Fitch Rates Monmouth County Improvement Authority's Revs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following revenue bonds to be issued by Monmouth County Improvement Authority, New Jersey:

--$41,480,000 governmental pooled loan refunding revenue bonds, series 2016B.

The bonds will be sold via negotiation on or about Sept. 13th. Proceeds will refund outstanding obligations of the authority for debt service savings.

Fitch has also affirmed the following ratings at 'AAA':

--Monmouth County Long-Term Issuer Default Rating (IDR);

--$391 million of outstanding authority revenue bonds;

--$418 million of outstanding general obligation (GO) bonds of Monmouth County.

SECURITY

The revenue bonds are payable by loan repayments made by various municipal borrowers and are additionally backed by the full, unconditional and irrevocable guarantee of Monmouth County and its unlimited ad valorem taxing power pursuant to various guaranty resolutions entered into by the county and the authority.

KEY RATING DRIVERS

The 'AAA' rating on the authority revenue bonds is based on the county guaranty agreement. Monmouth County's 'AAA' GO rating and IDR reflect its stable fiscal track record and combination of high reserves and budget flexibility that result in an exceptionally strong capacity to manage through economic downturns. The county's proximity to New York City creates a strong economic core but one that has not supported strong revenue growth given its near built-out status. Long-term liabilities related to debt and pensions are expected to remain low.

Economic Resource Base

Fitch expects the Monmouth County economy will remain stable over time given the benefits inherent in its proximity to New York City and desirable location along the northern Atlantic shore of New Jersey. The county has an affluent and highly educated population of almost 630,000. Opportunities exist for new investment and job growth on the site of the former Fort Monmouth Army base, but tax base development may be a key issue going forward given the somewhat mature nature of the county and limitations on developable land. Exposure to seasonal leisure activity is a moderate risk.

Revenue Framework: 'aa' factor assessment

Given its development status and history of slow growth, Fitch would expect revenues to generally trend in line with inflation over time. Fitch views the county's revenue raising flexibility within the framework of various state tax cap laws as high relative to potential revenue losses in a moderate economic downturn.

Expenditure Framework: 'aa' factor assessment

Fitch would expect spending levels to remain aligned with revenue despite some existing pressures from rising healthcare contributions. The county is believed to have some capacity to make expenditure reductions outside of public safety and other mandatory services, if needed, despite notable reductions in headcount since the recession. Fixed carrying costs for long-term liabilities claim a moderate proportion of governmental spending and reflect a very rapid amortization of county direct debt.

Long-Term Liability Burden: 'aaa' factor assessment

Fitch expects the county's long-term liability burden to remain low but at the upper range of the 'aaa' assessment based on the rapid amortization of outstanding debt and future capital needs and issuance plans.

Operating Performance: 'aaa' factor assessment

Conservative budgeting and financial management have allowed for relatively stable financial results over an extended period. Fitch expects the county to maintain a level of financial reserves and budget flexibility that more than adequately addresses risks commensurate with a moderate economic downturn.

RATING SENSITIVITIES

Management Practices: Fitch expects the ratings to remain stable in the absence of a shift in management practices and/or policy and resultant weakening of the county's long-term operating profile.

Increase in Liability Burden: An increase in the county's long-term liability burden due to additional debt issuances beyond current expectation or changes in the county's proportional share of the net pension liability (NPL) of the state pension plans it participates in could pressure the rating.

CREDIT PROFILE

Monmouth County is located about 50 miles outside of New York City and includes the incorporated cities of Asbury Park, Long Branch, and Red Bank. The county has an estimated 2015 population of 628,715 which is down slightly from the 2010 Census figure. Residents exhibit high educational attainment and per capita personal income equal to 123% and 155% of the N.J. and U.S. standard, respectively. Access to broader employment opportunities in northern New Jersey and New York City compliment the county's large tourism/seasonal home draw and health care presence. Unemployment within the county tends to register below state and national levels.

