TEXT-Fitch affirms Polk County, Iowa GOs

Thu Nov 15, 2012 3:37pm EST

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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).
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