Fitch Rates Charlotte, NC's Transit COPs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following certificates of participation (COPs) to be issued by the city of Charlotte, North Carolina (the city):

--$50,975,000 refunding COPs (transit projects/phase II), series 2015B.

The COPs will be sold via negotiation on or about June 3. Proceeds will refund the outstanding series 2005E COPs for debt service savings, estimated on a net present value basis at $8.2 million or 13.8% of refunded bonds.

Fitch also affirms the 'AA+' rating on $268 million of outstanding COPs (transit projects) series 2005E (pre-refunding), refunding series 2008A, series 2013B, and refunding series 2013C.

The Rating Outlook is Stable.

SECURITY

The COPs are payable from installment payments made by the city from any legally available resource but subject to appropriation on an annual basis. The city's obligation to make installment payments is secured by a deed of trust granting a lien on certain transit assets to certificate owners.

KEY RATING DRIVERS

COP RATINGS LINKED TO GO: The rating on the city's outstanding transit COPs is based on the city's overall credit quality and GO rating ('AAA' with a Stable Outlook). The COPs rating is one notch below the GO rating, reflecting the COPs weaker security provisions, most notably risk to annual appropriation of installment payments. A one notch distinction from the GO is warranted when bondholders have a security interest in an asset(s) essential to the city's core purpose, creating a stronger incentive to appropriate on an annual basis.

STRONG FINANCIAL POSITION: The city's GO rating reflects its long history of favorable financial operations and maintenance of high reserves that provide a cushion against unforeseen budgetary challenges or emergencies. The city's diverse revenue base is led by property taxes, and tax rates are regionally competitive and well within the statutory cap providing it with significant revenue raising capacity.

REGIONAL ECONOMIC HUB: Charlotte remains a major transportation, banking, and commercial center for the southeast and is among the fastest growing cities in the U.S. Resident income metrics are sound.

MODERATELY HIGH DEBT: Key debt metrics are moderately high. This risk is tempered by the city's manageable future issuance plans and significant debt service fund balances.

RETIREMENT LIABILITIES MANAGEABLE: The bulk of the city's employees participate in the North Carolina Local Government Employees' Retirement System (LGERS), which Fitch views as among the strongest multi-employer state pension plans. City administered pension and retiree health programs do not pressure its budget or create a significant liability relative to its financial and economic resource base.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health which tempers exposure to a moderately high debt position. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.

CREDIT PROFILE

REGIONAL ECONOMIC CENTER WITH STRONG GROWTH PROSPECTS

Fitch expects Charlotte's position as a regional center for trade, transportation, health care, and financial services will contribute to a general trend of economic growth and stability over time. Total employment in Charlotte has increased at a compound annual growth rate (CAGR) of 2.2% from 2005-2014 compared to 0.6% for North Carolina and 0.4% for the nation. IHS, Inc. forecasts job growth at 2.9% CAGR through 2016 ranking Charlotte among the fastest growing large metro areas in the country. City unemployment is low equal to 4.4% as of December 2014. The city and its economy attract a well-educated workforce; almost 40% of the adult-age population holds a bachelor's degree or higher (140% of the U.S. norm). Recent expansion within technology, pharmaceutical, and energy sectors has the potential to boost already above-average income indices. Per capita money income and median household income are equal to 125% and 113% of the North Carolina average, respectively.

STRONG FUND BALANCE POSITION

The city's financial position remains strong despite a $9 million (1.6% of spending) use of general fund balance in fiscal 2014 largely driven by the carry forward of prior year encumbrances. The resulting $103.8 million unrestricted general fund balance at year end was equivalent to 17.9% of spending. The city has a sound unrestricted fund balance policy equal to two months or 16% of spending. Available resources, adjusted by Fitch to include $65.5 million of fund balance conservatively restricted pursuant to state law, are estimated at a high 29.1% of spending.

General fund balance sheet resources are very liquid with cash and investments (C&I) totaling $152.1 million at the close of fiscal 2014 , which is equivalent to nearly 3.5 months of general fund operating expenses or 4.6x total liabilities. Total governmental fund C&I totaled $676.7 million. There were no fund deficits identified in any of the city's non-major governmental funds or enterprise funds. The city's airport and water and sewer enterprise funds exhibit good credit quality with revenue bonds rated 'A+' and 'AAA' by Fitch, respectively.

