Fitch Affirms Forsyth County, NC $448MM GOs 'AAA'; Outlook Stable
NEW YORK -- April 28, 2014
Fitch Ratings has affirmed the following ratings for Forsyth County, North
Carolina (the county):
--$447.9 million general obligation (GO) bonds at 'AAA';
--$36.6 million certificates of participation (COPs) at 'AA+';
--$27.5 million limited obligation bonds (LOBs) at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by a pledge of the full faith and credit and taxing
power of the county. The COPs and LOBs are secured by lease payments equal to
debt service, subject to annual appropriation by the county. As additional
security for the COPs and LOBs, the county has granted a lien on essential
KEY RATING DRIVERS
AMPLE FINANCIAL FLEXIBILITY: Strong financial management and planning coupled
with adherence to conservative reserve policies underscore healthy reserve
levels and high liquidity.
DIVERSIFYING ECONOMIC BASE: Notable growth in technology, healthcare, and
education is supplanting the county's traditional manufacturing base.
Socio-economic metrics are around average.
GOOD TAX BASE PROSPECTS: Fitch believes that the county's attractive economic
base supports solid long-term tax base growth despite a modest decline during
the past revaluation.
MANAGEABLE DEBT BURDEN: Debt levels are moderate and long-term obligations do
not pressure the credit. Above-average debt service costs have not hindered
the county's financial flexibility and are mitigated by the debt service
APPROPRIATION RISK AND LIEN ON ASSETS: The 'AA+' rating for the COPs and LOBs
reflects the appropriation risk inherent in the installment payments, the
essential nature of the respective leased assets, and the general
creditworthiness of the county.
HEALTHY RESERVES: The rating incorporates the expectation that county reserve
levels will remain healthy, even after planned intermediate and long-term
Forsyth County, with an estimated 2013 population of 361,220, is located in
the Piedmont region in central North Carolina. The county is home to the
state's fourth largest city, Winston-Salem (GOs rated 'AAA' Stable Outlook by
MEDICAL AND BIOTECHNOLOGY SECTOR BOOST ECONOMIC PROSPECTS
A significant medical and biotechnology presence within the county has
positioned it as one of the state's major commercial and industrial centers.
Education and health services represent a high 22.3% of the Core Based
Statistical Area's (CBSA) employment, well above state and national metrics.
The county has leveraged two major medical facilities (Wake Forest University
Baptist Medical Center, employing approximately 12,837, and Novant Health,
which employs 8,145 at three area hospitals) as well as a number of local
universities to create the Wake Forest Innovation Quarter (WFIQ; formerly
called Piedmont Triad Research Park).
Fitch is optimistic that the WFIQ's sound prospects will underscore sustained
long-term growth. The tax base has shown resiliency since the recession, even
with a manageable 8.2% reduction in the last revaluation. Fitch anticipates
neutral or positive future performance.
MANUFACTURING, TOBACCO DECLINES HINDERED RECOVERY
The sector has superseded but not eliminated the economy's historical
concentration in the volatile manufacturing, textiles, and tobacco industries.
Reynolds American Inc. and HanesBrands, Inc. are two of the county's largest
employers, at 3,000 and 2,500 employees, respectively. Both employers shed
jobs in the past decade from a high of 5,930 and 6,000, respectively.
Fitch believes that these sectors contributed to the county's delayed
emergence from the recession. The December 2013 6.1% unemployment rate has
returned to its historical position below the national average, in contrast to
the 8.8% rate of the prior year. The unemployment rate improved due to a
notable labor force drop; employment is still weak, showing a modest decline
on a year-over-year basis. Income levels are slightly above the state's but
below the national average. Fitch notes positively that the county's cost of
living is below the national average.
AMPLE FINANCIAL FLEXIBILITY
Effective financial management and planning consistently yields ample reserves
and financial flexibility. General fund results since at least fiscal 2007
have produced reserve levels above the county's prudent policy of 16% of the
subsequent year's expenditures. Fitch expects continued healthy reserves even
after planned drawdowns. Liquidity levels are consistently high.
County finances benefit from an established property tax base, representing
about 55.2% of fiscal 2013 revenues. Management's willingness to raise the
millage to a revenue neutral rate (when including additions to the tax base)
after the recent AV decline bodes well for the stability of this revenue
source. Sales taxes (12.2% of revenues) have recovered from a low in fiscal
2010. Fitch notes that sales taxes were below budget in fiscal 2013 due to
large refunds attributable to construction among the hospitals in the county.
