Fitch Affirms Cobb County (GA) GOs at 'AAA'; Outlook Stable
--The Long-Term Issuer Default Rating (IDR);
--$6.3 million in outstanding general obligation (GO) bonds;
--$376.6 million in outstanding revenue bonds, series 2015 (Cobb County Coliseum Project) (Federally Taxable) issued by the Cobb-Marietta Coliseum and Exhibit Hall Authority, GA (the authority).
The Outlook is Stable.
The GO and revenue bonds are general obligations of the county, for which its full faith and credit and unlimited taxing power are pledged.
The authority-issued bonds are a limited obligation of the authority, payable from contract payments to be made by the county to the authority under the terms of an intergovernmental agreement. In the agreement the county has agreed to make contract payments equal to debt service on the bonds not less than two business days prior to any debt service payment date, to the extent funds are not otherwise lawfully available for such purpose. The obligation of the county to make payments under the intergovernmental agreement is absolute and unconditional and will not expire so long as any of the bonds remain outstanding and unpaid.
KEY RATING DRIVERS
The maintenance of the 'AAA' IDR and GO rating reflects the county's strong gap-closing capacity, including an unlimited legal ability to independently raise revenues and solid reserves; a low long-term liability burden; and a vibrant and growing economic resource base.
Economic Resource Base
Cobb County is located 20 miles northwest of downtown Atlanta, in the core of the diverse Atlanta metropolitan statistical area (MSA) economy. The county's population of 741,334 in 2015 has grown by 7.7% since 2010, exceeding state and national norms.
Revenue Framework: 'aa' factor assessment
Historical general fund revenues have grown at the pace of inflation despite robust population growth and ongoing development. Revenue-raising ability is strong as property tax rates have no legal limit. Rates are competitive within the Atlanta MSA.
Expenditure Framework: 'aa' factor assessment
Fitch expects expenditures to generally align with or marginally outpace revenue growth trends to meet the needs of the growing population. Fixed carrying costs are moderate and expected to remain stable with the implementation of reforms to retiree benefits and limited debt plans. The county has exceptional flexibility to adjust spending, aided by its ability to control workforce costs in the absence of collective bargaining.
Long-Term Liability Burden: 'aaa' factor assessment
The county's long term liabilities are equal to a low 4% of personal income. Fitch expects liabilities will remain low due to pension reforms and limited debt plans.
Operating Performance: 'aaa' factor assessment
Fitch expects the county will maintain a high level of financial flexibility throughout economic cycles based on its superior budget flexibility, significant reserves, and history of conservative budgeting.
FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in financial management that would lead to a significant deterioration in the county's financial flexibility and gap-closing ability. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
The county's participation in the Atlanta MSA provides strong growth prospects with its central location and broad transportation access to diverse employment opportunities. IHS, Inc. projects population growth in the Atlanta MSA to average 1.5% annually through 2020 compared to a national rate of 0.8%. County unemployment remained low at 4.7% in June 2016 relative to the state and national average and compared to the recessionary peak of 9.3%. The county continues to exhibit above-average wealth and a low poverty rate, benefitting from favorable employment and population trends and a highly educated workforce. The county is home to five Fortune 500 companies that include The Home Depot, Coca-Cola Enterprises, Genuine Parts (NAPA), NCR and First Data. Home values were adversely impacted by the recession (a 24% decline from 2006 to 2012) although have since rebounded with 40% growth through August 2016 exceeding pre-recession levels, according to Zillow Group. County home values are forecast to expand by an additional 4.3% over the next year.
Property tax revenues comprised over 60% of total general fund revenues in fiscal 2015. Property taxes are not due until October 15 in each year, right after the September 30 fiscal year end; as such the county issues tax anticipation notes (TANs) to provide cash for operations for cash flow purposes in the early part of the calendar year.
Cobb County's general fund revenues have grown only in line with inflation, despite steady population and employment growth trends. The county's revenue growth was moderated by the extraordinary reduction in home values and related declines in the tax digest during the recession. Favorably, tax digest growth has shown a strong recovery, with a 4.2% CAGR from fiscal 2013 to fiscal 2015. Tax digest growth has continued through 2016 and has helped to absorb the recessionary losses. Fiscal 2016 represents the fourth consecutive year in which the county has lowered the property tax millage rate (to 9.85 mills) in an effort to 'roll-back' the rate increase enacted in 2011. Fitch expects the county's revenues to continue to grow at similar pace, absent policy action.
