NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following city of Durham, North Carolina (the city) bonds:
--Issuer Default Rating (IDR) at 'AAA';
--Approximately $197 million of outstanding GO bonds at 'AAA';
--$35.8 million of outstanding limited obligation bonds (LOBs), series 2010 A&B at 'AA+';
--$27 million of outstanding LOBs, series 2013 A&B at 'AA+'.
The GO bonds are payable from a pledge of the faith and credit and taxing power of the city subject to the statutory state tax rate limit of $1.50 per $100 of assessed value (AV) .
The LOBs are payable from annual payments made by the city subject to annual appropriation and a deed of trust on certain essential government properties.
KEY RATING DRIVERS
The 'AAA' IDR is supported by a strong economic base and solid control over revenues and spending, which leave the city well positioned to address economic downturns. The city's long-term liability burden is low, reflecting healthy funding of retiree benefit liabilities and conservative debt management.
Economic Resource Base
The city's stable and diverse economy is anchored by higher education and healthcare. It is home to Duke University and Medical Center and International Business Machines' (IDR of 'A+', Stable Outlook) supply chain management division which provide over 42,000 jobs collectively. The economy's success is also related to nearby Research Triangle Park (RTP), a prominent research and development center, which has helped draw biotechnology and high-tech firms into the city. Wealth indicators are average, unemployment is below average, and the labor pool is highly educated.
Revenue Framework: 'aaa' factor assessment
Prospects for the natural pace of revenue growth are strong based on historical performance, increasing AV and the expanding regional sales tax base. The city's revenue base is divided between property and sales taxes. Current property tax rates are low, providing significant revenue raising ability.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected to be generally in line with or marginally above revenue growth. The city's moderate carrying cost burden and strong control over labor spending provide the city with solid spending flexibility.
Long-Term Liability Burden: 'aaa' factor assessment
The city's long-term liability burden is low, due to the fully funded pension system and manageable debt levels. Fitch expects long-term liabilities to remain a low burden on taxpayer resources, given rapid debt amortization and conservative debt management throughout the region.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to maintain its historically high level of financial flexibility throughout the economic cycle, given solid revenue and expenditure flexibility and strong revenue and economic growth prospects. The city's financial cushion remained ample through the last recession and has been bolstered by strong operations in years of recovery.
Structural Balance, Stable Liabilities: The rating is sensitive to the city's ability to maintain structural balance and a low long-term liability burden.
The city is located in central North Carolina and serves as an economic hub for the region due to its longstanding education, healthcare, and related industries. The city has a 2015 Census population of 257,636, representing an increase of approximately 11% since 2010.
General fund revenues are dominated by property and sales taxes, constituting 51% and 28% of total revenues, respectively. Revenues have exhibited strong growth over the last decade with minimal recessionary declines followed by strong growth. The fundamental economic drivers of revenue performance augur continued strong performance in future years. If pressured the city retains a high degree of revenue flexibility to weather any possible declines.
General fund revenue growth has outpaced both national CPI and GDP due to strong property and sales tax growth. The city's last revaluation (conducted every eight years) was in 2008, and the revaluation effective fiscal 2017 represents growth in excess of new construction, suggesting strong AV performance throughout the recession and subsequent recovery. Continued economic expansion and the city's role as a regional economic center support expectations of continued strong revenue performance.
The city maintains ample revenue raising capacity under the statutory cap of $1.50 per $100 of AV given the fiscal 2016 tax rate of $.5912. This high degree of flexibility provides extremely strong capacity to offset possible financial pressures in future years.
General fund expenditures are mainly driven by public safety spending, which represented approximately half of fiscal 2015 spending. The natural pace of spending growth is expected to remain manageable, in line with revenues. The city retains solid spending flexibility, given strong management control over personnel spending and a moderate carrying cost burden.
Fitch expects the pace of spending, over time, to be in line with or marginally above revenue growth trends, given rising population and increased demand for services. Solid revenue performance through the recession allowed the city to maintain services without material spending cuts, and spending growth in recovery years has remained manageable.
The city retains a solid level of expenditure flexibility, as carrying costs, which comprise total debt service, actuarially determined pension payments, and other-post employment benefit (OPEB) actual contributions were a moderate 17.6% of fiscal 2015 general fund spending. Additionally, the city has considerable control over personnel spending due to the absence of collective bargaining, providing additional flexibility.
Long-Term Liability Burden
Fitch expects the city's long-term liability burden, with unfunded pension and overlapping debt currently at 6.2% of personal income, to remain low. The liability burden is almost entirely derived from debt, and the city's share of total debt amortizes rapidly, with 68% of principal retired in 10 years. The district plans to issue approximately $130 million in new debt for capital projects by 2020, which is not expected to materially increase the city's liability burden, given strong amortization trends.
Pension and OPEB continue to be well managed. The city is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS). The city's fiduciary net position of the system's total pension liability is fully funded, adjusted for a 7% investment return assumption. The city also participates in the Law Enforcement Officers' Special Separation Allowance plan. The funded ratio is just 5.4%, but the unfunded liability is minimal at less than 1% of personal income. The city funds OPEB on a pay-go basis, and the fiscal 2015 unfunded liability for the plan was a low 1.2% of personal income.
In a moderate economic decline scenario Fitch believes the city would maintain an operating reserve cushion well above the level needed to maintain high levels of financial flexibility throughout the economic cycle, given the city's superior revenue and spending control and minimal revenue volatility. The city demonstrated its financial stability by maintaining balanced operations through the last recession, with transfers to other funds driving only modest deficits.
Budget management in years of recovery has been similarly strong, with the city increasing available fund balance to an ample $69.4 million in fiscal 2015, equaling a robust 40.8% of spending. Fiscal 2016 unaudited results are breakeven, and the fiscal 2017 budget projects a manageable appropriation of $7 million, preserving the city's financial cushion at ample levels.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form