Fitch Affirms Forsyth County, NC $448MM GOs 'AAA'; Outlook Stable

  Fitch Affirms Forsyth County, NC $448MM GOs 'AAA'; Outlook Stable  Business Wire  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.  SECURITY  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 government assets.  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 leveling plan.  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.  RATING SENSITIVITIES  HEALTHY RESERVES: The rating incorporates the expectation that county reserve levels will remain healthy, even after planned intermediate and long-term drawdowns.  CREDIT PROFILE  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 Fitch).  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 rating category.  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 governmental spending.  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 Underwriter.  Applicable Criteria and Related Research:  --'Tax-Supported Rating Criteria' (Aug. 14, 2012);  --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).  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