Fitch Affirms Gwinnett County, GA GOs and Revs at 'AAA'; Outlook Stable
--Long-Term Issuer Default Rating (IDR);
--$12 million general obligation (GO) bonds;
--$81.4 million development authority revenue bonds;
--$475.1 million water & sewerage authority revenue bonds.
The Rating Outlook is Stable.
The GO bonds are direct and general obligations of the county for which its full faith and credit and unlimited taxing power are pledged.
The revenue bonds are secured by county payments under an interlocal agreement with the development authority and a lease agreement with the water and sewerage authority. The county's obligation under the agreements is absolute and unconditional and secured by a pledge of its full faith and credit and unlimited taxing power.
The water and sewerage authority bonds are also secured by a pledge of the net revenues of the utility system.
KEY RATING DRIVERS
The affirmation of the 'AAA' IDR and GO rating is supported by the county's strong revenue and expenditure flexibility, the maintenance of healthy reserves and low long-term liability burden.
Economic Resource Base
Gwinnett County is located in north-central Georgia. The county seat, the city of Lawrenceville, is roughly 35 miles northeast of the city of Atlanta. The county has an estimated 2015 population of 895,823, which is up 11.2% from the 2010 census, exceeding state and national population growth.
Revenue Framework: 'aa' factor assessment
Fitch believes general fund revenues will grow in line with inflation, fueled by ongoing population growth and development. Revenue raising capacity is strong, as there is no legal limit to the property tax rate or levy.
Expenditure Framework: 'aa' factor assessment
Fitch expects the pace of spending to generally align with or marginally exceed revenue growth in order to meet the service needs of a growing population. The county maintains significant expenditure flexibility, benefitting from low fixed carrying costs and the absence of collective bargaining.
Long-Term Liability Burden: 'aaa' factor assessment
The county's liability burden is modest. Fitch believes liabilities will decline with no additional debt plans, rapid debt amortization and affordable unfunded pension liabilities.
Operating Performance: 'aaa' factor assessment
The maintenance of high reserves and superior inherent budget flexibility provide the county with exceptional financial resilience and gap-closing ability in the event of an economic downturn.
FINANCIAL MANAGEMENT: The rating is sensitive to shifts 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 supports strong growth prospects with its access to multi-modal transportation and 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%. The county's July 2016 unemployment rate of 4.8% is improved from 9.2% in 2009 and is consistently below the state and nation, driven by steady employment gains and a highly educated workforce. Home values were adversely affected by the recession (a 35% decline from 2007 to 2012) but have since rebounded with 50% growth through September 2016, according to Zillow Group. County home values have grown by 7% in the past year and are forecast to expand by an additional 4.4% over the next year. Income levels exceed the state but slightly trail the nation.
Property tax revenues comprised 84% of total general fund revenues in 2015. The county's tax digest experienced some volatility during the recession, with a 20% decline from 2008 to 2013. Tax digest growth has since recovered, with a 3.1% CAGR from 2013 to 2015, although it still remains below the pre-recession peak.
Gwinnett County's general fund revenue growth has generally tracked the rate of inflation. Prospects for similar growth are based on solid population and employment trends and ongoing development.
The county benefits from broad revenue-raising ability, as it is not subject to any limitation on its property tax rate or levy.
The county's general fund spending is driven mainly by public safety, judicial services and public works.
Fitch expects the natural pace of spending growth to track revenue growth trends in order to meet the needs of a growing population, absent policy action.
Employee wages and benefits account for about 70% of general fund spending. The county's expenditure flexibility is enhanced by its strong legal control over employee wages, benefits and work rules given the absence of collective bargaining. Carrying costs related to long-term debt and retiree benefits are low at 7% of government spending and are expected to remain stable given the county's rapid debt repayment, lack of additional debt plans and modest unfunded retiree benefits.
Long-Term Liability Burden
The county's long-term liability burden is modest at less than 5% of personal income, attributable in part to a solid history of financing capital projects on a pay-as-you-go basis. Since 1985 the county has benefited from the proceeds of voter-approved one-cent special purpose local option sales tax (SPLOST) levies. Approximately 90% of the county's direct debt is supported by the revenues of the water and sewer enterprise. Debt amortization is rapid with over 80% to be repaid within 10 years. The county does not contemplate any additional debt issuance at the present time.
County officials will seek voter approval to extend the current SPLOST levy for six years in a November 2016 referendum; the current SPLOST is set to expire in March 2017. The upcoming SPLOST levy is estimated to raise $950 million through expiration, to be shared between the county (78.76%) and cities (21.24%) for various capital projects. Given the six-year term of the SPLOST, Fitch does not expect the county to leverage the revenues to support debt.
County liabilities associated with retiree benefits should continue to decline with the implementation of reforms to pension benefits and OPEB. The county provides pension benefits to employees through a single employer defined benefit plan. In 2015, the plan had a reported 75% funded ratio (using a 7% discount rate) with an unfunded actuarial accrued liability of $304 million equal to a nominal 1% of personal income. The county has a solid history of contributing at least 100% of the actuarial required contribution (ARC) in each year. The county closed the plan to new hires in 2007, lowered the discount rate from 8% to 7% in 2015 and changed the amortization period from 13 years to 16 years in 2016. In 2007, the county established an irrevocable trust to pre-fund OPEB benefits and has continually made annual contributions over the ARC, resulting in a healthy 65% funded ratio for OPEB benefits in fiscal 2015. The OPEB unfunded liability was equal to $64 million or less than 1% of personal income.
Fitch's scenario analysis highlights the county's exceptional financial resilience, despite the sizable revenue volatility of 4.5% depicted by Fitch's analytical sensitivity tool, benefitting from the county's solid reserves and superior budget flexibility. Fitch believes that the county would maintain reserves at a level that would be consistent with a 'aaa' financial resilience assessment in the event of a future economic downturn.
The county has continually demonstrated prudent fiscal management through conservative budgeting without the use of reserves. During the last recession, the county was challenged by the need to balance its core services with declining revenues. The county balanced the budget by raising property tax rates and utilizing various cost saving measures such as furloughs, hiring freezes, suspended pay increases, deferrals of capital projects and reductions in services and managing vacant positions. Fitch believes the county would enact similar measures throughout future economic cycles.
In 2013, the county created new district funds and dedicated property tax millages for fire, emergency medical services, and development and enforcement with a majority of its municipalities. The expenses related to the provision of these services were shifted to the new district funds. Additionally, $64 million in reserves was transferred from the general fund to establish a three-month reserve for each fund ($51 million), and to meet other requirements of the Service Delivery Strategy agreement with respect to the distribution of motor vehicle taxes and supplemental title ad valorem taxes ($13 million). While the reserves held in each district fund are no longer available for general fund use and limit the county's overall financial flexibility, management has increased general fund reserves as a percent of spending in each year since the recession. The 2015 unrestricted general fund reserve of $140 million was a solid 53% of spending (and transfers out). County policy requires the maintenance of unassigned fund balance equal to at least three months of expenditures (and transfers out), which it comfortably exceeds.
The 2016 budget is 4% over the 2015 adopted budget. The adopted budget maintains the prior year's property tax rate (13.579 mills) and incorporates a 4% merit pay increase, longevity pay, new positions to meet increased service demands, and the restoration of capital spending and services that were cut during the recession. At the time of the 2016 millage rate adoption, because of increasing values with the tax digest, the county rolled back the general fund millage rate to 13.176. Even with the lower millage rate, management estimates year-end results to be favorable relative to the budget.