Fitch Rates Carteret County, NC's GO Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following Carteret County, North Carolina (the county) general obligation (GO) bonds:

--$4.6 million GO school bonds series 2015.

The bonds are expected to sell Oct. 13 via competition. Bond proceeds will be used to fund school capital maintenance and construction costs.

In addition, Fitch has affirmed the following ratings:

--$34.6 million GO bonds at 'AA+';

--$3.1 million limited obligation bonds (LOBs) series 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GOs are payable by the county's pledge of its full faith, credit, and taxing power.

The LOBS are payable from installment payments equal to debt service on the LOBs made by the county, subject to annual appropriation, to the County of Carteret Public Facilities Financing Corporation. Two school sites are mortgaged property used as lien collateral.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: Prudent financial management and healthy reserve levels serve to mitigate the risks associated with an economy concentrated in tourism and exposed to frequent storm damage. Spending cuts to date have been moderate, and the county's millage rate is very low for the state.

ECONOMY CENTERED ON TOURISM: Economic activity is highly concentrated in tourism and related activities reflecting the presence of the popular Outer Banks communities, but also benefits from government and health care sectors. Economic indicators trend on par with those of the state and nation.

MANAGEABLE DEBT BURDEN: Overall debt levels are low. Rapid amortization of principle further helps to accommodate planned additional debt issuance. Fitch expects annual carrying costs related to debt service and retirement benefits to remain manageable.

APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and the LOBs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholder's recourse to an event of non-appropriation or default. Such risk is somewhat diminished by the incentive to appropriate arising from a deed of trust granted for the benefit of bondholders on essential public schools.

RATING SENSITIVITIES

STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the county's ample financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Carteret County, with a 2013 population of 68,434, is located along the central portion of the North Carolina coast and contains the southern parts of the Outer Banks.

TOURISM-BASED ECONOMY; SLOW TO RECOVER HOUSING MARKET

The county is a popular vacation area benefitting from its coastal location. Recent gains in the county's room occupancy and tourism development tax demonstrate solid growth in tourism. Since the fiscal 2013 year-end, occupancy tax receipts have increased at a natural growth rate of almost 10% annually (which does not including the increase of the tax rate to 6% from 5% in Jan. 2014). Taxable retail sales have also increased significantly over the same time period, at almost 7% average annually, which further highlights the areas economic recovery.

Economic indicators for the county trend on par with national averages. As of June 2015, Carteret County's unemployment rate of 5.9% is slightly favorable to the state (6.1%) and just behind the nation (5.5%). Joblessness falls considerably during the high tourist season. Wealth indicators approximate state and national averages.

Second homes account for nearly two-thirds of residential property. The tax base has been slow to recover; total assessed value (TAV) fell a notable 22% upon the reassessment effective in fiscal 2012. The most recent reassessment, which was effective in the fiscal 2016 budget, decreased TAV by an additional 5.2% resulting in a cumulative 23% decline since the 2008 assessment (there were tepid gains between reassessments). August data from Zillow Group show improved price stability, with home values up 1.9% year-over-year in the county. The revenue and financial impact of the tax base declines have been negligible to date, as discussed in more detail below.

HEALTHY FINANCIAL FLEXIBILITY

Conservative budgeting practices and prudent fiscal stewardship has resulted in structural balance and healthy reserve levels, with net operating surpluses in five of the past six fiscal years. Spending cuts to date have been moderate, and flexibility also remains to raise recurring revenues. Over the past several years the county has been able to avoid layoffs, furloughs, and reductions in capital spending by achieving savings through departmental reorganizations and the elimination of non-critical programs.

Fiscal 2014 ended with a $7.1 million addition to reserves, equal to 9.7% of spending. This increased unrestricted fund balance to $40.9 million (a robust 55.6% of spending) when including the state-required reserve for receivables, which Fitch views as more conservative than the treatment of receivables in other states. Liquidity metrics are also strong, with fiscal 2014 cash and investments covering liabilities 16.2x. Unaudited fiscal 2015 results are positive. The county reports increasing reserves by about $1.5 million. Available reserves are projected to remain a very healthy 52% of spending.

The fiscal 2016 approved budget appropriates $3.7 million of general fund reserves. The county decided against increasing the millage rate to a revenue neutral level due to the reassessment; the tax rate is unchanged at 30 cents per $100 of AV. The county's competitive property tax rate is one of the lowest in the state and well within the 1.5 mill cap. The county did increase its tax rate by 30% in fiscal 2012 to offset the impact of the 2012 reassessment.

LOW DEBT & CARRYING COST BURDEN

Overall county debt levels are very low on both a per capita basis ($938) and as a percentage of market value (0.4% of MV). The county is considering future debt issuance of $30 million within the next two years for a new human services building and a new administration facility. Rapid amortization of outstanding principle (90% within 10 years) helps support the affordability of future debt issuance, most of which the county outlines in their $26.3 million capital improvement plan (CIP) for fiscal years 2015 - 2019.

All full-time employees participate in a state-sponsored Local Governmental Employees' Retirement pension plan. The county fully funded its $1 million share of the fiscal 2014 ARC, representing a modest 1.3% of spending. The state plan is well-funded at around 97.1% when adjusted for Fitch's 7% annual rate of return. Other post-employment benefits (OPEB) are funded on a pay-as-you-go basis. As of December 2013, the unfunded actuarial accrued liability for OPEB totaled $6.1 million or a very low 0.04% of MV.

Annual carrying costs related to debt service and retirement benefits represent an affordable 12% of governmental spending. Debt service represents the majority of these expenditures, totaling $8.8 million or a moderate 10.4% of spending.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991462

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Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com