances for emergencies, the loss of significant tax payers, and prior year deficiencies. Other fees provide a significant source of general fund revenues and provide solid flexibility, including the independent ability to adjust local business license fees.

Expenditure Framework

Public safety is the primary spending category at nearly half of general fund expenditures. Debt service, capital projects and special revenues of the accommodations and hospitality tax are spent outside of the general fund. General fund transfers to these funds routinely make up 5%-10% of spending and include the city's annual paygo capital spending.

The city's spending obligations are likely to increase at or slightly ahead of revenues for operations, including from liability-related spending for pensions and debt.

Fixed carrying costs for debt service, required pension payments and other post-employment benefits (OPEB) actual payments were a relatively moderate 17.6% of governmental spending in fiscal 2015, and Fitch expects them to remain moderate. In the previous recession the city was able to meet expenditure cutting goals, which management described as only minimally necessary, through the postponing of paygo capital spending without reducing headcount. Workforce rules regarding layoffs, benefits and wages in South Carolina are favorable to management and the city retains this flexibility if necessary.

Long-Term Liability Burden

The combined burden of overall debt and the city's net pension liability is moderate at just under 10% of personal income. Over 50% of the overall liability burden is due to the overlapping debt of the school and county, with the remainder roughly equally divided between direct debt and pensions. Neither indicates significant debt issuance plans. The amortization rate of overall outstanding debt including the city, county and school district is rapid at over 70% of debt retired in within 10 years. The city's updated five-year capital plan includes no further debt.

General city employees and police officers participate in defined benefit cost-sharing multiple employer plans administered by the state and firefighters participate in a city-administered plan. The net pension liabilities of the plan total a low 2.6% of personal income. Police officers participate in the South Carolina Police Officers Retirement System (PORS) that as of June 30, 2015 reported a funded ration of 68%, or an estimated 64% using Fitch's 7% rate of return assumption. City employees participate in the South Carolina Retirement System (SCRS), which reported a funded ratio of 62.7%, or 59.5% using Fitch's 7% assumption. The city fully contributes its contractually required pension obligation to both state plans. Increases in requirements for employer contributions are likely in the future as the state plans attempt to improve funding levels. Separately, annual contributions to the city's single employer pension plan for firefighters consistently exceed the actuarially calculated annual contribution; the plan's assets cover 85% of the liability and the net pension liability is very small.

Operating Performance

Fitch believes the city's healthy financial position provides a high level of financial flexibility to manage through economic downturns. Reserves are expected to remain above the city's formal policy of 20%, well above the level that Fitch would consider consistent with the current assessment given the city's low historical revenue volatility and its superior budgetary flexibility given the legal ability to raise revenues. Fiscal 2015 resulted in a general fund net operating surplus after transfers of $3.1 million or 4.3% of spending. The unrestricted general fund balance was a very high 36.7% of spending, up primarily due to an increase in the millage rate for the fire station (the first increase in 15 years) and the 7% growth in the tax base.

Since the recession the city has added to fund balance each year since fiscal 2009 while increasing paygo capital spending and without postponing the funding of liabilities. The tax rate has trended lower overall.

Fiscal 2016 unaudited results show a larger than budgeted draw down of reserves of $4 million, primarily to pay for the public works projects. The tax rate was decreased 4.5%, which partially offset revenues generated from the large increased value of the tax base from the reassessment. The city adopted a merit increase of 3% for employees. The fiscal 2017 adopted budget maintains the existing tax rate and projects in a surplus after transfers of $1.5 million.

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
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Parker Montgomery, +1-212-908-0356
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Director
or
Committee Chairperson
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or
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Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery, +1-212-908-0356
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong, +1-212-908-0652
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com