Fitch Upgrades Iredell County, NC's GOs to 'AAA'; Outlook Stable
--$19,000,000 general obligation school bonds, series 2016.
The bonds are scheduled for competitive sale on September 20. Bond proceeds will be used to fund improvements to North and South Iredell high schools.
In addition, Fitch upgrades the county's Issuer Default Rating (IDR) and approximately $79.8 million of outstanding GO bonds to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
The bonds are a general obligation of the county payable by its full faith, credit and unlimited taxing power.
KEY RATING DRIVERS
The upgrade reflects application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18. The revised criteria highlight the county's strong revenue framework, low long-term liability burden, and outstanding gap-closing capacity. The 'AAA' IDR and GO ratings reflect the county's strong growth prospects, ample reserves, and broad budgetary tools.
Economic Resource Base
Iredell County is located in the Piedmont region of North Carolina, immediately north of Mecklenburg County. With a 2015 population of 169,866 the county's population has increased by an average annual rate of 1.3%
Revenue Framework: 'aaa' factor assessment
Revenues have been rising at a pace above U. S. GDP growth. The county has strong revenue raising flexibility, as its current property tax rate is well within the statutory cap.
Expenditure Framework: 'aa' factor assessment
Expenditures have grown at about the pace of revenues, and Fitch expects that trend to continue. Moderate carrying costs and broad flexibility to manage labor-related costs allow the county solid leeway to adjust spending throughout economic cycles.
Long-Term Liability Burden: 'aaa' factor assessment
The combined burden of debt and unfunded pension liabilities is low in relation to personal income and should remain relatively stable over time based on modest future capital and issuance plans, rapid amortization and minimal pension liabilities.
Operating Performance: 'aaa' factor assessment
The county's superior budget flexibility and ample general fund balance position it to comfortably manage through economic downturns without diminishing its overall financial flexibility.
MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the county's continued strong financial flexibility and budget controls.
Fitch believes that the county's proximity to Charlotte, accessible transportation as well as its competitive tax rate enhances its intermediate - and long-term potential for expansion. The southern portion of the county has grown to be a desirable commuter suburb of Charlotte, particularly the area around Lake Norman.
The manufacturing sector is a key component of the local economy at 16% of county employment. Existing manufacturing companies continue to make investments in the county; ASMO (car parts manufacturer) will be investing $96.7 million over six years creating 83 new jobs and C. R. Onsrud, Inc. (machinery parts manufacturer) announced a $6 million expansion project that is expected to create 20 new jobs. Employment growth over the past four years has exceeded the state and nation. As of July 2016 the unemployment rate was 4.7%.
The county's revenue base is dominated by property and sales taxes at about 60% and 19%, respectively, of fiscal 2015 general fund revenues. Total general fund revenues are expected to increase given projected assessed value (AV) growth as a result of ongoing economic activity and home value appreciation.
The county's general fund revenue growth has trended above U. S. GDP growth, increasing at a 10-year CAGR of 4.4% through fiscal 2014. Revenue growth does include tax rate adjustments but would still be strong without them given gains in the county's assessable base due to new construction and appreciation. Revaluation occurred in 2015 with a 2% increase in valuation. Iredell County reassesses its tax base every four years, with the next revaluation beginning in 2019. According to the July 2016 Zillow report, home values are 105% of peak 2007 levels. Sales tax revenue growth has remained strong over the past five years and is projected to increase by 6% in fiscal 2016.
The county maintains healthy capacity under the statutory property tax cap of $1.50 per $100 of (AV) with a fiscal 2017 tax rate of $0.5275.
Fitch expects the natural pace of spending growth to remain below or in line with revenue growth. Moderately low carrying costs and broad flexibility to manage labor-related costs allow the county solid spending.
The county's largest expenditure category is education at roughly 31% of general fund outlays, followed by public safety at 20%. In North Carolina counties are responsible for the funding of school capital and current expenses which does include a supplement for teachers' salaries above the state allocation. During fiscal 2010 and 2011 the county reduced current expenses to offset a weakened revenue environment due to economic conditions. Student enrollment has been flat, increasing by less than 1% over the past decade on an average annual basis. The county's capital improvement plan (CIP) does include the issuance of additional debt over the next two fiscal years to fund the construction of a higher education facility and two middle schools, which may modestly impact carrying costs.
The county's expenditure flexibility is aided by a workforce environment that is favorable to management. Employment terms are not subject to collective bargaining. As such, management has independent control of compensation and work rules.
Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions total a manageable 16% of governmental spending, almost entirely attributable to debt service (15.4%). Amortization is rapid at 78% in 10 years. Carrying costs include contributions to the state's Local Governmental Employees' Retirement System (LGERS) as well as contributions to several supplemental plans.
Long-Term Liability Burden
Long-term liability levels are low at 4% of total personal income. Debt levels are expected to remain low because of the county's affordable debt issuance plans. The vast majority of overall debt is issued by the county. The adopted fiscal 2017 to 2020 five-year CIP totals approximately $81 million, of which $59 million is expected to be debt-funded compared to outstanding direct debt of $238 million after this issue. Proposed borrowings focus primarily on capital projects for Mitchell Community College and Iredell County Schools. The additional debt is not expected to have a substantial impact on the long-term liability profile.
County employees participate in 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 participates in the Law Enforcement Officers' Special Separation Allowance plan. The county has been funding the plan on a pay-go basis. The unfunded liability is minimal ($3.3 million). The county funds OPEB on a pay-go basis, but the unfunded liability is less than 1% of personal income
Given the county's superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the county to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the county's 18% target - a level of financial cushion far higher than is sufficient for an 'aaa' subfactor assessment. The unrestricted general fund balance of $42 million in fiscal 2015 was a high 26% of spending (excluding transfers out for capital and bond proceeds). The county's reserve required by state statute, which is primarily to offset accounts receivable, is an additional source of financial flexibility and increases the total available fund balance to $59.8 million or 37%.
In addition to general fund reserves the county maintains several capital projects funds, funded with transfers from the general fund. The county did increase the tax rate in fiscal 2012 and 2016 to fund future capital projects. The county plans to fund a jail expansion and the construction of a new public safety campus using these reserves. This reduces the need to issue debt and keeps debt servicing costs low. As of fiscal year-end 2015 the balance was $18.3 million.
The county proved its financial resilience and strong budget management through the most recent recession by implementing furlough days for most employees except public safety, repurposing positions, and maintaining vacancies, among other measures. Fitch expects the county to make similar operational changes as needed during an economic downturn.
The fiscal 2016 budget was a notable 10.5% over the fiscal 2015 budget and included a tax rate increase to fund increasing debt service costs related to current and future bond issuance and cash-funded capital spending. Preliminary general fund operating results show a $15.2 million operating surplus (9% of fiscal 2016 budget) which was mostly due to revenue growth resulting from the tax rate increase. Fitch believes this is evidence of conservative budgeting.
The fiscal 2017 adopted budget maintained the tax rate at $.5275 per $100 of AV. The 5.7% budget increase funds 17 new staff positions, a performance increase up to 3% and a 2% salary scale adjustment.