Fitch Affirms Charlotte, NC's GOs and IDR at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following Charlotte, North Carolina ratings:
--$715.7 million general obligation (GO) bonds at 'AAA';
--$254.8 million Transit Projects certificates of participation (COPs) at 'AA+';
--$138.7 million Government Facilities COPs at 'AA+';
--Issuer Default Rating (IDR) at 'AAA'.
In addition, Fitch has upgraded the rating on the following bonds to 'AA+' from 'AA':
--$64.4 million COPs series 2003B, 2005C and 2009B (Convention Facility Project);
--$128.2 million COPs refunding series 2009E (Cultural Arts Facilities);
--$37.3 million COPs series 2009C (NASCAR Hall of Fame Facilities).
The upgrades reflect application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18, 2016. The revised criteria include a more focused consideration of project factors in ratings for appropriation-backed debt; the bonds do not carry any of the additional risk features that Fitch identifies for assigning a rating more than one notch below the IDR under the revised criteria.
The Rating Outlook is Stable.
The GO bonds are backed by the city's full faith and credit and unlimited taxing power.
The COPs are payable from installment payments made by the city from any legally available resource but subject to appropriation on an annual basis. The city's obligation to make installment payments is secured by a deed of trust granting a lien on certain assets to certificate owners. Some of the COP proceeds fund economic development or entertainment projects, but the city fully pays the debt service requirements for these projects (the Convention Facility Project, Cultural Arts Facilities and NASCAR projects).
KEY RATING DRIVERS
Charlotte's 'AAA' rating reflects its long history of favorable financial operations and a combination of budget control and reserve cushion that leaves it exceptionally well suited to address economic cyclicality and unforeseen budgetary challenges or emergencies. The city's revenue base is diverse and economic prospects are good. A low long-term liability burden, another credit strength, benefits from a very healthy pension situation.
Economic Resource Base
Charlotte is the largest city in North Carolina and the second largest city in the southeast, with a population of about 810,000 based on the 2014 census estimate. The city is the region's financial hub with two of its top 10 employers being Wells Fargo (23,000 employees) and Bank of America (15,000 employees), the latter of which is headquartered in the city. Total employment in Charlotte has increased well ahead of the region, state and nation since the recession, and Fitch expects this trend to continue.
Revenue Framework: 'aaa' factor assessment
Revenue growth prospects are positive based on assessed value growth stemming from economic expansion. The city's diverse revenue base is led by property taxes, and tax rates are regionally competitive and well within the statutory cap, providing it with significant revenue-raising capacity.
Expenditure Framework: 'aa' factor assessment
The city has demonstrated a solid ability to manage spending pressures associated with growth, despite relatively high carrying costs for debt service. The pace of spending is expected to be generally in line with revenue growth as service demands grow along with the economy.
Long-Term Liability Burden: 'aaa' factor assessment
The low long-term liability burden benefits from the healthy pension situation. Debt makes up the majority of the liability and is affordable based on future borrowing needs compared to the rate at which the city is paying down existing debt.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to maintain a high level of fundamental financial flexibility throughout economic cycles based on its expenditure flexibility and conservative fund balance policy, supported by its solid economic and revenue prospects.
STRONG FISCAL HEALTH: The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health and solid economic base. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.
Fitch expects Charlotte's position as a regional center for trade, transportation, health care, and financial services will contribute to a general trend of economic growth and stability over time. The city and its economy attract a well-educated workforce; 41% of the adult-age population holds a bachelor's degree or higher (137% of the U.S. norm). Recent expansion within technology, pharmaceutical, and energy sectors has the potential to boost already above-average income indices. The city's transportation network is well developed and contributes to the expectation for increased economic investment.
Over half of general fund revenues come from property taxes with a growing portion coming from sales tax (15% in fiscal 2015). Property is slowly revalued over an eight-year cycle and the city's assessed values grew throughout the recession. The tax base is well-above pre-recession levels and projects moderate growth.
General fund revenue growth in the last 10 years is ahead of both U.S. GDP and inflation. The city has increased the general tax rate slightly over this timeframe and is in the process of increasing it further, generating revenue growth faster than organic economic growth, but baseline prospects are also strong. Home values have recovered since the recession to approximately 4% higher than 2007 peak values according to Zillow Group, which estimates another 3% increase in the one-year forecast.
The city maintains healthy capacity under the statutory cap of $1.50 per $100 assessed valuation (AV), which could be exceeded with voter approval. The city increased the total tax rate by 1-cent (2.1%) in fiscal 2016 and is proposing a less than half-cent (0.9%) increase in the preliminary fiscal 2017 budget. Charlotte's fiscal 2016 total tax rate of $0.4787 per $100 AV is the second lowest among cities in North Carolina with population of 200,000 or more (Raleigh is the lowest at $0.421).
The city made no major cuts during the most recent downturn but did institute a hiring freeze, froze discretionary spending and held wages level for a time. Public safety accounts for about 63% of general fund spending. Carrying costs including debt service, pension and other post-employment benefits (OPEB) are relatively high at 22% of governmental spending.
Spending is growing as the economy improves and along the lines that revenues grow. Recent merit increases were approved after an extended postponement during the recession to catch up with regional salary benchmarks (along with a tax increase to pay for them).
The city's workforce spending is highly flexible, as there is no collective bargaining and no strikes allowed. The majority of carrying costs are for debt service spending. Debt service is expected to remain elevated due to new debt plans ($635 million of GO and COPs) in the current capital investment plan (CIP) that is near to the five-year amortization rate.
Long-Term Liability Burden
Fitch expects Charlotte's long-term liability burden, currently low at 8% of personal income, to remain so, based primarily on the modest unfunded pension liability and manageable debt plans. The city issues GO debt to fund their sizable capital plan and issues appropriation-backed debt for cultural and tourism related projects. The city funds the CIP from a variety of revenues including a devoted property tax millage ($21.8 million is budgeted for fiscal 2016).
Charlotte participates in the state-wide CSME plan (LGERS) and provides defined benefits in two single-employer plans for firefighters and law officers. The fiscal 2015 valuation reported LGERS was 100% funded at a 7% investment return assumption, while the firefighters' plan is 98% funded under the same investment assumption. The much smaller law enforcement officer's supplemental plan is funded on a pay-as-you-go basis and provides benefits only until age 62. In total, the city's net pension liability is very small.
The city's strong financial resilience through downturns benefits from its strong inherent budget flexibility and sizable reserves. Fitch expects the city would use these tools to mitigate any potential economic stress. Reserves in the debt service fund provide financial cushion in addition to other reserves, resulting in a total financial cushion that Fitch calculates at 79% of general fund spending.
The city has successfully exercised its strong inherent budget flexibility (on both the revenue and spending side) to consistently come in ahead of budgets, which are conservatively developed to comply with comprehensive financial and debt policies. The city does not defer pension spending. There were no fund deficits identified in any of the city's non-major governmental funds or enterprise funds.
Fiscal 2015 ended with a $6 million operating surplus (after transfers) in the general fund. Year-end results were much healthier than previously anticipated due to strong sales tax collections and strong expenditure management countering a reduction in property tax receipts from an ongoing Mecklenburg County revaluation that lowered the city's tax base by $2 billion (about 2.2%).
The adopted fiscal 2016 general fund budget is balanced and does not appropriate existing reserves. The budget includes a modest 1-cent or 2% increase in the property tax rate to $0.4787 per $100 of AV. Property taxes account for 57% of general fund revenues in the fiscal 2016 budget while sales taxes account for an additional 17%. Recent sales tax performance has been exceptionally strong, reflecting continued improvement and expansion of the area economy.