NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following Dare County, North Carolina ratings:
--$0.2 million general obligation (GO) bonds at 'AA';
--$118 million certificates of participation (COPs) and limited obligation bonds (LOBs) at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are general obligations of the county secured by a pledge of its full faith and credit and unlimited taxing power.
The LOBs and COPs are payable from funds subject to appropriation by the county board of commissioners, and secured by a respective deed of trust granting a lien on certain project sites and improvements. If a default occurs the trustee can direct the foreclosure on the mortgaged property and apply the proceeds to the payment of amounts due to bondholders.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Dare County's history of prudent financial management and reserve levels serve to mitigate its potential exposure to volatility of tourism related revenues and to storm damage.
PROPERTY TAX FLEXIBILITY: Property taxes account for about half of general fund revenues. The county's tax rate is among the lowest in the state, enhancing overall financial flexibility in the event of potential downturns in less stable sources.
MANAGEABLE DEBT POSITION: Debt levels are affordable, existing debt is rapidly repaid, and future capital needs and borrowing plans are modest.
TOURISM AND MAJOR STORM RISK: Economic activity is highly concentrated in tourism and related activities. The majority of developable land within the county is located on a barrier island exposed to storm damage; the attractiveness of the region has served to encourage rebuilding efforts following past storms.
APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and the LOBs and COPs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholder's recourse to an event of non-appropriation or default; such risk is partially offset by the deed of trust granted on essential facilities.
RATING SENSITIVITIES
DIMINISHED RESERVES: Maintenance of large reserve balances offset concerns regarding the cyclical nature of the county's tourist-based economy and susceptibility to event risk. A significant reduction in reserve levels could lead to negative rating action.
CREDIT PROFILE
Dare County is located along the northeastern North Carolina coast and contains most of the popular barrier island known as the Outer Banks. The 2013 year round population was 35,019, and the county estimates the summer population at over 250,000.
AFFLUENT, TOURISM-DEPENDENT TAX BASE
The county's resilient tourism industry fared well during the recession, as evidenced by only two years of moderate declines in the occupancy and local sales tax collections and subsequent consistent annual growth. Building permit values have shown strong growth over the past two and a half years. The estimated full value of real property is a sizable $13.6 billion and the full value per capita is a strong $390,000 reflecting both the high value of property as well as the small year round population. The eight year revaluation of the tax base for fiscal 2014 resulted in a 29% decline in values. The mill rate was adjusted to offset the entire decline, yet the county tax rate remains among the lowest in the state.
The tax base includes approximately 12,500 rental homes and condominiums and 3,200 hotel or motel rooms. Only 44% of property taxpayers reside in Dare County. Income indicators are above those of the state and nation. The poverty rate is 11.1%, below the state and national rates of 16.1% and 14.3%, respectively. Employment is seasonal and varies greatly over the year, typical of tourist-based economies. Annual unemployment peaked at 12.1% in 2011, and has since gradually improved. Most recently, the April 2014 rate was 7.5%, reflecting contraction of the labor force over the past year.
RESERVES A FAVORABLE RATING CONSIDERATION
Fitch views the sound reserves as an important mitigant to the financial unpredictability in an area dependent on tourism and susceptible to major storms. Historically strong reserve levels have moderated some in recent years but remain sound.
In fiscal 2013, the general fund incurred a modest operating deficit of $2.4 million (1.5% of spending) due to the budgeted use of reserves to fund a $3.2 million swap termination fee. Overall, general fund operations outperformed budget by $4.4 million (4.6% favorable variance) due to monitoring and management of operating expenditures.
The fiscal 2013 unrestricted general fund balance is $15 million, equal to 16.6% of expenditures. Additionally, state law requires a portion of general fund balance to be classified as restricted for stabilization. In fiscal 2013, the stabilization reserve totaled $10.2 million, which when added to unrestricted general fund balance brings available reserves up to $25.2 million or an ample 28% of expenditures.
FAVORABLE FISCAL 2014 PROJECTIONS
The fiscal 2014 budget was balanced with a $1.8 million appropriation of fund balance, but both revenues and expenditures are trending favorably to budget. Management currently projects a $2.1 million general fund surplus for the year. Fiscal 2014 property tax receipts were conservatively budgeted with a 5% allowance for revaluation appeals and collections were over budget by approximately $837 thousand.
The county raised the mil rate to offset the revaluation decline and to allow for levy growth. Dare County's 43 cent property tax rate is the 10th lowest in the state in fiscal 2014. Ample margin exists under the $1.50 statutory tax rate limit.
Expenditure savings were achieved through consolidations of health and social service departments as well as process changes in the emergency medical services department. The fiscal 2014 budget included a 3% employee cost of living adjustment for just under $1 million; the first employee pay raise since 2008. Health plan changes were made so as to moderate cost increases and actual medical costs are expected to come in lower than the previous year.
PRUDENT FISCAL 2015 BUDGET
The fiscal 2015 budget is a 1.9% increase over the previous year and includes no wage adjustments. The largest cost driver is $1.2 million of additional funding into the internal service fund to fund growth in insurance costs for retirees and to bolster the fund's financial position. The budget incorporates revenue from 1.95% growth in property values and a $2 million appropriation of fund balance (2% of budget). Given the county's practice of budgeting conservatively, balanced operations are likely.
MANAGEABLE LONG TERM OBLIGATIONS
Overall debt is low relative to market value (1.1%) and average on a per capita basis ($3,500); the higher per capita ratio is typical for communities with a high proportion of second homes. Fiscal 2013 debt service accounts for a manageable 14.6% of governmental spending. All debt is fixed rate and the county is not party to any derivatives as the county paid swap termination fees in fiscal years 2012 and 2013.
The majority of outstanding debt is for school projects and no near term needs are identified. The county is responsible for school debt service, but school instructional and educational expenses are reported separately in the school system's financial audit. Debt is rapidly retired (over 80% in 10 years), and future borrowing needs are moderate. The county is planning financings totaling approximately $10 million for expansion to county social service facilities and an emergency operations center in 2016.
Pension and other post-employment (OPEB) benefit liabilities continue to be low and well managed. The county contributes to five retirement plans, primarily the state's well-funded Local Government Employees' Retirement System (LGERS). The county's fiscal 2013 total contribution was a low 1.8% of governmental fund spending. The actuarially accrued unfunded OPEB liability is $68 million, which is low relative to the size of the real property tax base. The county pays its OPEB obligation on a pay-go basis and the cost is also low at less than 2.7% of spending. Total fiscal 2013 carrying costs (debt service, pension ARC and OPEB payments) was a manageable 19.2% governmental fund spending.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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, 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:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=851554
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