Fitch Rates Hennepin County, MN's $155.3MM GOs 'AAA'; Outlook Stable
--$95 million general obligation (GO) bonds, series 2016B;
--$60.32 million GO refunding bonds, series 2016C.
The series 2016B bond will fund capital improvement projects and the series 2016C bonds will currently refund series 2008B bonds and advance refund series 2009A bonds. The bonds are scheduled to sell competitively on Sept. 27.
Additionally, Fitch affirms the following ratings:
--Issuer Default Rating (IDR) at 'AAA';
--$826 million general obligation (GO) bonds at 'AAA';
--$142.6 million first-lien sales tax revenue bonds (ballpark project), series 2007A at 'AAA';
--$92.9 million second-lien sales tax revenue bonds (ballpark project), series 2008B at 'AA+'.
Fitch has upgraded the following ratings:
--$7 million third-lien variable rate sales tax revenue bonds (ballpark project), series 2008C to 'AA+' from 'AA'.
The GO bonds are backed by the county's full faith and credit and unlimited taxing power.
The sales tax bonds are special limited obligations of the county payable from certain proceeds of a county wide sales tax of 0.15% imposed by county ordinance as of Jan. 1, 2007.
KEY RATING DRIVERS
The 'AAA' GO rating and IDR reflect the county's strong gap-closing capacity, including an unlimited legal ability to independently increase revenues, solid reserves, a low long-term liability burden, and a strong and growing economic resource base.
The 'AAA' rating on the first lien sales tax revenue bonds is based on the solid growth prospects of the pledged revenues, and strong resilience to revenue loss under scenario declines and worst historical performance. The 'AA+' ratings on the second and third lien bonds reflect solid performance under a moderate stress scenario. The upgrade on the third-lien bonds reflects the results of the dedicated tax analysis that is a component of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016. All three liens are effectively closed. The sales tax revenue bond ratings are capped at the county's IDR, as Fitch does not view the pledged sales taxes as special revenues.
Economic Resource Base
Hennepin County is located within the Minneapolis-St. Paul metropolitan area. The area economy is broad and diverse and home to several large corporate headquarters, including United Health Group, Target, Best Buy and U. S. Bancorp. The county's wealth levels are above state and national medians and the county has seen solid population growth over the past 10 years; the current population is roughly 1.2 million.
Revenue Framework: 'aaa' factor assessment
The county has strong revenue flexibility given its independent legal ability to increase property taxes without limitation. Revenue growth over the past 10 years has exceeded the rate of inflation and U. S. economic output, and is expected to continue to remain strong given ongoing development and growth in the property tax base.
Expenditure Framework: 'aa' factor assessment
Solid revenue growth and moderate increases in the cost of services provided should lead the pace of spending growth to be more or less aligned with revenues over time. Carrying costs related to debt and retiree benefits are moderate.
Long-Term Liability Burden: 'aaa' factor assessment
The long term liability burden is low at 4.7% of personal income. The county's capital improvement plan is expected to add $646 million in new debt from 2016 through 2020; however, Fitch believes debt levels will remain modest as the county has a history of paying debt at an accelerated rate.
Operating Performance: 'aaa' factor assessment
Fitch believes the county will maintain a satisfactory financial cushion over time and through periods of economic decline based on its high reserves, superior budget flexibility, and history of conservative management practices.
Sensitive to Revenue Growth: The GO ratings and IDR are sensitive to the county's strong revenue raising ability, expenditure flexibility and strong financial position.
Sales Tax Bonds: Large and sustained declines in pledged revenues or significant additional leveraging may lead to negative rating pressure if debt service coverage is substantially reduced.
The local economy is large and diverse and includes several significant sectors that provide a strong employment base; these include healthcare, manufacturing, financial services, technology and financial services. Unemployment rates have historically been below state and national averages and the county has seen annual job growth since 2011. Tax base growth is expected to remain healthy given extensive construction activity occurring within the area.
Revenue growth within the county has been strong, and the county has significant legal ability to raise revenues.
General fund revenues have increased above the rate of inflation and U. S. economic output over the last 10 years. A component of this growth reflects policy action by management and accounting changes; however, Fitch believes revenue growth will continue at a healthy pace given the positive trends in the economy, population, and tax base.
The county is not subject to a limit on its property tax rate or levy. The county has the ability to adjust fees for providing a wide range of services including health services and solid waste, which provides additional revenue flexibility.
General fund spending, which is largely driven by public safety functions, public works, and general administration services, has risen a modest 7% from fiscal 2011-2015.