Revenue Framework

The county's current fund (or general fund) budget is approximately 70% funded from local property taxes. Revenue raising flexibility is limited by state-imposed tax caps (see 'Legal Ability to Raise Revenues' for detail). County taxes are collected by the municipalities within the county and paid to the county treasurer on a quarterly basis. The county receives its share of the taxes collected from the first taxes collected by each municipality assuring 100% collection. The bulk of other revenues are derived from a combination of fees, permits, and grants, among other miscellaneous sources. Under state law no miscellaneous revenues from any source shall be included in the budget in an amount in excess of the amount actually realized during the next preceding fiscal year which Fitch considers a conservative approach.

Current fund revenues are expected to generally track the level of inflation over time, largely due to the nature of restrictions on property tax growth imposed by state law and expectations for a stable to moderately expanding population and economy.

Revenue raising flexibility is high when viewed in the context of potential revenue declines in a moderate economic downturn despite the presence of statutory tax caps. New Jersey municipalities operate under two separate cap laws - the 1976 law limits increases in the tax levy by the lesser of 2.5% or the Cost-of-Living Adjustment ("COLA"); however, increases up to 3.5% in the tax levy are allowed by adoption of a resolution of the county freeholders whenever the COLA is less than 2.5%. A second test effective initially for budget year 2011 limits growth in the tax levy to 2% which is the level of growth that Fitch applies for purposes of assessing legal revenue raising capacity.

Importantly, each test includes exclusions from the caps for the value of new construction and additions to the tax base, increases in debt service, certain increased pension contributions and healthcare costs, and expenditures mandated as a result of certain emergencies. Local governments may bank that portion of the maximum tax levy that is not utilized for a period of three years which Fitch also considers in its assessment of legal revenue raising capacity - at the conclusion of its 2016 budget process the county's cap bank totaled $16.4 million (or about 4% of budgeted current fund revenue).

Expenditure Framework

Public safety functions account for 20% of the current fund budget, human service and health functions 16%, and various insurance costs 13%. The county budget funds a mix of administrative functions (public safety, public works, economic development, parks and recreation, etc.) and constitutional offices (county clerk, county prosecutor, county sheriff, and county surrogate) for which the county manager retains control over centralized functions such as hiring, wages, and purchasing regulations, for example.

The tax cap laws referenced earlier are similarly applied to increases in annual appropriations which should generally align the pace of revenue and spending growth over time.

Fixed costs associated with debt service and contributions for retiree pension and health benefits are estimated at roughly 17% of current fund spending in 2015 after deductions for state support for county college bonds. More than half of the county's carrying costs are attributable to its own direct debt and reflects an aggressive principal amortization schedule of nearly 86% repayment within 10 years. Annual debt service requirements decline by 70% or $47 million through 2026 providing potential for budgetary flexibility and/or capacity for additional debt incurrence.

Salary and wage expenses represent about 35% of the budget. County employees are represented by a total of 25 labor organizations. Contracts are settled with the bulk of the labor groups through 2017. Impasse resolution occurs through a binding arbitration process for law enforcement unions only in which the arbitrator must assess the financial impact of the award on the local governing unit and its residents, the continuity and stability of employment, and a comparison of contract terms with other employees generally. Furthermore, under existing New Jersey law there is also a 2% hard cap on arbitration awards for all public safety employees.

The county has experienced a significant reduction in personnel since the recession mostly through a combination of outsourcing and attrition that results in fewer opportunities for spending reduction than existed several years ago. That said management has identified options to make cuts in certain non-mandated and non-critical functions that Fitch estimates accounts for roughly 5% of the budget.

