Dec 21 - Fitch Ratings has assigned the following ratings to Mecklenburg
County, North Carolina (the county) general obligation (GO) bonds and limited
obligation bonds (LOBs):
--$122 million GO refunding bonds, series 2013A 'AAA';
--$100 million GO public improvement bonds, series 2013B 'AAA';
--$15 million LOBs, series 2013 'AA+'.
Proceeds of the series 2013A bonds will be used to refund the 2003B and 2004B
variable rate GO bonds, 2005A&C GO bonds, 2007A GO bonds, and 2008A&B GO bonds
for debt service savings and to reduce the county's variable rate exposure.
Proceeds of the series 2013B bonds will be used to provide approximately $10
million for park and recreational facilities, approximately $80 million for
school facilities and approximately $10 million for community college
Proceeds of the taxable LOBs, series 2013 will be used to refund a portion of
the 2008B certificates of participation (COPs; Bryton Development Project)
The GO refunding bonds, series 2013A are scheduled to price on Jan. 10, 2013.
The GO bonds, series 2013B are scheduled to price on Feb. 5, 2013. The LOBs are
scheduled to price on Jan. 24, 2013.
In addition, Fitch affirms the following ratings:
--$1.39 billion GO bonds at 'AAA';
--$455.8 million COPs and LOBs at 'AA+';
--$113.9 million variable-rate GO refunding bonds, series 2009D at 'AAA/Fl+';
--$12.2 million series 2011 special obligation (SO) bonds at 'AA+'.
The Rating Outlook is Stable.
The general obligations of the county are secured by a pledge of the faith and
credit and unlimited taxing power of the county.
The LOBs and COPs are payable from lease rental payments made by the county,
subject to annual appropriation. The LOBs and COPs are additionally secured by a
deed of trust granting a lien of record on essential government assets.
The SO bonds are secured by a gross pledge of the residential solid waste fee
levied on each equivalent residential unit within the county limits. If the
principal and interest accounts are not funded by Dec. 10 of each fiscal year,
the county pledges to deposit with the trustee the required amounts from any
other legally available funds other than proceeds of any tax that the county
KEY RATING DRIVERS
Robust Economy: Mecklenburg County's economy benefits from a substantial
financial sector and associated professional services. A growing presence in the
energy sector complements a diverse employment base that includes high
technology and healthcare. Prospects for continued economic expansion are
Improved Debt Profile: Proactive financial management has begun to temper a
historically high debt burden and intends to limit future debt in conformance
with the newly instituted debt affordability policy. The county has also
significantly reduced its variable rate exposure.
Strong Operating Performance: Prudent fiscal management bolstered by strong
revenue growth has yielded two conservative years of operating surpluses
strengthening unrestricted reserves.
Covenant Obligation Debt: The 'AA+' rating on the SOs are notched down from the
GOs, reflecting the county's covenant to pay debt service from any legally
available funds other than proceeds of any tax. The obligation is not subject to
termination, and is cumulative to the extent not paid.
Appropriation Lien on Essential Assets: The LOBs and COPs ratings are notched
down from the GOs reflecting risk to annual appropriation, and a lien on
essential government assets.
Short-Term Rating Rationale: The 'F1+' rating on the series 2009D 'Windows Debt'
GO bonds is largely derived from the county's long-term rating and demonstrated
access to the capital markets. Fitch also considers the county's consistently
strong liquidity which could be used in case market access was restricted during
the 180-day remarketing window, and sufficiently documented asset liquidation
Mecklenburg County is located in south central North Carolina on the South
Carolina border. The county encompasses an area of 546 square miles and with a
population of 944,373 it is the most populated county in North Carolina.
CONSIDERABLE ECONOMIC BASE
Mecklenburg County's robust economy provides consistent credit strength,
buttressed by financial and professional services that are supplemented by a
growing presence in energy production, tourism, high-technology manufacturing,
and health and education. Anchored by the city of Charlotte (GO rated 'AAA',
Stable Outlook by Fitch), with a transportation infrastructure supported by
Charlotte-Douglas International Airport (revenue bonds rated 'A+', Stable
Outlook by Fitch), the diverse economy contains the second largest financial
center in the U.S. and more than 264 of the Fortune 500 companies. The economy
continues to diversify and expand with over a $1 billion in capital investment
year-to-date for calendar 2012.
The strong employment base has helped fuel the county's rapid population growth
to 919,628, representing a 2.8% average annual increase since the 2010 census,
well above the nationwide 1% average annual growth during that period. Estimated
2011 population of 944,373 represents strong growth of 2.7% year-over-year.
Wealth levels are above state and national averages. The October 2012
unemployment rate of 8.7% is still high relative to the U.S. rate of 7.5% but
has declined significantly from the 10.4% of the previous year and is currently
below the state rate of 8.8% for the first time since 2008.
STRONG FISCAL MANAGEMENT MARKED BY AMPLE RESERVE LEVELS
Historical financial operations are characterized by prudent fiscal management
marked by maintenance of sound reserves. During fiscal 2011, the county reduced
expenditures to replenish reserve levels after a $50 million cumulative
operating deficit between fiscal 2008 and 2010. Operations after transfers in
fiscal 2011 resulted in a net surplus of $41.7 million (3.4% of spending). The
unrestricted general fund balance increased to $273.9 million or an ample 22.1%
of spending. When factoring in the state required fund balance reservations for
certain receivables, to be comparable with fund balance presentation in other
states, reserves equaled 30% of spending.
