Fitch Rates Dane County, WI's $31M GO Bonds & Notes, Series 2016 'AA+'; Outlook Stable
The Rating Outlook is Stable.
The bonds are expected to price competitively during the week of September 5. Proceeds will be used to fund a variety of public purposes benefiting residents of the county, including public safety, human services, conservation, culture and recreation, and public works.
The county pledges its full faith and credit and unlimited taxing power for the repayment of principal and interest on the bonds and notes.
KEY RATING DRIVERS
The 'AA+' IDR and GO bond ratings for Dane County, WI, reflect the county's low long-term liability burden, satisfactory revenue framework and exceptionally strong financial resilience. In addition, the county's solid operating performance since the 2009 recession - characterized by a rapid rebuilding of available reserves - underscores Fitch's view that the county's fiscal flexibility is likely to remain strong.
Economic Resource Base
Dane County is located in south-central Wisconsin and is home to the state capitol of Madison. It is the second-most populous Wisconsin county after nearby Waukesha County, with an estimated 2015 population of 508,000. The local economy is both resilient and wealthy. Residents are highly educated with 47% having attained a college degree compared to the 29% US average. Per capita income levels are above both the state (123%) and national (120%) averages. The economic base is diverse, anchored by a combination of healthcare, insurance, government and higher education. The unemployment rate remains exceptionally low at 3.3% in June 2016 compared to the 4.1% state and 5.1% US rates.
Revenue Framework: 'a' factor assessment
Fitch expects the county's natural revenue growth pattern will continue at its slow pace, with tax revenues growing at close to the rate of inflation. The county's independent legal ability to raise revenues is moderate relative to its revenue volatility given the constraints imposed by Wisconsin's annual property tax levy cap on local governments.
Expenditure Framework: 'aa' factor assessment
Fitch expects the county's expenditure growth rate will be roughly in line with or slightly above that of revenues in the absence of management actions to limit budgetary growth. Fitch also believes that the county retains ample expenditure flexibility supported in part by very low carrying costs.
Long-Term Liability Burden: 'aaa' factor assessment
Dane County's long-term liability burden consists entirely of net overall debt issued by the county and overlapping municipalities. Long-term liabilities are low compared to the county's personal income.
Operating Performance: 'aaa' factor assessment
In Fitch's view, Dane County maintains a very high level of fiscal flexibility. The county's inherent budgetary gap-closing capacity, coupled with a healthy level of reserves, will ensure the resilience of its fiscal operations in a normal downturn. Budget management since 2009 has been superior, as evidenced by a rapid growth in fund balances and liquidity coupled with consistent funding of long-term liability payments and necessary upkeep of infrastructure.
CHANGE IN BUDGETING PROFILE: The rating is sensitive to changes in the county's conservative budgeting approach.
INCREASED ECONOMIC ACTIVITY: The rating is sensitive to increased economic activity and its knock-on effect on the county's tax revenue growth rate. If revenues outstrip Fitch's expectation that growth will approximate the rate of inflation, then positive pressure could develop for the rating.
Dane County is home to both the Wisconsin state capitol and the state's largest university, the University of Wisconsin at Madison, which enrolled 43,000 full-time students in 2015 and employs over 20,000 staff members. The local economy is highly diverse with a mix of public and private sector employers across varied industries. Top employers include the university and its affiliated health care providers, the state government, Oscar Meyer Foods Corporation, Epic Systems Corp. (an electronic health records company), American Family Insurance and Wisconsin Physicians Service Insurance. The county also has a small but growing biotechnology presence. The university's presence ensures that high numbers of doctorate-holders live and work in the county, undergirding the economy's transition from a traditional service and manufacturing economy to a more modern 'knowledge-based' economy.
Taxable assessed values (AV) contracted modestly from 2010 through 2013 to reflect housing price depreciation and slower new construction following the recession, but have risen by over 8% since 2014. Management's projection of about 4% assessed valuation growth for 2016 has been largely borne out, with about half of AV growth stemming from new building and half from market appreciation.
The county's general fund revenues are primarily comprised of local taxes (75%) with the remainder coming from state transfers (14%) to fund a portion of the county's social service costs, and from service charges (8.3%). Local taxes are divided between property taxes (68% of general fund revenues) and local sales taxes (7.6%).
Fitch believes the county's revenue growth prospects are likely to be in line with recent historical performance, which nearly matched the US inflation rate in the period from 2004 through 2014. Sales tax and AV growth is likely to be stronger going forward than in the prior decade, but Wisconsin's annual cap on property tax levies (Act 10 of 2011), will serve as a constraint to property tax revenue growth. All in all, Fitch believes revenues are likely to expand at roughly the rate of inflation.
Given the constraints imposed on Wisconsin municipalities by Act 10, Dane County's independent legal ability to raise revenues is moderate even relative to its low revenue volatility. The Act limits annual property tax levy growth to the percentage increase in AV attributable to new construction. New construction has generated AV growth of around 1% to 2% for the county in recent years, but could be less in some future periods due to slowdowns in new building caused by recessions.
Because Fitch believes the county would be able to raise the property tax levy conservatively by one-half of 1% percent in any given year due to new growth, and because it has the legal authority to raise service charges and fees, Fitch believes it could respond effectively to an estimated 1% drop in general fund revenues resulting from a 1% decline in GDP by raising new funds about equal to that decline.