FINANCIAL OPERATIONS EXPECTED TO REMAIN STABLE

The city retains broad authority to control revenues and expenses. Fitch believes this favorable rating factor positions the city to maintain a relatively stable financial position over time and adequately respond to several recent revenue challenges. A $9 million shortfall in property tax revenues for the fiscal year ending this June 30 and $10.8 million for fiscal 2016 has materialized from an ongoing Mecklenburg County revaluation that lowered the city's tax base by $2 billion. The city estimates the loss of property tax revenue this year will be offset by very strong sales tax growth. Sales tax revenues were expected to increase 10% on the year, budgeted at $80.3 million or 14% of general fund revenue in fiscal 2015, but year-to-date collections are up 21% due to the improving economic recovery and decline in gas prices. As a result, the city believes its year-end general fund results will track closely to the adopted budget, which had appropriated a modest $1 million of existing reserves. The city manager's recommended fiscal 2016 budget is structurally balanced. The budget proposal addressed a near $22 million preliminary budget gap that developed following the loss of property tax revenue following the revaluation and the state legislature's repeal of the business privilege license tax with a combination of expenditure and revenue actions.

City employees are not represented by collective bargaining or subject to contractual agreements; as such the city has flexibility to actively manage its personnel costs. The recommended fiscal 2016 budget eliminates 100 full-time positions at the same time avoiding layoffs. Ample capacity to increase property tax revenues exists, if necessary. Property taxes are the largest general fund revenue source budgeted at close to $325 million or 56% of total revenue this year. The recommended fiscal 2016 budget proposes a modest increase in the city's current tax rate of $0.4687 per $100 of assessed value (AV) to $0.4863. The city's tax rate is well within the $1.50 statutory cap and competitive with the tax rate of its in-state peers.

DEBT METRICS MODERATELY HIGH BUT NOT A RATING CONCERN

Overall debt ratios are estimated by Fitch at 3.8% of market value or a moderately high $4,316 per capita. Debt metrics would be higher if not for the city's notable contributions to pay-as-you-go capital. The current year pay-go budget totals $55.2 million largely funded from $15.5 million in sales tax dedicated for transit improvements, $12.2 million from motor vehicle licenses, and $10.7 million from property taxes. Additional borrowing outlined in the capital investment plan for 2015-2019 is not expected to have a material adverse impact on the city's debt ratios given the healthy pace of outstanding debt amortization and expectations for continued population and tax base growth. The city retains high balances in its debt service fund with $264.6 million in fiscal 2014, approximating two times the city's annual governmental funds debt service requirement.

RETIREE BENEFITS NOT A RATING PRESSURE

The city administers a single employer defined benefit pension plan for firefighters and participates in the North Carolina Local Government Employees' Retirement System (LGERS) for all other employees. Although the funded level of LGERS has declined it remains nearly fully funded at a reported 94.2% as of Dec. 31, 2013. The city's firefighter plan is also solidly funded at 78% (based on a Fitch-adjusted 7% investment rate of return) and the unfunded actuarial accrued liability (UAAL) is the equivalent of only 0.1% of the city's market value.

A defined benefit plan for sworn law enforcement officers is also administered by the city, the benefit provisions of which are established by the North Carolina General Assembly. The city funds this plan, which has a limited number of beneficiaries (207 in fiscal 2014) on a pay-go basis. The city paid $4 million toward this plan in fiscal 2014 (or 63% of the $6.3 million actuarial required contribution). Eligible retirees also receive health coverage through a city administered plan; benefits provisions and contribution amounts are established by the city council. The city has made significant annual contributions to a trust fund to pre-fund its future retiree health coverage liability; the trust reported an actuarial value of assets of $44.1 million at the end of fiscal 2014 (resulting in an 18% funded ratio). Costs for debt, pension, and retiree health are manageable at 19% of fiscal 2014 governmental fund spending.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985064

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com