Long-Term Liability Burden

Fitch estimates the county's long-term liability burden at $2.6 billion or 9% of personal income and on the high end of the 'aaa' subfactor assessment. The metric includes county-guaranteed debt issued by the authority and backed by the unlimited tax GO pledge of the local unit participants; this amount represents about 15% of the metric (or 1% of personal income). The county's direct debt is equivalent to 1.6% of personal income. The five-year capital program adopted by the county in 2016 totals $395.5 million, the bulk of which is expected to be paid from debt sold in the approximate amount of roughly $60 million every 18 months. Fitch does not believe the issuance of this debt would have a material impact on the county's long-term liability burden assessment considering the rapid pace at which existing debt is repaid. Many of the projects represented in the capital improvement program have not received a funding commitment from the county. Capital needs are viewed as somewhat flexible centering on road improvement and engineering facilities.

The long-term liability burden metric also includes the county's proportionate share of the unfunded liability related to two state administered pension plans, the Public Employees' Retirement System (PERS) and the Police, Firemen's Retirement System (PFRS). The state prepares separate actuarial valuations for state and local groups for both PERS and PFRS. The county's proportionate share of the local group NPL was estimated at $643 million or 2.3% of personal income. Fitch believes this amount to be somewhat conservative as it reflects the use of a single discount blended discount rate. Under GASB 67 both PERS and PFRS currently report specific depletion dates for when assets set aside to fund benefits are expected to run out in 2033 and 2045, respectively. Plan liabilities payable after the depletion dates are discounted at a municipal bond rate index elevating the reported liabilities. The bulk of the NPL for PERS and PFRS is derived from the state group.

County Guaranty Provisions

Authority revenue bonds are issued to acquire separate series of borrower bonds that are a direct and general obligation of each of the respective municipal borrowers. The bonds are additionally secured by the full, unconditional and irrevocable guarantee of Monmouth County, backed by its unlimited ad valorem taxing power. If on the 15th day of the month preceding a month in which authority debt service is payable there are insufficient funds in the debt service fund to make such payment the authority shall notify the county and the county shall immediately take all actions necessary to cure the deficiency (which may include the adoption of an emergency appropriation). In the history of the authority debt program there has never been an occurrence of a local unit bond payment default.

Operating Performance

The county has consistently adhered to a minimum reserve policy adopted in 2006 equal to 7% of revenues. Fitch views this level of reserve safety margin as consistent with a 'aaa' operating performance assessment when considered in the context of the current fund's stable revenue history and the county's independent revenue raising authority and existing expenditure flexibility.

Current fund reserves reached $92.2 million or 17.3% of spending in 2015 compared to $66.4 million or 12.6% in the year prior after the county sold its John L. Montgomery Care Center and the Geraldine L. Thompson Care Center for a total of $32.4 million. The disposition of the care facilities also relieves a financial burden on the current fund budget, which has subsidized the care centers' cost of operations in the amount of $7.1 million in 2014, $6.9 million in 2013, and $6.9 million in 2012. Results from operations in 2015 excluding the impact of the sale of the care centers yielded a relatively modest $2.7 million net deficit.

Fitch views the county's reserve position as understated as it uses a cash/modified accrual basis of accounting in accordance with state requirements as opposed to GAAP accounting. Under the statutory accounting framework issuers are required to establish a reserve for receivables - this amount totaled $5.1 million in 2015 and no less than $2.3 million dating back to 2007. The county is also required to reserve for unexpended appropriations for an additional year - this amount totaled $15 million in 2015 and no less than $12.5 million since 2007. With the inclusion of appropriation reserves and reserves for receivables total unrestricted reserves swell to more than 21% of spending in 2015.

Given the conservative nature of certain revenue and expenditure budgeting policies established under state law most New Jersey local governments are required to appropriate existing reserves to balance the budget. The county has appropriated between $40 million and $48.5 million in current fund balance on an annual basis since 2007 during which period reserves actually increased (albeit in large part due to the sale of the care centers last year). The 2016 budget appropriates $45.8 million of fund balance up from $40 million in 2015; the increase in fund balance utilization represents tax relief and a one-time diversion from the county's plan to return the budget to a state of structural balance over the next several years.

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
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com