Fitch Rates Dare County, NC's LOBs 'AA-'; Outlook Stable
--\\$11.8 million LOBs, series 2016A.
Bonds proceeds will be used to refund the series 2007 LOBs for debt service savings and for the construction of certain county facilities. The bonds are scheduled on sale on or about June 1 via negotiation.
In addition, Fitch has affirmed the county's Issuer Default Rating (IDR) of 'AA' and the following ratings:
--\\$110,000 outstanding general obligation (GO) bonds at 'AA';
--\\$109.4 million outstanding LOBs at 'AA-'.
The Rating Outlook is Stable.
The LOBs and COPs are payable from funds subject to appropriation by the county board of commissioners, and secured by respective deeds of trust granting liens on certain project sites and improvements. If a default occurs the trustee can direct the foreclosure on the mortgaged property and apply the proceeds to the payment of amounts due to bondholders.
KEY RATING DRIVERS
The county's historically strong operating performance and conservative debt management offset credit risk related to the county's remote location and concentration in the tourism sector, supporting the 'AA' overall rating.
Economic Resource Base
Dare County is located along the northeastern North Carolina coast and contains most of the popular barrier island known as the Outer Banks. As a result of the economic concentration in tourism, the county's housing stock is constituted largely of second homes. The 2015 year-round population was 35,663, and management estimates the summer population at over 300,000.
Revenue Framework: 'aa' factor assessment
The county has strong revenue flexibility given the current property tax rate is less than one-third the statutory cap. The natural pace of revenue growth has been slow, as historical revenue growth has been fueled by tax rate increases to address considerable recessionary assessed value (AV) declines.
Expenditure Framework: 'aa' factor assessment
The county has solid flexibility in adjusting labor spending given the absence of collective bargaining and overall flexibility in the level of service provision, which remained stable throughout the recession. Additional flexibility comes from low carrying costs despite rapid debt amortization .
Long-Term Liability Burden: 'aaa' factor assessment
The County's overall debt and pension liability is low as a percentage of personal income. The county uses conservative debt management practices.
Operating Performance: 'aaa' factor assessment
The County has demonstrated sound financial resilience. During and after the recession reserves remained ample. Given the county's revenue and expenditure flexibility and strong reserves, the county is poised to perform well in an economic downturn.
High Economic Concentration: The rating is sensitive to fundamental changes in tourism activity and the market for vacation homes, which drive the county economy. A non-cyclical decline in activity could have significant negative impacts on county finances and lead to downward rating action.
The county's economy is largely tourism dependent, with a large share of vacation homes and hotels. The economy fared well during the recession, as evidenced by only two years of moderate declines in occupancy and local sales tax collections and subsequent consistent annual growth. That said, AV declines were pronounced at 28% in the most recent (2014) eight year revaluation, and modest tax base growth resumed in fiscal 2015.
The county's revenue structure is dominated by property and sales and occupancy taxes, with property taxes constituting approximately 58% and sales and occupancy taxes totaling 16% of fiscal 2015 general fund revenues. Revenue performance has been driven by the county's use of its ample property tax rate flexibility to offset recessionary AV declines. The long revaluation cycle leads to delayed recognition of the impact on property tax revenues of changes in property values and AV .Fitch expects natural revenue growth absent management action to continue to be somewhat slower than U.S. GDP going forward. Resilient sales and occupancy tax growth following the recession partially offsets weak AV performance.
The county maintains considerable capacity under the statutory cap of \\$1.50 per \\$100 of assessed value. The current rate of \\$.4300 is the sixth lowest county tax rate in the state.
The county maintains healthy expenditure flexibility with affordable fixed carrying costs, and flexible labor spending. The county's responsibility for public education spending and maintaining services considered central to the tourism economy place practical limits to legal spending flexibility.
Spending growth has generally been held in line with revenues, achieved largely through re-organizations and attrition. The overall stability of key expenditures indicates that spending growth is unlikely to outpace available resources.
Carrying costs associated with debt service, actuarially determined pension payments, and OPEB actual contributions total 18.3% of fiscal 2015 governmental spending. High debt servicing costs are due largely to a very rapid amortization rate of 93%. Labor costs are fairly flexible, as management has solid legal ability to adjust workforce spending, though the county's obligation to partially fund public education services and maintain certain services limits overall spending flexibility.
Long-Term Liability Burden
Long-term liabilities are low relative to the county's economic resource base at 8% of personal income. Given the county's rapid amortization rate of 93% in 10 years, modest planned additional debt, and lack of unfunded pension liability, the burden is likely to decline.
County employees participate in the Local Government Employees Retirement System (LGERS) administrated by the state. The county's portion of LGERS is funded at 100% based on a Fitch adjusted 7% return assumption. The county also manages the Law Enforcement Officers' Special Separation Allowance plan. The county has only been funding the plan on a pay-go basis. The funded ratio is just 6%, but the unfunded liability equals a minimal \\$1.6 million or less than 1% of personal income. The county funds OPEB on a pay-go basis, and the unfunded liability is 5.2% of personal income.
The county's strong operating performance is aided by considerable revenue and expenditure flexibility and a history of prudent financial management, as reflected in sound revenue and expenditure management through times of economic downturn. These sources of flexibility help to offset Fitch's credit concerns related to the tourism-centered economy and remote location. The county proved its financial resilience and strong budget management through the most recent recession by utilizing tax rate flexibility, expenditure adjustments, and departmental reorganizations, among other measures.
The county has maintained its commitment to preserving strong reserve levels. Net operating surpluses (after transfers) increased the general fund balance in fiscals 2014 and 2015, further bolstering available reserves to a very high 30% of fiscal 2015 general fund spending, which is well above the level Fitch believes provides a satisfactory reserve safety margin for a 'aaa' assessment of financial resilience.