The county's general fund spending is concentrated mainly on public safety, which accounted for 66% of general fund expenditures in fiscal 2015. General government, the second largest spending category, took up 19% of spending in the same year. The county habitually funds a large portion of social services and county nursing home operations by transferring moneys from its general fund to its human services fund and nursing home fund, respectively. These annual transfers have averaged approximately $65 million in recent years, with the larger portion ($50 million in FY2015) going to the human services fund to support healthcare and other social services. The $65 million in fund transfers, if added to overall general fund expenditures, would account for 30% of total general fund spending.
Fitch expects the natural pace of spending growth to be in line with, to marginally above, revenue growth, given the nature of the county's spending obligations and its carrying costs.
Expenditure flexibility is ample, as the county's carrying costs are less than 10% of governmental expenditures. The county's fixed carrying costs include debt service (6% of expenditures), pension contributions (2.2%) and annual (i. e. other post-employment benefits) OPEB payments (0.3%) that, taken together, accounted for 8.5% of spending in fiscal 2015. In addition to having low fixed costs, Dane County benefits from Wisconsin's post-2011 public labor bargaining framework, which gives municipalities broad leeway in determining workplace rules, hours, workforce size and employee benefits, including health plan design.
The county has three bargaining units, two of which represent county sheriffs and sheriff's deputies and one of which represents building trade employees. In all case, wages are the only mandatory subject of collective bargaining and are the only contract provision that can go to binding arbitration. For non-represented employees, the county can ultimately implement wages unilaterally. Employees do not have the right to strike.
Long-Term Liability Burden
Dane County's long-term liability burden is low compared to its resource base. Net overall debt and pensions equal 8.6% of county personal income. Publicly-issued debt accounts for 100% of the liability because the county has a net pension asset, rather than a liability. Overlapping debt of other municipal entities located within the county, including towns, villages and school districts, accounts for 86% of the overall debt burden. Direct debt, which totals $322 million including the current issue, accounts for the remaining 14% of total debt.
County employees participate in the Wisconsin Retirement System, a cost-sharing multiple employer defined benefit pension plan. As of Dec. 31, 2014, the plan was fully funded on an actuarial basis with a 7.2% annual rate of return assumption, and 103% funded on a market value of assets basis. When adjusted by Fitch to reflect a discount rate of 7%, the plan is still approximately 100% funded on an actuarial basis. The county continues to fully fund its actuarially determined annual pension contribution.
Fitch believes Dane County's financial resiliency to be exceptional based on its steady and predictable revenue streams, strong ability to control expenditures and high general fund reserve cushion since the last downturn. The county has a good track record of closing budget gaps and maintaining reserves at adequate levels. Since 2010, management has nearly tripled its amount of available reserves, and Fitch believes management would most likely retain the greater portion of these reserves by resorting to prudent expenditure reductions and the modest revenue-raising measures that are within its power, along with some moderate draw-downs of reserve. Our FAST scenario tool contemplates little change in current reserve levels assuming that annual transfers out of the general fund revert to historical levels in the $65 million range.
Dane County's budget management during the present expansion has been solid. Management has succeeded in building up reserves since the prior downturn in order to be in a position to cope more effectively with the tax levy cap associated with Act 10 of 2011. Management has increased reserve levels while making its full actuarially required pension contributions annually. The county has also kept up a steady pace of capital improvements to county infrastructure, and has expanded some county operations, notably those involving the medical examiner's office, which now provides services to several surrounding counties.
The county achieved an operating surplus in four of the past five fiscal years. Fiscal 2015's $2.3 million operating deficit was something of an aberration, and was caused by a greater-than-budgeted transfer from the general fund to the county's highway fund in order to eliminate a prior payable related to a grant made from the general fund. The fiscal 2016 budget grew by 6.5% over fiscal 2015 and was balanced with $1.8 million of reserves. Expenditures are performing below budget and revenues are growing faster than projects. According to management, sales tax revenues are up 3.7% over 2015 levels; management expects the general fund to conclude with a $1.5 million addition to reserves.
Fitch has affirmed the ratings on the following series of bonds and notes previously issued by the county:
--$3.4 million GO bonds, Series 2006B
--$3.5 million GO bonds, Series 2007A
--$315,000 GO promissory notes, Series 2007B
--$995,000 GO refunding bonds, Series 2008A
--$1.9 million GO promissory notes, Series 2008B
--$8.7 million GO corporate purpose bonds, Series 2008C
--$1.4 million GO promissory notes, Series 2009A
--$2.1 million GO corporate purpose bonds, Series 2009B
--$8.5 million GO health center bonds, Series 2009C
--$8.2 million GO refunding bonds, Series 2010A
--$11.4 million GO refunding bonds (taxable), Series 2010C
--$11.8 million GO refunding bonds, Series 2010D
--$14.4 million GO refunding bonds, Series 2010E
--$5.2 million GO promissory notes, Series 2010F
--$5.8 million GO corporate purpose bonds, Series 2010G
--$10.8 million GO corporate purpose bonds, Series 2011B
--$10.9 million GO refunding bonds, Series 2012A
--$6.9 million GO promissory notes, Series 2012B
--$7.6 million GO corporate purpose bonds, Series 2012C
--$17.7 million GO capital improvement bonds, Series 2013A
--$12.7 million GO promissory notes, Series 2013B
--$26.5 million GO promissory notes, Series 2014A
--$26.4 million GO corporate purpose bonds, Series 2014B
--$14 million GO promissory notes, Series 2014C
--$37.3 million GO promissory notes, Series 2015A
--$40.1 million GO corporate purpose bonds, Series 2015B