Fitch Rates the City of Rocky Mount, NC's $36MM Special Obligation Bonds 'AA+'

NEW YORK--()--Fitch Ratings has assigned a 'AA+' rating to the following special obligation (SO) bonds of the City of Rocky Mount, North Carolina:

--$36 million special obligation bonds, series 2016.

Fitch also has assigned an Issuer Default Rating (IDR) of 'AA+'.

The Rating Outlook is Stable

Proceeds from the sale of the 2016 bonds will be used to finance the costs of the acquisition, construction and equipping of a multi-purpose event center known as the Downtown Community Facility.

SECURITY

The bonds are special obligations of the city payable from sales tax revenues and other state distributions. The Trust Estate includes proceeds of the Article 39 1% sales and use tax, Article 40 0.5% sales and use tax, Article 42 0.5% sales and use tax, and the hold-harmless distribution pursuant to Article 44 as well as franchise, telecommunications, cable television, beer and wine tax revenue and solid waste disposal tax revenues levied by the state and allocated to the city pursuant to a population-based or point of sale formula.

KEY RATING DRIVERS

The 'AA+' IDR rating reflects the city's low long-term liability burden, and broad budgetary tools that leave it well positioned to maintain a high level of financial flexibility throughout the economic cycle. Fitch believes that revenue growth is likely to be slow, but the city will benefit from recent development.

The 'AA+' rating on the SO bonds reflects the strong debt service coverage and exceptional resilience that Fitch expects to continue through economic cycles, even at full leverage to the additional bonds test (ABT). Fitch's expectation is that pledged revenues will not be leveraged to the ABT, as surplus revenues are used to support general operations. The rating is capped at the level of the city's IDR because, in Fitch's opinion, the pledged revenues would not be insulated from the general operations of the city in the event of a bankruptcy filing.

Economic Resource Base

Rocky Mount is located one hour east of the city of Raleigh at the intersection of I95 and U.S. Highway 64, with access to employment centers like Research Triangle Park and major transportation hubs like Raleigh-Durham International Airport, both approximately one hour away. The city spans 44 miles within Nash and Edgecombe counties. The city's population has been declining modestly, by a compound annual growth rate of less than 1% since 2010; the 2015 population was 55,806.

Revenue Framework: 'aa' factor assessment

Revenues have been rising at a pace generally in line with U.S. GDP growth, including the impact of policy changes at the city and state level. Fitch expects the pace of revenue growth in the absence of policy action to approximate inflation. The city has strong independent legal revenue-raising flexibility as its current property tax rate is well within the statutory cap.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural pace of spending growth to remain in line with to marginally above the city's revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs allow the city 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 future debt issuance plans, above-average principal amortization of direct debt and modest pension liabilities.

Operating Performance: 'aaa' factor assessment

The city's historical operating performance has been very sound with a high level of fundamental financial flexibility maintained during and after the great recession. Given the city's revenue and expenditure flexibility, supplemented by strong reserves, Fitch believes the city is poised to perform exceptionally well during, and manage the risks associated with, future economic downturns.

RATING SENSITIVITIES

Keys to Rating Stability: The rating assumes that the city will continue to have strong revenue growth prospects and low long-term liabilities.

Strong Debt Service Coverage: The rating is sensitive to material shifts in Fitch's expectations for pledged revenue performance that materially affect expectations for the debt service coverage cushion.

City IDR: The rating on the special obligation bonds is sensitive to changes in the general credit quality of the city as expressed by the city's IDR.

CREDIT PROFILE

Rocky Mount's major employment sectors are manufacturing, retail trade and healthcare. The manufacturing sector is led by Pfizer which is the city's top employer (a reported 2,600 employees) and taxpayer (about 5% of assessed value). Pfizer continues to reinvest in its Rocky Mount plant. Pfizer recently completed a significant expansion of its manufacturing facility. Nash Health Care Systems/UNC Health Care anchors the healthcare sector. The hospital also recently completed an expansion and is now the city's fourth largest employer. Retail sales have strongly rebounded over the past three years reflecting activity at the city's third largest taxpayer, the Gold East Crossing mall.

