NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds to be issued by the County of Essex, NJ (the county):
--$23,560,000 general improvement bonds, series 2015A;
--$55,000,000 county vocational school bonds, series 2015B (New Jersey School Bond Reserve Act).
Fitch also assigns a rating of 'F1+' to the county's $65,790,000 bond anticipation notes (BANs), series 2015.
The bonds and BANs will be sold competitively on Sept. 2. Proceeds of the series 2015A bonds will finance various capital improvements for the county; series 2015B bonds will fund the initial phase of the anticipated construction of the new Essex County Vocational School. The BANs will temporarily finance and refinance various capital improvements for the county and vocational school.
Fitch also affirms the following ratings for outstanding county obligations:
--$105 million outstanding GO bonds at 'AA';
--$377 million outstanding Essex County Improvement Authority (county guaranteed) bonds at 'AA'.
A list of the individual Fitch-rated series of bonds is provided at the end of this press release.
The Rating Outlook is Stable.
SECURITY
The GO bonds and the BANs are backed by the county's full faith and credit and unlimited taxing authority. The county unconditionally and irrevocably guarantees the payment of the Essex County Improvement Authority (ECIA) bonds and has pledged its unlimited taxing authority to bondholders.
KEY RATING DRIVERS
SOUND FINANCIAL MANGEMENT: Generally conservative budgeting and steady, moderate tax levy increases the past six years have led to growth in reserves providing for improved financial flexibility.
BROAD AND DIVERSE ECONOMY: The county remains an important hub for commercial activity, transportation, education and healthcare, and further benefits from its participation in the New York-Newark-Jersey City metropolitan statistical area.
MIXED ECONOMIC INDICATORS: Income levels slightly exceed national levels but fall below state levels. Unemployment rates are above average, reflecting the presence of an urban core in contrast to its wealthy suburban communities.
MANAGEABLE DEBT AND CAPITAL NEEDS: Overall debt levels should remain moderate based on future borrowing and capital needs and the very rapid retirement of outstanding debt. Rising costs associated with pension and healthcare is a driver of spending growth; however, Fitch considers the cost of servicing long-term liabilities manageable.
EXPECTED MARKET ACCESS: The 'F1+' short-term rating corresponds to the 'AA' rating on the county's outstanding GO bonds reflecting market access for long-term debt.
RATING SENSITIVITIES
CHANGE IN FINANCIAL PROFILE: The 'AA' rating reflects Fitch's expectation that economic and debt fundamentals will remain largely stable and that the county will continue to manage its finances to maintain structural balance and an adequate reserve cushion. The rating is sensitive to performance outside of Fitch's stated expectations.
CREDIT PROFILE
MAJOR COMMERCIAL CENTER; MIXED SOCIOECONOMIC METRICS
Essex County is situated in northeastern New Jersey approximately 10 miles directly west of downtown Manhattan. The county is densely populated and highly developed and has an estimated 2014 population of 795,723 which represents a modest increase since 2000.
The city of Newark, which accounts for more than one-third of the county's population, serves as the anchor of the county's urban core. The city's very weak income and unemployment metrics are balanced against the remainder of the county, which includes several wealthier suburban communities such as Milburn, Glen Ridge, and Livingston. As such, overall income and unemployment metrics are mixed. Median household income registers 104% of the U.S. standard but only 77% of the state. Unemployment as of May 2015 was 7.5% in the county, 9.7% in Newark, 6.3% in New Jersey and 5.5% across the U.S.
The county features a broad and diverse economic base with representation from the telecommunication, commercial aviation, higher education, health care, pharmaceuticals, and financial services sectors. Substantial employers include St. Barnabas Hospital (23,000), Verizon (17,100), Prudential Insurance (16,850), and Rutgers University-Newark (15,500). An excellent transportation infrastructure provides residents of the county with access to employment opportunities throughout the New York-Newark-Jersey City metropolitan statistical area (MSA). The MSA ranks as the largest employment base in the country with nearly 8.9 million non-farm jobs.
The county's tax base remains significant at $83 billion on an equalized basis in 2015 or close to $105,000 per capita. After an aggregate 16.5% decline since 2009 the tax base improved modestly in 2015 by 1.2%. Home prices throughout the county improved in 2014 but showed a 3.8% decline through June 2015 year over year according to Zillow.com.