Fiscal 2012 ended with a substantial $86 million general fund operating surplus
after transfers out. General fund expenditures in fiscal 2012 were a notable
$99.6 million under budget. During fiscal 2012 the county terminated its
relationship with Carolinas Healthcare for the provision of indigent care and
behavioral health services, effective for fiscal 2012. The termination yielded
budgetary savings in fiscal 2012 of $40 million. The county will assume
responsibility for providing public health services beginning in fiscal 2014.
Also, spending for detention and court services was $9.3 million under budget.
Contributing to the positive variances is the county's practice of conservative
budgeting. Actual revenues came in 3% over budget due to
increases in property and sales tax receipts.
The unrestricted general fund balance increased to $381.9 million or an ample
26.5% of spending. When factoring in state required reservations, reserves
equaled $458.3 million or 45% of spending.
Property and sales tax revenues as well as lottery proceeds allocated for the
repayment of debt service are now accounted for in a separate debt service fund.
The county's fund balance goal is to accumulate reserves equal to two years' of
non-property tax revenue. The unrestricted debt service fund balance at the end
of fiscal 2012, inclusive of state required reservations for receivables,
equalled $31.4 million or 7.2% of spending.
The fiscal 2013 adopted budget, which is 3.4% more than the prior year's budget,
includes a $14 million fund balance appropriation to pay for one-time expenses
for facility maintenance and technology infrastructure and reduces the tax rate
by $.0244 to $0.7922 cents per $100 of assessed value. The budget also includes
compensation and benefit increases for government employees totaling $12.1
million or approximately 0.8% of budget. Year-to-date operations are in-line
OVERALL DEBT BURDEN IS MODERATE
The county's debt levels are expected to remain moderate and within the county's
internal guidelines. Direct debt ratios at 1.7% of assessed value (AV) and
$2,076 per capita are well within policy guidelines which restrict debt to AV to
2% and debt per capita to $2,000. Overall debt levels are moderate at $3,973 per
capita and 3.2% of AV and within the county's policy of $4,000 per capita and 4%
Debt amortization is above average at about 75% retiring in 10 years, in
compliance with conservative county policy of 64%. The county has reduced its
variable-rate debt exposure from a high of 46% to a manageable 15% in just four
years. The county's revised debt guidelines is more conservative and limits
variable-rate debt exposure to 20% compared to the previous policy of 35%.
As part of a restructured capital planning process, the county instituted more
stringent debt affordability guidelines. It intends to restrict future capital
projects to those that can be financed within the calculated debt capacity and
available pay-as-you-go capital funds.
Debt issued within policy parameters will result in debt service payments equal
to between 17% and 19% of the budget over the next five years. Although Fitch
views this percentage as high, it notes that it is consistent with historical
levels, which have not in the past hampered financial flexibility. Future debt
issuance plans will adhere to debt policies and approximate $100 million
annually. The county is committed to annual pay-as-you-go financing amounts
equal to three cents of the tax rate and a portion of excess fund balance in the
debt service fund.
Long-term obligations associated with pensions and other post-employment benefit
(OPEB) are limited. The county contributes 100% of its ARC to the statewide
cost-sharing multi-employer defined benefit Local Government Employees'
Retirement System (LGERS), which totaled just 1.1% of general fund spending. The
overall plan is extremely well funded at 99.5% as of the most recent valuation
date or 96.9% after adjusting the discount rate to 7%. Additionally, the county
contributes to various supplemental retirement plans with a total 2012 cost of
After reaching a funded ratio of 100% in 2008, the county cut back OPEB funding
to the pay-go amount beginning in 2011. For fiscal 2012, the county contributed
$15.7 million or 1.2% of 2012 spending. OPEB has been closed to employees hired
after July 1, 2010. The county is committed to developing a funding strategy for
COVENANT TO FUND SOs IS STRONG
While bondholders benefit from strong coverage from gross revenues collected on
the property tax bill, the 'AA+' rating solely reflects the county's covenant to
fund debt service payments. Solid waste system operations yield satisfactory
coverage on a net basis of approximately 1.5 times in fiscal 2012.
Within 10 days after the end of each month, the county will deposit with the
trustee gross solid waste fee revenues into the interest account, an amount
equal to the interest payable on the bonds on the next two interest payment
dates, and into the principal account, an amount equal to the principal due on
the next Jan. 1. The county's obligation to make such deposits shall cease for
each fiscal year when the principal and interest accounts have been funded as
described above. If the principal and interest accounts are not funded as
described above by Dec. 10 of each fiscal year, the county covenants that by
that date it will cause to be deposited with the Trustee the required amounts
from any other legally available funds other than proceeds of any tax that the
WINDOWS DEBT RATING REFLECTS AN EXCEPTIONAL GENERAL CREDIT PROFILE
The assignment of the 'F1+' rating reflects Fitch's belief that given the
county's 'AAA' credit quality and demonstrated access to capital markets through
frequent GO issuance, the county will be able to refund the bonds during a
windows period. In addition, the county's strong cash position provides a
potential source of repayment in a failed remarketing scenario.
Upon an investor tender notice, the bonds are subject to a remarketing window.
The remarketing agent has one month to find another buyer at the existing spread
or at a higher spread acceptable to the county. If neither is completed, the
funding window begins. Within the six-month funding window, the county has the
option at any time to: refund or redeem the bonds, convert to another mode under
the bond resolution (such as weekly with LOC), or remarket in the windows mode
at a new spread.
If no option is exercised during the funding window, the bonds are subject to
mandatory tender. A failure to pay the tender price of the bonds on a mandatory
tender date will constitute an event of default under the bond resolution.
In the unlikely scenario that tenders would need to be paid with cash on hand,
the county has maintained strong average daily portfolio balances. Short-term
investments with a maturity of one month or less have provided coverage ranging
from 1.01x to 4.03 over the year ending November 2012.