Fitch Rates Raleigh, NC's GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following city of Raleigh, North Carolina general obligation (GO) bonds:

--$5.05 million GO street improvement bonds, series 2015A;

--$20 million GO parks and recreational facilities bonds, series 2015B;

--$10 million GO housing bonds, series 2015C (taxable).

The bonds are scheduled for public bid on June 16. The bonds will fund street improvements, park and recreation projects, and housing projects.

In addition, Fitch affirms the following ratings:

--$297 million GO bonds at 'AAA';

--$68 million limited obligation bonds (LOBs) series 2010A, 2010B, 2013, 2014A and 2014B at 'AA+';

--$2.9 million capital improvement COPs, series 2005C at 'AA+';

--$153.5 million downtown improvement COPs, series 2004A, 2005A, 2005B, 2005B-1, 2005B-2 and 2007 at 'AA';

--$33 million variable-rate demand limited obligation revenue bonds, series 2009 at 'AA+/F1+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the city's full faith and credit and unlimited tax pledge.

The COPs and LOBs are secured by annual payments made by the city subject to appropriation and a deed of trust on certain governmental property.

KEY RATING DRIVERS

SOUND RESERVES AND BUDGETARY FLEXIBILITY: The city's financial profile is bolstered by conservative budget assumptions and regular performance monitoring that consistently generates results that outperform budgeted expectations and are in line with the formal 14% general unassigned fund balance policy.

MODERATE DEBT BURDEN: Debt ratios are expected to remain stable, given the rapid amortization and affordable future capital needs and debt issuance plans.

ROBUST ECONOMY: The diversified economy benefits from an extensive government, university and healthcare presence and proximity to the Research Triangle Park (RTP), in addition to an extensive transportation network. Economic indicators are strong, including low unemployment, above-average income indicators, and a highly educated labor pool.

APPROPRIATION DEBT: The ratings on the LOBs and COPs reflect the appropriation risk inherent in the installment payments to be made by the city to the trustee, the level of essentiality of the respective leased assets to governmental operations, and the general creditworthiness of the city of Raleigh. The 'AA+' ratings reflect a high level of essentiality, in Fitch's estimation, while the 'AA' rating on the downtown improvement COPs reflects the non-essential nature of the leased assets.

AMPLE LIQUIDITY: The 'F1+' rating principally reflects the long-term credit quality of the city and sufficient period of time following a tender and failed remarketing to access the capital markets and provide takeout proceeds.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health which tempers exposure to a moderately high debt position. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.

CREDIT PROFILE

Raleigh is located in Wake County (rated 'AAA' by Fitch) in the north central portion of the state. Population increased a notable 46% between 2000 and 2010 and a more moderate 6.9% since 2010.

ROBUST ECONOMY, STRONG FUTURE

Raleigh is located adjacent to the successful RTP, which serves as an important economic engine. The city has a highly skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, healthcare, and other professional services. Strong population growth, an expanding technology and medicine niche, a surging professional and businesses service sector bode for a strong future.

The metro area job growth is expected in biotech industries, all aspects of service producing enterprises and high tech manufacturing. Global Insights expects the growth leaders will be professional/business services and education/healthcare sectors, with average annual payroll growth of 4.0% and 2.3%, respectively, from 2015 through 2019. Combined, these two sectors account for just over 30% of Raleigh's total employment.

The economy remained relatively stable through the economic downturn with a 4.5% unemployment rate as of January 2015, well below the state (5.9%) and national (5.9%) average. Wealth levels are above average.

SOUND RESERVE LEVELS

For at least the past seven years, general fund results have increased operating reserves. Fiscal 2014 closed with an $11.4 million increase to the general fund balance (2.9% of spending), both revenues and expenditures outperformed budget. The fiscal 2014 budget included a $13 million appropriation of fund balance, but the city conservatively budgets for full staffing and utilizes prudent revenue assumptions, enabling historically strong year end results. Sales tax collections showed strong 6.9% growth. The unrestricted balance totaled $176.7 million, or an ample 44.7% of spending. In addition, the city's reserve by state statute, an offset to accounts receivable, totals $45.2 million or an additional 11.5% of spending.

