Fitch Affirms Gastonia, NC's $39MM GOs at 'AA', $15MM LOBs at 'AA-'; Outlook
NEW YORK -- September 13, 2012
Fitch Ratings affirms the following ratings for the city of Gastonia, North
Carolina (the city):
--$38.8 million general obligation (GO) bonds at 'AA';
--$15.3 million limited obligation bonds (LOBs) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's pledge of its faith, credit, and taxing
power. The LOBs are payable from payments to be made by the city, subject to
appropriation, pursuant to a Master Trust Agreement. The LOBs are additionally
secured by a Deed of Trust granting a lien on four fire stations.
KEY RATING DRIVERS
ECONOMIC BASE EXPANSION: The city continues to diversify its traditional
manufacturing base into the international, technology, high end manufacturing,
and trade sectors. The city benefits from its proximity to downtown Charlotte.
BELOW AVERAGE SOCIO-ECONOMIC METRICS: The city underperforms in wealth and
employment metrics. Growth in these metrics has lagged national trends.
HEALTHY FINANCIAL PROFILE: Prudent financial management underscores ample
reserve levels, sound liquidity, and overall notable financial flexibility.
POSITIVE DEBT PROFILE: Debt levels are moderately low and long-term
obligations do not pressure the credit.
LOBS APPROPRATION RISK: The 'AA-' rating on the LOBs reflects the city's
general creditworthiness, the inherent appropriation risk, and the
essentiality of the assets under the lien.
CONTINUED ECONOMIC BASE DIVERSIFICATION
Gastonia is located near the South Carolina border and benefits from its
proximity to downtown Charlotte (GO bonds rated 'AAA', Outlook Stable by
Fitch). The city has widened its economic base from the textile industry to
other sectors, such as high end technology. Gastonia Technology Park has
become increasingly international with the addition of Lanxess AG and REPI
S.P.A., which are two companies with European roots. The city is working in
conjunction with Gaston County on the possible expansion of the current
Gastonia Technology Park as well as the development of a second technology
RELATIVELY WEAK SOCIO-ECONOMIC METRICS
The city's unemployment has consistently trended above that of the region and
nation. In July 2012, the city's unemployment rate was 10.3% while the
national unemployment rate was 8.6%. Fitch recognizes that diversifying an
economic base will often lead to a transition period of increased
The city's 2010 median household income was about 80% and 90% of the national
and state medians, respectively. The city's individual poverty rate was about
50% above national norm. Growth in these socio-economic metrics has also
lagged national trends despite parallel population growth.
FINANCIAL FLEXIBILITY AND HEALTHY RESERVES
The city has consistently maintained ample reserves and retained financial
flexibility. Unrestricted fund balance has steadily exceeded the city's
prudent policy of 12%-15% of expenditures. Liquidity levels are solid.
The city concluded fiscal 2011 with a $1 million surplus in the general fund,
which is equal to 1.8% of expenditures and transfers out. The unrestricted
fund balance, which is the sum of committed, assigned, and unassigned balance
per GASB54, equaled a solid 14.4%. Including reserves required by state
statute, which are primarily to offset accounts receivable, the available
balance has decreased in recent years but remains strong at 28.8% of spending.
In 2012, the city budgeted for a fund balance appropriation of $1.2 million.
However, the utilization of this appropriation will likely be unnecessary. The
city expects to increase unrestricted fund balance to 18% at the end of year,
primarily due to $2.1 million in American Recovery and Reinvestment Act (ARRA)
receivables being converted to cash.
The fiscal 2013 general fund budget does not incorporate a fund balance
appropriation. The budget benefits slightly from a projected 3% growth in
property taxes, arising from a slight uptick in assessed value (AV). The city
expects to continue to reduce expenditures by increasing operational
efficiency, and Fitch believes there is ample flexibility should additional
expenditure reductions be required. The city projects the unrestricted fund
balance to remain at 2012 levels.
MODERATELY LOW DEBT BURDEN AND MINIMAL CAPITAL PROJECTS NEEDS
Overall debt equals 2.7% of market value and $1,918 per capita, and
amortization is above average at 59% of principal retired within ten years.
The city has no plans to issue more tax supported debt in the near future.
The fiscal 2013 - fiscal 2017 capital improvement plan (CIP) has $19.2 million
of expenditures of which $11.2 million is attributable to self-supporting
enterprise funds. The city has identified sufficient resources to fully cover
all of its tax supported capital projects in the near future without having to
issue debt. Fitch does not expect the city's capital projects to pressure the
MANAGEABLE POST-EMPLOYMENT LONG-TERM OBLIGATIONS
The city contributes to the state-wide Local Governmental Employees'
Retirement System (LGERS), a cost-sharing multiple-employer defined benefit
pension plan. The city administers a small single-employer (SE) defined
benefit pension plan that provides supplemental retirement benefits for law
enforcement and fire fighters. Pension contributions do not pressure city
finances. The city's fiscal 2011 annual required contribution (ARC) for its SE
plan equals 1.4% of spending and for LGERS equals 4.2% of spending. The
unfunded actuarial accrued liability is 0.2% of taxable market value for the
SE plan. Although funding of the state's major pension system has declined, it
remains nearly fully funded at 95.4% as of Dec. 31, 2010.
The city's fiscal 2011 ARC for other post-employment benefit (OPEB) was $3.6
million, which equals 5.8% of spending. In 2011, the city contributed $1
million for OPEB. Fitch does not expect post-employment obligations to
pressure the credit.
LIMITED OBLIGATIONS BONDS
Debt service payments for the LOBs are subject to annual appropriation. As
security for the bonds, the city delivers a deed of trust granting a lien on
four fire stations which have a combined insured value of $9.3 million. Fitch
considers these facilities to be essential and thus believes the city has
sufficient incentive to appropriate. The city may also partly or wholly
substitute other properties as security, provided that the remaining fire
stations or the substitute property are worth 50% or more of principal
The conference center, which the LOBs partially finance, is not pledged as
collateral. The city projects that the full cost of debt service can be met by
existing hotel occupancy tax and municipal service district tax revenues, but
these revenues are not pledged to the LOBs. While Fitch does not give these
bonds self-supporting credit, it does recognize that the fiscal 2012 hotel
occupancy tax revenues and the municipal service district tax revenues cover
1.11x of the 2012 LOBs debt service. Fitch also recognizes that these revenues
shift some of the debt burden to non-residents.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
CreditScope, University Financial Associates, S&P/Case-Shiller Home Price
Index, IHS Global Insight, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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