Population growth has been weak following the displacement of many residents following Hurricane Floyd in 1999. However, the construction of several new developments is expected to attract growth. While the unemployment rate remains above both the state and national average, the rate has continued to decline over the past six years.

Revenue Framework

The revenue base is dominated by property and local option sales tax revenues at 44% and 19%, respectively, of fiscal 2016 general fund revenues. During the recession, total revenues declined in just one year, by less than 1%, due to sales tax performance (including the impact of policy actions). Revenues have since recovered.

The city's general fund revenue growth has trended in line with U.S. GDP growth, increasing at a 10-year CAGR of 3.3% through fiscal 2015. Revenue growth captures just one reassessment of taxable property. Nash and Edgecombe counties revalue every eight years with the next revalue scheduled for fiscal year 2018. Given economic growth prospects, Fitch expects growth to be in line with inflation going forward.

The city 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 $0.605. The city does plan to increase the tax rate during fiscal 2018 to fund debt service related to the current issuance, but will retain ample independent legal revenue-raising flexibility.

Expenditure Framework

Fitch expects the natural pace of spending growth to remain generally in line with revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs allow the city solid leeway to adjust spending.

The city's largest spending area is public safety, which makes up about 47% of general fund spending, followed by public works and culture and recreation. Aside from regularly scheduled capital purchases the city is not experiencing any expenditure pressures.

The city'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. The city makes annual contributions for capital projects which in fiscal 2016 totaled approximately $2.5 million or a notable 4% of general fund spending, adding additional budgetary flexibility.

Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions totaled a moderate 14% of governmental spending in fiscal 2016. Following this issuance debt service costs will nearly double but remain in the moderate range as a percentage of spending. Carrying costs includes contribution to the state's Local Governmental Employees' Retirement System (LGERS) as well as contributions to several supplemental plans. After fully funding the OPEB annual required contribution (ARC) in fiscal 2012, the city has scaled back funding. During fiscal 2016, the city funded about 75% of the OPEB ARC. The city plans to continue to fund OPEB on a pay-go basis.

Long-Term Liability Burden

Overall debt and unfunded pension liabilities are low at approximately 5% of the city's personal income after this sale, which will more than double the city's direct debt to $56 million. About 60% of the city's total liabilities will be in the form of direct debt, and another third of the metric reflects the overlapping debt of Nash and Edgecombe counties. The city has affordable additional borrowing plans, and outstanding debt is amortized at a pace of over 60% in 10 years. The city's 5-year general fund capital improvement plan of $41 million is $16.6 million debt-funded. Additional debt plans are not expected to materially impact the city's debt profile.

City employees participate in LGERS, which is administrated by the state. The system is funded at 93% based on a Fitch-adjusted 7% return assumption. The city also participates in the Law Enforcement Officers' Special Separation Allowance plan. The city has only been funding the plan on a pay-go basis. The unfunded liability for both plans is minimal at less than 1% of personal income. The city's unfunded OPEB liability of $36.6 million is also modest, accounting for about 2% of personal income.

Operating Performance

Given the city's superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the city to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the city's 10% policy. The unrestricted general fund balance of $15.5 million in fiscal 2016 was a high 26% of spending. The city'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 $21.5 million or 35%.

The city proved its financial resilience and strong budget management through the most recent recession by holding vacancies, postponing capital spending, and implementing a moderate fee increase for solid waste and recreation. Fitch expects the city to make similar operational changes as needed during a future economic downturn.

The fiscal 2017 general fund budget of $61 million is 1.6% over 2016. The budget keeps the tax rate unchanged and appropriates $1.57 million of fund balance, which is a similar appropriation to prior years and includes $2.8 million for pay-go capital spending.

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
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com