Nov 15 - Fitch Ratings has affirmed the following bonds of Polk County, IA (the county). --$207 million unlimited tax general obligation (GO) bonds at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are secured by the county's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount. KEY RATING DRIVERS STABLE ECONOMY; HIGH WEALTH: The regional economy has weathered the recession well, benefiting from the stability of the state government and its position as a regional insurance and financial center. Residents display a superior economic profile with above average wealth levels coupled with below average unemployment rates. ROBUST FINANCIAL FLEXIBILITY: The county's financial position is strong and should remain so despite recent reserve draw downs. MANAGEABLE DEBT; WELL-FUNDED PENSION: Debt levels are slightly elevated but amortization is rapid and non-tax revenues supporting repayment is an important mitigant. Pension obligations are adequately funded and comprise a small portion of expenditures. CREDIT PROFILE STATE CAPITAL WITH ROBUST, RESILIANT ECONOMY Polk County, the most populous county in the state, enjoys a substantial economic base anchored by the state capital, and its position as a regional financial center. Employment within the insurance and financial services sector as a percentage of total employment is nearly three times the national average, and plays a vital role in the region's prosperity. While the financial services and insurance industry recently experienced contracted on a national basis, the area did not face similar disruptions. Socioeconomic indicators are superior with per capita income levels at 115% of the state average coupled with the August 2012 unemployment rate at 5.5% compared to 5.3% and 8.2% for the state and national averages, respectively. The tax base is primarily residential and has experienced only minor declines despite the national recession. The tax base is well diversified with the top 10 payers accounting for 9% of total assessed valuation. Approximately 65% of general fund revenues come from property taxes, and 21% comes from the state. The state has considered several measures that could notably decrease payments to the county, but none have been enacted to date. Fitch will monitor these measures, though if they are enacted, Fitch believes the county maintains enough financial flexibility to respond to these challenges. HIGH FUND BALANCE LEVELS PROVIDE FINANCIAL FLEXIBILITY The county finished fiscal 2010 and fiscal 2011 with operating surpluses of $1.26 million (0.9% of expenditures) and $472,000 (0.3% of expenditures), respectively. The surpluses were achieved primarily through close management of expenses. The county's fiscal 2011 total fund balance was $39.3 million (24.9% of expenditures and transfers out) and the unrestricted fund balance (the sum of committed, assigned and unassigned as per GASB 54) was $38.5 million or 24.4% of spending. The county had an $8.8 million contingency reserve that provides additional flexibility. Preliminary results for the fiscal year ended June 30, 2012, show a $4.7 million decline in fund balance. The cause of this deficit was split almost evenly between capital funding in advance of a bond sale in early fiscal 2013 and a planned use of fund balance for one-time costs as fund balance was above policy levels. The county offered employees an early retirement incentive (ERI) in fiscal 2012 and expects to save $4 million per year from these initiatives. Management budgeted a $1.5 million operating deficit to fund the remaining ERI costs in fiscal 2013 which would reduce reserves further to a still robust 20% of spending. GAMING REVENUES OFFSET DEBT SERVICE EXPENSES Overall debt is more elevated at $3,011 per capita and 4.6% of market value. Principal amortization is above average, with over 83% of principal retired within 10 years. Future borrowing plans are limited, although several large projects such as a court complex renovation are under consideration. Fiscal 2013 debt service is high at 18.5% of expenditures. However, roughly 48% of the total is expected to be supported from non-property tax revenues, including a significant portion from gaming revenues, in other funds. The county recently updated its agreement for the receipt of gaming revenues from Prairie Meadows, a horse racing and gaming facility owned by the county and leased for operations. The new agreement provides the county with roughly similar payments from 2011 to 2013, followed by guaranteed fixed payment and a percentage of adjusted gross receipts through 2018. Debt service is fully supported by just the fixed portion of payments through 2018. Fitch believes the county could support debt service from the general fund in the event gaming revenues decline precipitously although current robust reserve levels could suffer. Historically consistent gaming receipts during an unfavorable economic cycle provides some comfort that the general fund will likely not need to support debt service, absent outside factors such as increased competition. MANAGEABLE PENSION LIABILIIES Long term liabilities related to employment benefits are modest. Employees are in a state-sponsored pension plan, and the county annually funds its full actuarially required contribution. Annual contributions have increased over the last several years but are still low at roughly 4% of total general fund expenditures in fiscal 2011. As of June 30, 2011, the plan is currently 77% funded using Fitch's 7% return assumption. The county allows its retirees to participate in its healthcare plan at 100% of the stated premium until the retiree reaches Medicare eligibility (implicit rate subsidy).