The natural pace of expenditure growth is expected to remain in line to marginally above revenue growth, reflecting expectations for moderate increases in the cost of services, headcount, and core service provision over time.
Carrying costs for debt, pension and other retiree benefits (OPEB) are modest at 12% of fiscal 2015 governmental fund expenditures. Personnel wages and benefits are subject to collective bargaining and binding arbitration; however, under state law the arbitration decision must take into consideration existing levels of governmental services and an analysis of the fiscal impact on the municipality. County officials report strong relations with labor unions, and has settled its largest contracts with moderate salary increases. The county anticipates manageable labor costs the next several years due to a number of retirements of employees at the top of their salary range.
Expenditure flexibility is aided by the county's practice to annually appropriate contingencies within the budget, which was 2% of fiscal 2016 general fund expenditures. An additional area of flexibility includes transfers from the general fund for one time capital expenditures. In fiscal 2015 the county transferred $18.7 million out of the general fund, including $7.4 million for one-time capital expenditures. The county could minimize these transfers if additional expenditure reductions were necessary to fund operations.
Long-Term Liability Burden
The long term liability burden related to overall debt and the unfunded pension liability is a low 5.1% of personal income. The county's capital improvement plan is expected to add $646 million in new debt from 2016 through 2020, but Fitch believes debt levels will remain modest as the county has a history of paying debt at an accelerated rate.
The county has $34.7 million of bonds which are limited tax obligation of the Hennepin County Regional Railroad Authority (HCRRA), payable from ad valorem taxes on all taxable property in the county. The levy cannot exceed 0.04835% of countywide property market value. The bonds were issued to fund improvements to local rail service. The HCRRA are statutorily required to levy taxes at 105% of debt service annually. The maximum tax rate provides very strong MADS debt service coverage of 21.5x.
County employees participate in the state's Public Employees Retirement Association, a defined benefit multiple-employer retirement plan for public employees including police and fire. The county's annual required contribution in 2015 was $42.9 million, and the amount is expected to increase in fiscal 2016. The ratio of plan assets to liabilities was 72.7% using Fitch's 7% discount rate assumption as of Dec. 31, 2015. Other post-employment benefits (OPEBs) are very low, and the county discontinued providing post-retirement healthcare benefits to new hires starting in 2008.
Hennepin County has consistently maintained a healthy level of general fund reserves equal to no less than 17% of spending dating back well over a decade. The county's reserve balances combined with its superior level of budgetary flexibility translate to an exceptionally strong capacity to manage through economic downturns and related revenue volatility.
Available reserve balances have increased to 30.4% of general fund expenditures in fiscal 2015 from 17.3% in fiscal 2010, driven by four large general fund surpluses over the past five years. Management has a strong record of conservative budgeting and has increased tax rates as needed to ensure positive financial outcomes. The fiscal 2016 adopted general fund budget assumes a 3.4% increase in the county's general fund tax levy and a $24 million fund balance appropriation. The county budgets fund balance on an annual basis, which typically is not utilized given that actual financial results have historically exceeded budgeted expectations. Management conservatively projects revenues and includes contingency funds to increase financial flexibility. The fiscal 2017 proposed budget assumes a $28 million fund balance appropriation and a $13 million budgeted contingency which provides strong budgetary flexibility to minimize the actual use of general fund balance.
Sales Tax Bonds
Hennepin County issued sales tax revenue bonds in 2007 and 2008 to fund the construction of Target Field in Minneapolis, home of the Minnesota Twins. The sales tax bonds have benefitted from steady growth since the sales tax was imposed in 2007. Average annual growth from 2008 through 2015 exceeded the rate of inflation. Fitch believes that growth prospects will continue to be solid based on the historical trends and ongoing growth within the local tax base. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Pledged sales tax revenues could tolerate a large 60% drop and still achieve 1.0x MADS coverage on the first lien ballpark revenue bonds, 12x the scenario results and 15x the largest actual revenue decline in the review period. These results are consistent with an 'AAA' rating on the first lien bonds.
The second and third lien ballpark revenue bonds could tolerate a large 38% drop in sales tax revenues and still cover MADS, 7.6x the scenario results and 9.5x the largest actual revenue decline in the review period. These results are consistent with an 'AA+' rating for both liens. The third lien series 2008C bonds are variable rate and are supported by a liquidity facility expiring Dec. 31, 2016. The county anticipates redeeming the entire $7 million outstanding on December 1, 2016 with surplus sales tax revenues. The Ballpark fund has $9.7 million funds restricted for debt and other statutory requirements.