FISCAL 2014 OPERATING RESULTS GROW FUND BALANCE
The county has experienced generally stable to positive operating results the past six years supported by careful expenditure management and consistent moderate tax levy increases. Operating results for 2014 reflect a surplus of $15.7 million (net of appropriated fund balance) or 2% of spending resulting in an ending current fund balance of $63.7 million (8% of spending). The positive results reflect primarily the lapsing of previously appropriated reserves and revenues exceeding expenditures. These results reflect the third year of growth in reserves. The county discontinued its use of tax anticipation notes in fiscal 2014 as a result of the improvement in its cash position.
FISCAL 2015 RESULTS PROJECTED TO SHOW SURPLUS
The 2015 budget totals $731 million, and includes an $8.1 million increase in the tax levy. Property taxes represent 57% of the budget. The statutory 2% tax levy cap excludes payments for debt service, capital improvements, and pension and healthcare cost increases in excess of 2% from the prior year. The county has $9.3 million (1.3% of budget) in available unused levy under the cap for the 2016 through 2018 tax years. The state's tax cap laws are based on the prior year's levies thereby mitigating the effect of a decline in valuation. The county's tax levy is 100% guaranteed from the county's municipal governments eliminating collection risk.
The budget includes a fund balance appropriation of $11.3 million, an increase of $7.3 million over the $4 million amount appropriated in years 2012 through 2014. $5.3 million of the increase represents retroactive pension contributions to the state for prior periods during which labor contracts were unsettled (2008 through 2011). An additional $2 million was appropriated mostly to cover anticipated increases in snow removal costs.
Results to date for 2015 are tracking positively and management expects additional lapses in appropriated reserves similar to 2014. Management is projecting surplus operations of approximately $4 million to $5 million (net of appropriated fund balance) with a corresponding increase in reserves.
MODERATE LONG-TERM LIABILITIES; RAPID DEBT AMORTIZATION
Overall debt metrics, net of self-supporting and state assistance, are moderate at 2.5% of market value and $2,555 per capita. These ratios include county-guaranteed debt issued by the ECIA. Debt amortization is very aggressive with approximately 82% of outstanding obligations repaid within 10 years. The county will repay almost $675 million in principal during this period and see its annual debt service costs decline from $98.6 million this year to $47.8 million in 2025. The county's current capital plan, which is mostly debt funded, proposes spending $20 million annually through 2020.
Construction of the new Essex County Vocational School is expected to cost $163 million and be funded from debt. The state approved debt service aid in the amount of 90% of the costs. Future debt for this project is expected to be issued over the next two years.
The county administers the Essex County Employees' Retirement System (the county system) which has been closed to additional membership since the mid-eighties. The plan's liabilities were funded through the purchase of a group annuity using proceeds of a GO bond issued in 1989; however, the plan's assets were depleted in 2009 so the county has been funding the plan on a pay-go basis since. The 2015 budget contains an appropriation of $3.5 million which is actuarially forecast to steadily descend by several hundred thousand over the next several years.
All other employees and retirees participate in the state administered Police and Firemen's Retirement System (PFRS) or the Public Employee's Retirement System (PERS). The funded status of the PFRS and PERS local portions was 76% and 74% respectively, as of June 30, 2014. Using Fitch's 7% investment rate of return, the funded levels decline to an estimated 69% and 67%, respectively. The county contributed $29.8 million in 2014.
The county makes annual pay-go OPEB contributions totaling $17.2 million in 2014, equal to 35% of the annual required contribution.
The county's carrying charges inclusive of debt, pension and other post-employment benefits (OPEB) remain manageable accounting for an estimated 20% of spending. Growth in pension costs is expected to increase this ratio slightly. Fitch's concern for rising carrying costs is lessened by the fact that the majority of the carrying costs are for debt service and the county's debt is amortized at a very rapid rate.
Outstanding Fitch-rated county GO bonds:
--GO (Early Retirement Incentive) pension refunding bonds, series 2003;
--GO general improvement and county college bonds, series 2004A and 2004B;
--GO county college bonds, series 2004C;
--GO refunding bonds, series 2014.
--GO general improvement bonds, series 2014A;
--GO county vocational school bonds, series 2014B (New Jersey School Bond Reserve Act);
--GO county college bonds, series 2014C (County College Bond Act);
--GO county college bonds, series 2014D (County College Bond Act).
Outstanding Fitch-rated Essex County Improvement Authority bonds:
--Project consolidation revenue bonds (refunding project), series 2004, 2005, 2006 and 2007;
--GO guaranteed lease revenue refunding bonds (sportsplex project), series 2005A and taxable revenue refunding bonds (sportsplex project), series 2005B.
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, National Association of Realtors.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989872
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989872
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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