Fitch Rates King County, WA's $17MM LTGOs 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AAA' rating to the following King County, Washington new debt issuance:

--$17.2 million limited tax general obligation (LTGO) refunding bonds, 2016, series C.

In addition, Fitch affirms the following ratings at 'AAA':

--the county's Issuer Default Rating (IDR);

--$1.7 billion outstanding LTGO bonds;

--$101.8 million outstanding unlimited tax GO bonds.

The 2016, series C LTGOs are scheduled to price via competitive bid on Dec. 5, 2016. Proceeds will refund outstanding debt for interest savings.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, supported by an irrevocable full faith, credit, and resources pledge to levy an ad valorem tax sufficient (together with all other legally available monies) to pay debt service. The county's pledge on LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction, and a rate cap of $1.80 per $1,000 of taxable assessed value (TAV).

KEY RATING DRIVERS

The 'AAA' rating reflects the county's strong economic underpinnings, demonstrated gap-closing capacity, and low liability levels. A history of steady revenue growth and sound financial cushion offset constraints on the county's ability to increase the property tax levy.

Economic Resource Base

King County benefits from a diverse economy and tax base that encompasses 29% of the state's population as well as Seattle, the Pacific Northwest's largest city. Major private employers include Boeing, Microsoft, and Amazon and the regional economy is also supported by a substantial military presence.

Revenue Framework: 'aa' factor assessment

General fund revenues have lagged behind overall U.S. economic performance during the past 10 years but have exceeded inflation, a trend that Fitch expects to continue given constraints on the revenue system that keep the county from fully benefitting from economic growth. The county's independent legal ability to raise revenues is limited by state constitutional provisions but an expanding economy has contributed to strong growth in recent years.

Expenditure Framework: 'aa' factor assessment

Expenditure demands have challenged revenue growth historically but the county has a strong track record of closing budget gaps and aligning expenditures with revenues. Carrying costs for debt service and retiree benefits are low.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities, primarily in the form of overlapping debt are a low burden on the resource base. The county participates in several well-funded state pension plans and has a minimal OPEB liability.

Operating Performance: 'aaa' factor assessment

The combination of the county's expenditure-cutting flexibility and solid reserve levels leaves it well positioned to address cyclical downturns. The county has strong budget management and a demonstrated commitment to bolstering its financial cushion as needed in times of economic recovery.

RATING SENSITIVITIES

Continued Expenditure Control: The rating is sensitive to the county's ability to manage ongoing expenditure pressures in response to limits on revenue growth. A material decline in the county's financial flexibility relative to historical and policy levels, while not anticipated, could pressure the current rating and/or Outlook.

CREDIT PROFILE

King County has benefited from above-average population and employment growth during the past decade and had an estimated population of 2.1 million in 2015. Wealth and income levels are well above national averages, and property values are high.

Revenue Framework

Property taxes account for approximately 43% of general fund revenues and have provided a steady source of revenue growth, despite a statutory limit of 1% annual levy increases, due to ongoing additions to the tax base from new construction. Sales taxes, charges for services and intergovernmental revenues each account for roughly 15% of revenues, with sales tax revenues generally performing in line with the overall economy.

Revenue growth has outpaced inflation historically but remains below overall U.S. economic performance. Fitch expects county revenues to continue to exceed inflation based on population gains and ongoing economic development, but to lag behind U.S. GDP over the long term due to the statutory limit.

The county's property tax levy can increase by no more than 1% annually, with the exception of levies upon new construction. Otherwise, property and sales tax increases require voter approval. The county's chief area of independent revenue flexibility is in charges for services, which accounted for about 17% of general fund revenues in fiscal 2015 and includes amounts received from local cities for contracted services. In aggregate, these tools provide the county with satisfactory independent legal ability to raise operating revenues in relation to expected normal cyclical revenue decline.

Expenditure Framework

Public safety is the county's primary responsibility (about three-quarters of general fund expenditures in fiscal 2015), with the bulk of spending on personnel costs.

Based on current spending practices, Fitch expects expenditure growth to be in line with to marginally above revenue growth in the absence of policy action.

Expenditure-cutting flexibility is solid. The county's carrying costs for debt service and retiree benefits are low at approximately 10% of governmental expenditures and appear likely to grow more slowly than overall spending due to limited new issuance plans and relatively well-funded pensions. In addition, the county has incorporated ongoing expenditure controls into its biennial budget process, providing a strong starting point for potential cuts that may be required in a downturn.

Long-Term Liability Burden

Overall debt and direct net pension liabilities are low relative to the county's resource base at less than 6% of personal income. Future growth in the long-term liability burden is likely to come from debt issuances by overlapping jurisdictions, which account for the majority of overall debt.

The county participates in several state-sponsored pension plans that are generally well-funded, with typical actuarial assumptions. OPEB liabilities are low at approximately 0.1% of personal income.

Operating Performance

Control over spending and revenues and limited revenue volatility leave the county well positioned to address cyclical downturns while maintaining a high level of fundamental financial flexibility. Unrestricted reserve levels are strong relative to expected revenue volatility and provide the county with a sizable reserve safety margin even in an unaddressed stress scenario. Financial resilience is supported by a policy that targets unassigned reserves at 8% of general fund revenues, as well as a rainy day reserve that exceeded $20 million in fiscal 2015 (equal to about 2.6% of general fund spending). Total unrestricted fund balance was equal to 13% of general fund spending at the end of fiscal 2015. The county also retains approximately $15 million in available balances outside the general fund.

The county has demonstrated a strong commitment to financial flexibility through the maintenance of reserves at targeted levels, extensive and conservative financial forecasting and monitoring, and regular closure of budget gaps without the use of reserves. In addition, the county has a track record of moving expenditure responsibilities outside of the general fund through voter-approved increases to property tax levy limits for specific purposes.

Recent Developments

Management projections for fiscal 2016 include a modest reduction in unrestricted general fund balance to address one-time needs. Such balances are restored in the county's proposed 2017-2018 biennial budget, which also incorporates a higher reserve policy target and a new credit enhancement reserve.

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=1014678

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com