However, collections were above fiscal 2012 actuals.
Fitch believes that the county has a healthy amount of expenditure flexibility
given that reductions implemented so far have been limited. Expenditure
variability will lessen due to a recently adopted school funding formula.
RESERVE LEVELS EXPECTED TO REMAIN HEALTHY
The county concluded fiscal 2013 with a $4.7 million net deficit (after
transfers) in the general fund, equal to 1.1% of spending excluding bond
proceeds. Fitch notes positively that the county's capital spending equaled
most of this deficit amount at $4.2 million. The county's assigned and
unassigned fund balance exceeded its reserve policy level of 16% of budgeted
expenditures in fiscal 2013. Fitch more commonly measures reserves as the
unrestricted fund balance, the sum of committed, assigned, and unassigned
balance per GASB 54. By that metric, unrestricted reserves equaled a high
29.8% of spending. The county's reserve for state statue, which is primarily
to offset accounts receivable, is a source of further flexibility, equal to an
additional 7.2% of spending.
The $399.8 million fiscal 2014 budget appropriates $15.8 million of fund
balance, which is on par with the fiscal 2013 budget appropriation of $15.1
million. Fitch notes positively that the county routinely does not utilize the
total amount of appropriated fund balance. Fitch considers property revenue
assumptions conservative, although sales tax growth assumptions might be
liberal given the variability in sales tax refunds. The county projects they
will conclude the year flat or with a slight deficit.
The county is in the process of determining the fiscal 2015 budget.
Preliminarily, they expect fund balance appropriations around historical
levels. County officials have stated that in the intermediate to long-term
they intend to draw-down reserves to policy levels, which Fitch believes will
remain consistent with the current rating.
FAVORABLE DEBT BURDEN
Debt levels are expected to remain moderate, supported by continued population
and assessed valuation growth. Overall debt equals 2.7% of market value and
$2,332 per capita, and amortization is above average at 65.5% of principal
retired within 10 years. Variable rate debt, which is unhedged, totals less
than 10% of outstanding par, a level that Fitch believes is prudent for the
The $474 million fiscal 2014-2023 capital improvement plan is nearly fully
bond-funded. Major projects include the schools ($190 million) and the court
system ($92 million). Fitch believes that solid prospects for tax base and
population growth coupled with the county's willingness to postpone debt
issuances will allow it to maintain a consistent debt profile. This summer,
the county expects to issue about $50 million in debt and then return to the
market in two years.
MANAGEMENT OF ABOVE-AVERAGE DEBT SERVICE COSTS
Fiscal 2013 debt service costs equaled an above-average 14.7% of expenditures.
The county's recently instituted policy limits total annual debt service, less
certain revenues restricted to debt service, to 15% of the budget. Fitch views
the policy as somewhat liberal but to date the above-average debt service
costs have not pressured county finances. The county's prudent debt service
leveling plan somewhat offsets the high debt service costs, which includes the
banking of tax receipts in advance of debt service payment and the use of
lottery proceeds. County officials expect to draw down the $32.6 million fund
over the next 15 years.
WELL-MANAGED LONG-TERM LIABILITIES
Post-employment long-term obligations do not pressure the credit. The majority
of county employees participate in the well-funded North Carolina Local
Government Employees' Retirement System, a cost-sharing multiple-employer
plan. Fitch notes positively that the county's pension contributions fiscal
2013 equaled a minimal 1.4% of governmental spending.
The county funds about 83% of its other post-employment benefit annually
required contribution. Actual payments equaled a low 1.1% of fiscal 2013
LEASE REVENUE BONDS
Debt service payments for the LOBs and COPs are subject to annual
appropriation. As security for both bonds, the county delivers a deed of trust
granting a lien on essential government property. Fitch believes the
property's essentiality provides sufficient incentive to appropriate. Were a
default to occur, the county would forfeit use of the leased property.
Additional information is available at 'www.fitchratings.com'.
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, National Association of Realtors, and the
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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Barbara Ruth Rosenberg, +1 212-908-0731
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Evette Caze, +1 212-908-0376
Doug Scott, +1 512-215-3725
Elizabeth Fogerty, +1 212-908-0526
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