CONTINUED REVENUE GROWTH EXPECTED IN FISCAL 2015

The fiscal 2015 budget shows continued revenue growth. Consistent with previous years, the adopted budget includes a $13 million appropriation of general fund balance. The budget also includes a moderate 2.12 cent property tax rate increase to 40.38 for voter approved transportation bonds (1.12 cents), as well as for a street resurfacing program (1.0 cents). The budget also includes an increase in the solid waste fee as part of a multi-year effort to achieve self-sufficiency for the enterprise operation begun in fiscal 2013. Based on the city's historical financial performance, operations are expected to remain positive and reserves ample.

The proposed fiscal 2016 budget reflects a 4.4% increase in expenditures. Property taxes and sales taxes drive general fund revenue growth. The property tax base is estimated to increase 1.5% (generating $3.1 million) and the proposed budget includes a 1.72 cent tax increase to support the 2014 Parks bond referendum ($8.8 million). Similar to the 2015 budget, balance is achieved with a $13 million appropriation of reserves.

Fiscal 2016 budgetary expenditure growth is for new or expanded facilities tied to growing service demands, including a new development services department and added public safety needs, as well as an average pay increase of 2.9%.

AFFORABLE DEBT PROFILE

Debt levels are moderate at 3.4% of market value, and debt service accounts for 11.7% of total fiscal 2014 governmental spending. Amortization is mid-range with 51% of all general obligation debt and LOBs/COPs retired in 10 years. The city's overall debt profile, including enterprise debt, is 29% variable rate debt.

The current fiscal 2015 to 2019 five-year capital improvement plan (CIP) totals $890 million. Water and sewer enterprise projects (revenue bonds rated 'AAA'/Outlook Stable by Fitch) account for the majority of the plan at 67%. The plan is 54% debt funded.

The city's near-term planned issuances include a $32 million equipment financing- a bi-annual program - and a $52 million borrowing (subject to final council approval) for park land acquisition; both sales are expected to be privately placed appropriation-supported obligations. The land acquisition involves a 308 acre parcel currently owned by the state, and represents a unique opportunity for the city to enhance park space. A $77 million utility revenue bond issuance and a $17.6 million LOB issuance (for fire facilities) are also planned. In the spring of 2016, the city may issue a portion of its $173 million of authorized but unissued general obligation debt. Given the above average amortization of existing debt and the prospects for continued tax base growth, debt metrics should not be impacted by the planned borrowings.

WINDOWS DEBT

The variable-rate 2009 LOBs were issued at an initial rate equal to the SIFMA index as of the date of delivery plus a fixed index spread (the first 'windows' rate) and will bear interest at the windows rate until adjusted to another interest rate (daily, weekly, long-term, etc.). Bonds in the window mode will not be subject to mandatory tender for purchase until 210 days following the tender notice.

While in the windows mode upon tender there is a 30-day remarketing window which is followed by a 180-day funding period during which the city may issue refunding bonds, remarket in the windows mode at a new spread, convert to another mode or another security type including third-party liquidity, or liquidate investments to provide for the purchase price of the bonds. The city's growing investment balances provide ample liquidity relative to the $33.2 million of windows debt. The assignment of the 'F1+' rating reflects Fitch's belief that given the city's 'AAA' credit quality and demonstrated access to debt markets through frequent GO issuance, the city will be able to access capital to fund any tender during the windows period. The LOBs have a bullet maturity with mandatory sinking fund payments. The city confirms the bonds are still in windows mode with actual interest rates coming in below budget. The rating does not cover the potential conversion to another interest rate mode which would require a mandatory tender.

WELL-FUNDED PENSION AND OPEB COST

Pension and other post-employment benefits (OPEB) continue to be well managed. The city is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS). The overall plan is well funded at 97%, after adjusting the discount rate to 7%. For OPEB, the city has set up an irrevocable trust. The unfunded liability as of the December 2013 valuation was $136 million, which represents a very low .3% of the taxable value of real property. Total carrying costs (debt service, pension requirements and OPEB contributions) were a manageable 17.6% of total fiscal 2014 governmental spending.

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, RealEstate Business Intelligence.

Applicable Criteria

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985881

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/20150604006167/en/

Fitch Ratings
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Patricia McGuigan
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Fitch Ratings, Inc.
33 Whitehall Street
New York NY 10004
or
Secondary Analyst
Parker Montgomery
Analyst
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Committee Chairperson
Amy Laskey
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Sandro Scenga, +1-212-908-0278
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Source: Fitch Ratings

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