Fitch Rates Guilford County, NC's GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Guilford County, North Carolina general obligation (GO) bonds:

--$20.8 million GO bonds, series 2011.

The bonds will sell via negotiation on or about Aug. 24.

In addition, Fitch affirms $776.3 million of outstanding county GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds constitute general obligations of the county, to which its full faith and credit and unlimited taxing power are pledged.

KEY RATING DRIVERS

--Strong Financial Management: Financial management is sound, budgeting practices are conservative, and reserve levels are consistently healthy. Financial flexibility is ample.

--Elevated Debt Burden: Debt levels remain manageable but face ongoing pressure as the county addresses school and general government capital needs through the issuance of voter-approved GO debt.

--Decreasing Exposure to Variable-Rate Debt: The county's exposure to variable-rate debt and derivatives continues to soften. The county's debt structure presents additional risks associated with the creditworthiness and performance of the counterparties to the county's various swaps and liquidity agreements and the relationship of variable rate indices (basis risk).

--Stable and Diverse Economy: The county's economic base is expanding through the use of incentives and promotion of its quality of life, educational opportunities, and excellent transportation infrastructure.

CREDIT PROFILE

The county has demonstrated a history of prudent financial management and conservative budgeting practices. In fiscal 2010, the general fund incurred a net deficit of $5.6 million or a relatively modest 1% of spending (operating expenditures and transfers out). The deficit, which was the first dating back to at least fiscal 2003, resulted from a $9.7 million transfer out of the general fund for pay-as-you-go capital.

Strong Financial Management and Healthy Reserve Levels:

The county's financial resource base remains solid despite the fiscal 2010 deficit and in-line with historical levels with an unreserved fund balance of $88.2 million or 16% of spending. In addition, Fitch considers the portion of the county's general fund balance reserved for state statute, which consists primarily of accounts receivable and is required by North Carolina state law, to be a source of additional financial flexibility totaling $34.1 million or an additional 4.8% of spending in fiscal 2010.

The fiscal 2011 general fund budget is performing well based on 10 months of actual results. Revenues are expected to be on budget, while expenditures are projected to have a positive variance of approximately $30 million. Due to this large positive variance for expenditures, the county anticipates it will spend on net $7 million for pay-go capital of its total fund balance, some of which will be undesignated fund balance. The county had appropriated use of $42 million of fund balance to plug budgeted gaps in the general fund. The county is projecting an unreserved fund balance close to $85 million or 15.5% of total spending on the year. The county maintains an 8% unreserved and undesignated fund balance policy.

The county's maintenance of financial flexibility is considered a credit strength. Property tax revenue accounts for almost 60% of total general fund revenue, reflecting a stable revenue base, and has increased nearly 6% on average the past several fiscal periods. Fitch favorably notes the county's demonstrated willingness to increase tax rates in response to softening tax base growth and sales tax revenue. Moreover, modest expenditure cuts to date have provided the county with sufficient flexibility to cut spending in the future. According to the county, there is still room for additional savings or efficiencies that would maintain the general fund balance at or near the current level over the next several years without affecting service levels.

Growing Economy:

Guilford County is the most populous county in the Piedmont Triad region of North Carolina. The county encompasses two of the state's larger trade and population centers, the cities of High Point (GOs rated 'AA+' with a Stable Outlook by Fitch) and Greensboro (GOs rated 'AAA' with a Stable Outlook by Fitch). Employment base losses due to a weak manufacturing industry are somewhat mitigated by job creation from growing industries like technology and warehousing and distribution. The county's unemployment rate has increased since the onset of the recession as a number of the remaining textile producers have announced layoffs affecting up to several hundred employees at a clip. Unemployment remains relatively high at 10.2% in May 2011 but has fallen 8.9% year-over-year from its high of 11.2% in December 2010 largely due to declining labor force participation, per BLS data. Wealth indicators for the county are on par with state and national averages.

The county's local economy does show diversification and growth despite manufacturing losses, through continuing investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and machinery products. Development of these sectors should add diversity and stability to the county's economic base. A good deal of growth is centered on the Piedmont Triad International Airport (PTIA) in Greensboro, where FedEx recently completed construction of its fifth national hub. The county notes that FedEx's presence has been recognized as an important consideration by several firms, like Honda Aircraft and Polo Ralph Lauren, which have recently decided to locate or expand within the county.

Fitch believes the county's education sector may also play a pivotal role in future growth. In particular, North Carolina Agricultural and Technical State University (NC A&T University) and The University of North Carolina at Greensboro (UNCG) are involved in the development of The Gateway University Research Park. This research campus features a joint school of nanoscience and nanoengineering that began offering advanced degree classes in fall 2010.

Elevated Debt Levels and Exposure to Variable-Rate Debt and Derivatives:

Debt levels remain manageable but face pressure largely due to the funding of capital requirements related to Guilford County Schools and Guilford Technical Community College (GTCC). Following this bond issuance the county will have a total of $347 million in authorized unissued debt of which the county plans to issue $141 million along with $16.8 million of qualified school construction bonds as an installment purchase financing in 2012. The county projects annual debt service will peak in fiscal 2015 at an above-average 18% of spending (exceeding the county's 15% target).

The county's exposure to variable-rate debt and derivatives continues to soften, which Fitch views favorably. Through the 2010 and now 2011 refundings, the county's fixed rate debt will total 71.4% of total debt with unhedged variable and synthetic fixed rate debt no greater than 17.8% and 10.8%, respectively. According to the county it has taken advantage of the current low fixed-rate market and opportunities to achieve debt service savings and ultimately a more conservative debt profile. The county conservatively budgets its variable rate cost of interest, contributing to the favorable expenditure performance noted above. The county will continue to evaluate the use of variable-rate debt for future issuances. Fitch will continue to monitor the county's variable-rate exposure to ensure it does not place undue pressure on its debt profile or on its financial flexibility.

Limited Pension and OPEB Liabilities:

The county's pension liability is limited to its participation in the North Carolina Local Governmental Employees' Retirement System (LGERS) state plan and its own plan for law enforcement officers. The county's obligation to contribute to these plans and contribution amounts are established pursuant to state law and are funded through appropriations made in the general fund operating budget. Fitch notes that as of fiscal 2009, the county's plan was poorly funded at 15.7%. The risk inherent in this low funding, however, is largely offset by the plan's low UAAL, equal to $6.5 million. The county fully funds its pension obligation on an annual basis with fiscal 2010 contributions totaling $6 million or a 1.1% of spending, which Fitch considers a low cost pressure.

OPEB liabilities remain relatively low. Fitch does not consider the county's OPEB liability as exerting pressure on its finances given the relatively small size of the OPEB ARC. The county has established a trust to pre-fund its OPEB liability. The fiscal 2011 budget provides $2 million to advance fund the county's other post-retirement employee benefits (OPEB) obligation, as the county did in fiscal 2010 and plans to continue in fiscal 2012.

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', dated Aug. 16, 2010;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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Contacts

Fitch Ratings
Primary Analyst
Ginny Glenn, +1-212-908-9130
Analyst
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-1833
Senior Director
or
Committee Chairperson
James Mann, +1-212-908-9148
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ginny Glenn, +1-212-908-9130
Analyst
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-1833
Senior Director
or
Committee Chairperson
James Mann, +1-212-908-9148
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com