Fitch Rates Johnson County, KS ULTGOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Johnson County, Kansas (the county) unlimited tax general obligation (ULTGO) bonds:

--$31.9 million general obligation internal improvement bonds, series 2015A;

--$27.9 million general obligation refunding bonds, series 2015B.

Proceeds of the series 2015A bonds will finance wastewater improvements and airport land acquisition. Proceeds of the series 2015B bonds will crossover refund callable maturities of the series 2008A and 2008D bonds. Bonds are expected to sell via competition on Nov. 18.

In addition, Fitch affirms the following ratings:

--$213.7 million outstanding ULTGO bonds, series 2009B, 2009C, 2010B, 2010C, 2010D, 2010E, 2011A, 2012A, 2012B, 2013A, 2014A and 2014B at 'AAA';

--$45.9 million Johnson County Public Building Commission (PBC) bonds, series 2010A, 2010B, 2010C and 2010D at 'AA+'.

The Rating Outlook is Stable.

SECURITY

All ULTGO bonds are obligations of the county to which the full faith, credit and power of the county to levy unlimited ad valorem taxes are pledged; however, the ULTGO series 2010B&E bonds ad valorem tax pledge excludes the assessed valuations of Olathe and Bonner Springs.

The PBC bonds (rated 'AA+') are special limited obligations payable solely from lease payments made by Johnson County from any legally available funds. The county's obligation is absolute and unconditional, not subject to appropriation, abatement, set-off or counterclaim.

KEY RATING DRIVERS

STRONG LOCAL ECONOMY: The county's diverse local economy is characterized by high wealth and low unemployment. The county's economy further benefits from extensive employment opportunities throughout the Kansas City metropolitan statistical area (MSA). An improving housing market and strong ongoing development contributed to solid assessed value (AV) growth for the fiscal 2016 budget.

STRONG FINANCIAL PROFILE: The county's financial position is expected to remain strong even after planned reserve draws and the five-year phase-out of the mortgage registration fee. The county's low tax rate and ability to adjust the millage rate provides additional flexibility, although state efforts to restrict property tax increases may limit revenue flexibility somewhat.

MANAGEABLE LONG-TERM LIABILITIES: Debt ratios are moderate and post-retirement costs, though increasing, are low. The county's annual debt service burden is low, helped by the county's practice of funding a substantial amount of its capital needs on a pay-as-you-go basis.

RATING DIFFERENTIATION: The rating for the PBC bonds is one notch lower than the ULTGO rating, reflecting the county's obligation to make PBC lease payments from available funds.

RATING SENSITIVITIES

LARGER THAN EXPECTED DRAWDOWNS: Fund balance draws beyond expectations could pressure the rating.

CREDIT PROFILE

Johnson County is located 12 miles southwest of the city of Kansas City, providing residents with easy access to numerous employment opportunities throughout the metropolitan region. Population since 2000 is up 27%, to approximately 574,000 in 2014, making the county the most populous in the state.

ROBUST METRO-KANSAS CITY ECONOMY WITH LOW TAX RATES

The county is home to several Fortune 500 companies. The economy is deep and diverse, anchored by such corporate headquarters as Sprint and Garmin in addition to various healthcare, government, finance, and engineering services. The county's 3.7% unemployment rate as of August 2015 is well below the state and national averages of 4.5% and 5.2%, respectively. Per capita income levels and educational attainment rates are both well above their respective national averages.

The county's AV posted solid 6.4% growth in fiscal 2015 as a result of strong development, a strengthening local economy, and an improving housing market. The county projects 5% annual AV growth over its multi-year forecast, which is at the lower end of the projection range provided to the county by its assessor. Fitch believes that the projections are realistic, at least over the near term, given ongoing real estate development and strong year-to-date construction permit activity.

STRONG FINANCIAL PROFILE; SIGNIFICANT USE OF PAYGO

The county has extensively utilized pay-as-you-go financing from the general fund to accomplish its capital improvement plan. From fiscal 2010 through 2014, the county utilized a cumulative $33.8 million in general fund balance. Nevertheless, the county consistently exceeds its fund balance policy, which calls for total general fund balance to remain within the 20%-25% range. The county posted $67.2 million in unrestricted general fund balance in fiscal 2014, a still strong 24.1% of spending.

The county's $7.1 million net general fund deficit in fiscal 2014 (ending Dec. 31) was largely driven by the continued spend-down of restricted fund balance accumulated from the county's dedicated public safety sales tax. A $5.2 million budgeted fund balance draw in fiscal 2015, which represents the penultimate year of the county's expected unrestricted general fund balance appropriations, continues to be driven by one-time capital expenditures and the use of restricted fund balance for public safety capital and operating expenses. Year to date projections suggest a smaller draw will be recorded.

The statewide five year phase-out of the mortgage registration fee (which contributed 4% of revenues in fiscal 2014) began in fiscal 2015 and is expected to have a modest negative impact on the county's general fund revenue. The fiscal 2016 budget includes offsetting fee increases which should blunt the impact. Fitch believes the county's demonstrated budgetary flexibility, diverse economy, ongoing commercial/residential development, and sound financial management should support sound reserves within the county's policy range over the longer term.

MANAGEABLE DEBT AND PENSION BURDEN

The overall debt burden is moderate at $4,483 per capita and 3.9% of market value, with the majority of debt attributable to overlapping school districts. A substantial portion of the county's GO debt is supported by the wastewater enterprise fund. Most of the county's future borrowing plans are related to a $280 million wastewater project, the borrowing for which is scheduled to ramp up over the next three years. The county has minimal plans for non-self-supporting debt in the near future but anticipates a $15-20 million library borrowing and a courthouse borrowing, the amount of which has not yet been determined.

The county's contributions to the Kansas Public Employee Retirement System (KPERS) and Kansas Police and Fire Retirement System (KP&F) are a manageable cost pressure at $20.6 million (5.1% of governmental spending) for fiscal 2014. The county makes 100% of statutorily required contributions to these plans. Using Fitch's conservative 7% discount rate, KPERS had a very poor 53.9% funded rate at year-end 2014. Required contribution rates will most likely continue to increase for the county over the next several years following legislative changes in 2012, but Fitch expects KPERS payments to remain affordable.

The county's liability related to other post-employment benefits (OPEB) is generally limited to an implicit rate subsidy for retirees, although the county incurred some temporary OPEB costs which expire next year, related to an early retirement incentive program. OPEB costs are funded on a pay-go basis. The county's unfunded OPEB liability is negligible at less than 0.1% of market value. Total carrying costs, including debt service and costs related to retirement benefits, are low at 10.2% of governmental spending (inclusive of PBC Fund expenditures).

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

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, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, and Zillow.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993812

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993812

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151111006068/en/

Fitch Ratings
Primary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue
Director
+1-212-908-0593
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: [email protected]

Source: Fitch Ratings

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