NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Kershaw Public Facilities Corporation, South Carolina (the corporation) bonds:
--$17 million installment purchase revenue bonds (2015 county infrastructure projects) series 2015A and series 2015B.
The bonds are scheduled for a negotiated sale on December 2. Proceeds will be used to fund the costs of acquiring and constructing certain economic development infrastructure.
In addition, Fitch has assigned an Issuer Default Rating (IDR) of 'AA+' to Kershaw County.
The Rating Outlook is Stable.
On Sept. 10, 2015, Fitch published an exposure draft of revised state and local government tax-supported criteria. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Pursuant to Fitch policy, new rating assignments during a criteria exposure draft period, and while the prior criteria is still outstanding, must be analyzed under both criteria approaches. If there is a difference in the rating under the two criteria then the proposed criteria is used because it more accurately reflects Fitch's current view. In this case, the assigned ratings are based on the exposure draft criteria, as the ratings under the current criteria would be lower. The difference reflects the more focused consideration of the economy in conjunction with the more explicit recognition of the strong operating environment for U.S. governments in the exposure draft criteria. In addition, under the exposure draft approach, with some exceptions, appropriation-backed bonds will generally be rated one notch below the obligor's unlimited tax general obligation (ULTGO) rating, reflecting the slightly higher degree of optionality associated with lease/appropriation payments compared to ULTGO bond payments. None of the exceptions apply in this case.
The bonds are payable from semi-annual installment payments to be made by Kershaw County (the county) directly to the trustee according to the installment purchase agreement. The installment payments are subject to appropriation by the county council. No debt service reserve fund is provided for this transaction.
KEY RATING DRIVERS
DIVERSE ECONOMY: The county's economic base includes the county's position as a bedroom community to Columbia and a sizable and relatively diverse manufacturing sector. Employment has been volatile in the past but has grown consistently since 2010.
SOLID REVENUE FRAMEWORK ('aa' key rating factor assessment): Revenues display solid growth prospects due to ongoing capital investments within the county. While state law limits property tax rate increases (about 40% of revenues) to CPI changes and population growth, the county can bank unused millage increases for up to three years providing them with a potential additional revenue generator if ever required.
EXCEPTIONAL EXPENDITURE FLEXIBILITY ('aaa' key rating factor assessment): South Carolina is a right to work state which affords the county ample ability to control spending. Modest carrying costs enhance the county's capacity to absorb expected growth in pension costs of the state's weakly funded retirement systems
MODERATE LONG-TERM LIABILITY BURDEN ('aa' key rating factor assessment): The county's combined debt and unfunded pension liability burden is moderate. Additional debt plans are affordable and should not significantly impact ratios given average amortization of outstanding debt.
EXCEPTIONALLY STRONG RESERVES ('aaa' key rating factor assessment): Exceptionally high reserves provide a stout cushion through a normal downturn without the need for revenue enhancements. Liquidity has expanded sharply, especially over the past few years and unrestricted cash and investments cover about a full year of general fund operations.
APPROPRIATION REQUIREMENT: The one-notch difference between the implied GO rating and the rating on the installment purchase bonds reflects the appropriation risk which is part of the bond structure.
MAINTENANCE OF RESERVES: The rating is sensitive to the maintenance of solid reserves. A decline in reserves to a level inconsistent with the rating could lead to downward pressure on the rating.
Kershaw County encompasses 726 miles and is located in the midlands region of South Carolina, about 35 miles north of state capital Columbia. Interstate 20 runs through the county facilitating access to I-95 at Florence and I-77 and I-26 at Columbia. The county's population of 63,161 has experienced slow growth since 2010, increasing at an average annual rate of 0.6%.
The county's economy is driven by a combination of employment opportunities in nearby Columbia and surrounding areas and a sizable manufacturing base. County officials estimate that approximately 70% of residents commute outside the county for work with many likely to work in Columbia. A relatively large number of international firms have located their facilities within the county. Top manufacturers include INVISTA, a producer of polymers and fibers, Hengst, which makes air filters and Suominen Nonwovens, a manufacturer of non-woven textiles. As of 2014, federal Bureau of Labor Statistics figures indicate that the manufacturing sector accounts for over 20% of county jobs and 30% of wages, compared with the national average of 10 - 11% of employment and 13% of total wages. Recently announced expansions by Hengst and Swominen totaling $127.5 million suggest continued growth within this sector.
ONGOING RECOVERY OF JOBS
The county was hit hard by the recession as its employment base dropped by 11% compared with 4.3% for the state. The unemployment rate briefly topped 12%. Since 2010, however, jobs have steadily grown. August 2015 employment was up 2.7% over the prior year, dropping the unemployment rate down to 6.3%, about even with the state average but above the national rate. Wealth indices are on par with those of the state but significantly below the national benchmarks.
