Fitch Rates King County, WA's $8.6MM ULTGOs 'AAA'; Outlook Stable
Fitch Ratings assigns an 'AAA' rating to the following King County, Washington new debt issuance:
--Approximately $8.6 million unlimited tax general obligation (ULTGO) bonds series 2013.
The bonds are scheduled to price on June 24, 2013 via competitive sale. Proceeds will be used to refund outstanding debt for interest savings.
In addition, Fitch affirms the following ratings:
--$128.7 million outstanding limited tax general obligation (LTGO) bonds at 'AAA';
--$1.6 billion outstanding LTGO bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are general obligations of the county, secured by an irrevocable full faith, credit, and resources pledge to levy an ad valorem tax sufficient (together with all other legally available monies) to pay debt service. The county's pledge on outstanding LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction.
KEY RATING DRIVERS
RESILIENT ECONOMY: King County retains a sound economic base due to its role as a regional economic center and above-average wealth and income levels. Employment levels have seen steady improvement over the past two years and recently surpassed pre-recession peaks. Assessed values for 2014 are projected to increase modestly after four years of declines and recent home price increases point to further gains.
SOUND FINANCIAL POSITION: General fund balances and cash levels are healthy and increased substantially in 2011. Unaudited financials for 2012 reflect continued positive results and the county's 2013 budget is balanced.
STRONG MANAGEMENT: The county's strong management is reflected in its commitment to long-term planning, adherence to council-adopted financial management policies, and low debt burden.
LIMITS ON REVENUE GROWTH: The county is property tax dependent in a state with restrictive property tax levy growth limits and recent significant taxable assessed value (TAV) declines.
STRUCTURAL IMBALANCE: The county will be challenged to maintain structural balance over the longer term due to ongoing cost pressures and constraints on revenue growth. Recent efforts to address this imbalance through efficiency measures have shown positive results but could prove difficult to maintain on a permanent basis.
BALANCED OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics, including the county's ability to maintain balanced operations despite revenue constraints. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
DIVERSE ECONOMIC BASE
King County benefits from a diverse economy and tax base that encompasses almost 29% of the state's population. Major private employers include Boeing and Microsoft and the regional economy is also supported by a substantial military presence. The county includes the Pacific Northwest's largest city, Seattle, and serves as a regional economic center. Wealth and income levels are well above national averages, and TAV is high at approximately $161,000 per capita.
King County performed better than many regions nationally in the recent downturn and has experienced steady employment gains during the past two years. The county unemployment rate fell to 5.1% in March 2013, well below the 7.6% national rate, and total employment levels recently surpassed pre-recession peaks. Assessed values appear likely to returnto growth in 2014 after four years of declines, rising an estimated 3.8%. April 2013 home values reported by Zillow.com increased by 14.9% compared to one year earlier, indicative of likely continued growth in TAV.
CONTINUED PROGRESS IN ADDRESSING STRUCTURAL IMBALANCE
King County's general fund fared better during the recent downturn than general economic indicators might suggest. Total revenues increased at a modest average annual rate of 0.5% between 2007 and 2011, while the county impressively held spending stable. In addition to ongoing savings from labor cost reductions achieved during this period, the county has sought to reduce costs by 3% per year on an ongoing basis through efficiency improvements. Key efficiency gains to date have included reductions in employee health insurance costs, office space consolidation, and the centralization of information technology services.
Such efficiency efforts respond to legal limits on growth in property tax, the general fund's largest source of revenue, and are intended to address the structural imbalance between projected revenue and expenditure growth. Voter-approved property tax levies for specific purposes, such as parks or criminal justice, have also helped the county to reduce demands on its general fund in recent years, but Fitch believes out-year gaps may prove challenging to manage. A material change in the county's financial flexibility and reserves relative to historical levels, while not anticipated, could pressure the current rating and/or Outlook.
STRONG RESULTS FOR 2011
General fund balances improved substantially in 2011 after a small increase in 2010 and three prior years of declines. Unrestricted fund balance reached 20% of general fund spending ($127.7 million) due to conservative budgeting, a planned increase in reserves, and reserve fund consolidation. Balance sheet liquidity is satisfactory, as the county closed fiscal 2011 with general fund cash and investments of $90.1 million, equivalent to almost two months of general fund spending and more than three times total liabilities. Management reports continued positive margins for the fiscal year ending Dec. 31, 2012, with unrestricted fund balance (unaudited) rising to $133.1 million, equivalent to 21% of 2011 spending. The county was able to eliminate a modest budget gap for 2013 without service reductions or use of fund balance and first quarter results appear positive.
LOW DEBT; MANAGEABLE PENSIONS
The county's debt burden remains low with net direct and overlapping debt at 2.1% of TAV. Amortization is quicker than average with approximately 67% of direct debt repaid in 10 years.
Pension liabilities are manageable and reflect historical strong funding levels for most state-sponsored plans. Other post-employment benefit liabilities are relatively minor as most retirees must pay for the cost of their participation in the county's group insurance plan. Carrying costs for both debt and retirement benefits are low at approximately 9% of noncapital governmental expenditures in 2011.
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, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
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