The county has broad revenue-raising ability, with no legal limit to the property tax rate and levy. The county's tax rate is competitive with other neighboring counties in the Atlanta MSA.
The county's general fund spending needs are mainly driven by public safety and general government, which together comprised 82% of spending in fiscal 2015.
Fitch expects general fund spending, in the absence of policy action, will generally track or slightly exceed revenue growth over time to meet the service needs of a growing population.
The county's expenditure flexibility is aided by strong control over employee wages, benefits and work rules in the absence of collective bargaining. Carrying costs related to long-term debt and retiree benefits are low at 10%. They will increase with a large 2015 issuance but Fitch expects them to remain moderate.
Long-Term Liability Burden
The county's overall debt and unfunded pension liabilities are equal to 4% of personal income and the burden is expected to remain well below the 10% threshold consistent with a 'aaa' assessment. Nearly one-half of the long-term liability is direct debt, which amortizes at a slow pace (33% in 10 years) but is expected to remain manageable given the county's significant pay-go capital contributions from a one-cent special purpose local option sales tax (SPLOST) levy and limited debt plans. Direct debt levels incorporate the county's $377 million GO issuance in fiscal 2015 to finance a portion of the costs for the new Atlanta Braves baseball stadium, which doubled the county's total debt.
In 2014, county residents voted for its third re-authorization of SPLOST levy to fund its various capital needs from 2016 through 2021. The SPLOST is expected to generate $750 million in revenue through expiration to be shared between the county and its six incorporated municipalities, to be used on a range of countywide projects that include road and park improvements, public safety equipment and buildings and new libraries. Given the six-year term of the SPLOST, Fitch does not expect the county to use the revenues to support debt.
County liabilities associated with retiree benefits should improve over time as it has implemented reforms to pension and retiree health benefits to help stabilize costs. The county provides pension benefits to its employees through a single employer defined benefit plan. The plan's low funded ratio is expected to gradually improve given the closed status of the plan and the county's practice of contributing over the annual required contribution (ARC) on an annual basis. In fiscal 2015, the county's pension funded ratio was 48% with an unfunded actuarial accrued liability of about $601 million, using Fitch's 7% discount rate estimate. The unfunded pension liability is equal to 1.6% of personal income.
Fitch's scenario analysis highlights the county's strong financial resilience given its low revenue volatility, solid reserves, and super budget flexibility. Fitch expects the county will maintain reserves at a level consistent within a 'aaa' financial resilience assessment in the event of a future economic downturn.
The county demonstrated strong budget management through the recession by implementing furlough days and a hiring freeze, eliminating vacant positions, suspending merit increases and overtime pay and deferring capital spending. The county also raised the millage rate (by 1.5 mills or 15%) in 2011 to offset revenue declines. These actions enabled the county to maintain service levels and avoid layoffs. Fitch expects the county to adopt similar measures in the event of a moderate economic downturn.
The county has consistently increased reserves above the county's 9% policy, with fiscal 2015 results marking the sixth consecutive year of surplus operating results improving the unrestricted fund balance to $96 million or a high 28% of spending. The county also budgets an additional 6% reserve for economic and revenue contingency. The 2016 adopted budget was balanced, with spending 3% higher than in the fiscal 2015 budget reflecting continued growth in the tax digest despite a reduction in the millage rate and a 3% merit pay increase. Preliminary year-end results indicate a possible $4 million net deficit, reflecting the Board's decision to reduce the water fund transfer from the budgeted 10% of water fund revenues to 6%, given the healthy general fund reserve level. County policy allows for up to 10% of water fund revenues to be transferred into the general fund and the county routinely budgets this amount. The county's 2017 proposed budget is balanced and represents a 9% increase over the 2016 adopted budget, due to continued tax digest expansion, increased debt service related to the new-stadium financing, new hires to meet service demands, and a rise in fee revenue due to a combination of increased activity and change in fee structure. The budget also incorporates a 10% transfer from the water fund.