Housing values within the county did not suffer a precipitous decline during the recession as seen in other parts of the nation. However, the housing market has fluctuated extensively since 2008, although in a generally upward trajectory according to the Zillow Group. As of September 2015, values had gained 2.6% year over year with Zillow predicting 3.6% growth over the coming year. Taxable values, including fees in lieu of taxes, exhibited more stability experiencing only one year of relatively modest decline over the past 10 years. Fiscal 2015 valuations gained 2% over the prior year, due in part to a 12.3% growth in vehicle assessments.
STELLAR FINANCIAL POSITION
Finances are exceptionally well-maintained characterized by abundant reserves and liquidity and generally positive operating results. Fiscal 2015 general fund balance of $13 million equates to a sizable 60% of spending. During the recession, unrestricted reserves were maintained at or above 25% of spending. Liquidity is also ample with fiscal 2015 unrestricted cash and investment sufficient to cover a full year of operations.
The fiscal 2015 net operating surplus of $1.8 million (8.4% of spending) represents the third consecutive year of surplus operations. Budgets are conservatively drawn. A large portion of the county's regular capital needs are funded through short term leases.
General fund revenues constitute a diverse set of revenue streams. Property taxes are the largest source of revenues, composing 37.5% of general fund revenues in fiscal 2015, followed by licenses and permits and intergovernmental revenues at 15.6% and 11.9%, respectively. A voter-approved local option sales tax is levied with proceeds used to reduce property taxes. State statute limits the growth in property tax rates each year to the change in the consumer price index and population growth. Unused millage capacity in any one year can be banked for future use for up to three years, providing the potential for additional revenue generation.
General government, which includes court activities such as family and probate court, constitutes the highest spending item representing 40% of expenditures with public safety second at 30%. Since fiscal 2011, general fund operating expenditures have only increased at an average annual rate of 1.6%.
Management does not yet have a formal fund balance target, but anticipates adopting one next year with a target range of three to six months of reserves.
The fiscal 2016 budget is balanced and incorporates an 8.7% increase in property taxes due to a rise in tax rates combined with assessed value growth. Expenditure growth is due in part to a 2% across the board wage hike.
County debt levels are moderate at 3.8% debt to full value and $2,381 debt per capita. Most of the debt load consists of overlapping debt of the county school district. Amortization, including the current offering, is average with 53% of principal amortized within the next ten years. The county does not have a five year capital improvement plan although no large projects are currently planned. Management expects to issue roughly $5 to $8 million of bonds in 2018 to fund various capital needs.
STATE PENSION PLANS WEAKLY FUNDED
The county participates in two state-run multiple employer pension plans; South Carolina Retirement System (SCRS) and the South Carolina Police Officers' Retirement System (SCPORS). Funding for both plans is weak at 62.5% for SCRS and 69.2% for SCPORS or 59.3% and 65.6%, respectively assuming a 7% investment rate of return. Pension costs place a light burden on resources, accounting for only 4% of governmental spending.
County retirees participate in a county-sponsored medical insurance subsidy plan. Funding for this other post-employment benefit (OPEB) plan is on a pay-go basis. As of July 1, 2015, the unfunded actuarial accrued liability totaled $5.4 million or a modest 0.1% of market value.
Total carrying costs of debt service, actuarially calculated pension contributions and OPEB payments constitute a modest 12% of fiscal 2015 general government spending enabling the county to absorb anticipated future increases in state pension requirements without pressuring financial operations. The county consistently funds the annually required contribution (ARC).
INSTALLMENT PAYMENTS EXPECTED TO BE MADE FROM GO BOND PROCEEDS
The installment purchase agreement (IPA) for the series 2015 bonds is supplemental to an installment purchase agreement for a 2014 privately placed bond. The agreement requires the county to make semi-annual base payments over the 30 year life of the bonds, subject to annual appropriation by the county council. The base payments are sized to cover debt service on each bond payment date.
The pledged assets consist of projects financed by the 2014 bonds including the county's detention center and an expansion to the local technical college. The projects to be financed by the series 2015 IPA are not part of the trust estate. In the event of non-appropriation, the county could be subject to loss of use of a share of the pledged assets for the term of the base lease.
Management plans on issuing short term general obligation bonds to fund base payments, allowing the county to levy a debt service millage rather than utilize general operating monies. However, installment payments can be made from all legally available revenues, which Fitch considers manageable as maximum pro forma installment payments in fiscal 2019 would represent about 11% of fiscal 2015 general fund 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.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form