NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following obligation of the city of Charlotte, North Carolina (the city):
--Not to exceed $180 million of TIFIA certificates of participation (COPs), series 2015-1007A.
The COPs are being issued by the city to evidence its obligation under a loan agreement with the United State Department of Transportation pursuant to the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA). Loan proceeds will be used to pay a portion of the cost of construction of the LYNX Blue Line extension project.
Fitch also affirms the 'AA+' rating on $257.8 million of outstanding COPs (transit projects) and the 'AAA' rating on $776.9 million of outstanding general obligation (GO) bonds. A full list of affirmed bonds follows at the end of this release.
The Rating Outlook is Stable.
SECURITY
The COPs are payable from installment payments made by the city from any legally available resource but subject to appropriation on an annual basis. The city's obligation to make installment payments is secured by a deed of trust granting a lien on certain transit assets to certificate owners. The GO bonds are backed by the city's full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
COP RATINGS LINKED TO GO: The rating on the city's transit COPs is based on the city's overall credit quality and GO rating. The COPs rating is one notch below the GO rating, reflecting the COPs weaker security provisions, most notably risk to annual appropriation of installment payments.
STRONG FINANCIAL POSITION: The city's 'AAA' GO rating reflects its long history of favorable financial operations and maintenance of high reserves that provide a cushion against unforeseen budgetary challenges or emergencies. The city's diverse revenue base is led by property taxes, and tax rates are regionally competitive and well within the statutory cap providing it with significant revenue raising capacity.
REGIONAL ECONOMIC HUB: Charlotte remains a major transportation, banking, and commercial center for the southeast and is among the fastest growing cities in the U.S. Resident income metrics are sound.
MODERATELY HIGH DEBT: Key debt metrics are moderately high. This risk is tempered by the city's manageable future issuance plans and significant debt service fund balances.
RETIREMENT LIABILITIES MANAGEABLE: The bulk of the city's employees participate in the North Carolina Local Government Employees' Retirement System (LGERS), which Fitch views as among the strongest multi-employer state pension plans. City administered pension and retiree health programs do not pressure its budget or create a significant liability relative to its financial and economic resource base.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health which tempers exposure to a moderately high debt position. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.
CREDIT PROFILE
STRONG CITY CREDIT QUALITY
The 'AA+' rating on the COPs is linked to the city's GO credit quality given its obligation to make installment payments in amounts equal to debt service, subject to annual appropriation. Various installment purchase obligations represent nearly two-thirds of the city's estimated $2.3 billion of outstanding direct debt. The city intends to pay debt service on the COPs from the operating revenue of the Charlotte Area Transit System (CATS), but the obligation to make installment payments is payable from any legally available funds of the city.
The city's 'AAA' GO rating reflects its very strong financial profile. Reserves are very high, with an unrestricted general fund (GF) balance of $103.8 million in fiscal year (FY) 2014 equivalent to 17.9% of spending. The city has a sound unrestricted fund balance policy equal to two months or 16% of spending. Available resources, adjusted by Fitch to include $65.5 million of fund balance conservatively restricted pursuant to state law, are estimated at a high 29.1% of spending. Liquidity is strong with cash and investments (C&I) across the primary government totaling $1.8 billion in FY 2014 or 1.3x total expenses. There were no fund deficits identified in any of the city's non-major governmental funds or enterprise funds.
FINANCIAL OPERATIONS EXPECTED TO REMAIN STABLE
City officials are forecasting a $17 million operating surplus (after transfers) in the GF for FY 2015. Year-end results were much healthier than previously anticipated due to strong sales tax collections (16% growth year-over-year) and strong expenditure management countering a reduction in property tax receipts from an ongoing Mecklenburg County revaluation that lowered the city's tax base by $2 billion (about 2.2%).
The adopted GF FY 2016 budget is balanced and does not appropriate existing reserves. The budget includes a modest 1.76-cent or 3.8% increase in the total property tax rate to $0.4863 per $100 valuation. Property taxes comprise 66% of the $519.7 million GF FY 2016 budget. The city's tax rate is well within the $1.50 statutory cap and competitive with the tax rate of its in-state peers, suggesting good revenue raising capacity going forward. Sales tax revenue accounts for 17% of the GF FY 2016 budget. Recent sales tax performance has been exceptionally strong, reflecting continued improvement and expansion of the area economy. City employees are not represented by collective bargaining or subject to contractual agreements; as such the city has flexibility to actively manage its personnel costs.
REGIONAL ECONOMIC CENTER WITH STRONG GROWTH PROSPECTS
Fitch expects Charlotte's position as a regional center for trade, transportation, health care, and financial services will contribute to a general trend of economic growth and stability over time. Total employment in Charlotte has increased at a compound annual growth rate (CAGR) of 2.2% from 2005-2014 compared to 0.6% for North Carolina and 0.4% for the nation. IHS, Inc. forecasts job growth at 2.9% CAGR through 2016 ranking Charlotte among the fastest growing large metro areas in the country. City unemployment generally registers below the state and national benchmarks, and was a low 4.7% in March 2015. The city and its economy attract a well-educated workforce; almost 40% of the adult-age population holds a bachelor's degree or higher (140% of the U.S. norm). Recent expansion within technology, pharmaceutical, and energy sectors has the potential to boost already above-average income indices. Per capita money income and median household income are equal to 125% and 113% of the North Carolina average, respectively.
DEBT METRICS MODERATELY HIGH BUT NOT A RATING CONCERN
Overall debt ratios are estimated by Fitch at 3.9% of market value or a moderately high $4,379 per capita. Debt metrics would be higher if not for the city's notable contributions to pay-as-you-go capital. The city dedicates a portion of its property tax rate ($0.012 per $100 valuation) for general pay-as-you-go investment. The general and total government pay-as-you-go amount budgeted for FY 2016 is $33.1 million and $146.1 million, respectively.
Additional borrowing outlined in the capital investment plan for 2016-2020 is not expected to have a material adverse impact on the city's debt ratios given an average pace of outstanding debt amortization and expectations for continued population and tax base growth. The city retains high balances in its debt service fund that temper credit pressures associated with its higher debt metrics. Management reports $254.8 million in reserves assigned for future debt service in FY 2015, approximating two times the city's annual governmental funds debt service requirement.
AFFORDABLE RETIREE BENEFITS
The city administers a single employer defined benefit pension plan for firefighters and sworn law enforcement officers, and participates in the North Carolina Local Government Employees' Retirement System (LGERS) for all other employees. The reported funded ratio for the firefighter plan was 84.4% as of Dec. 31, 2013, or an estimated 78% substituting the plan's 7.75% investment rate of return assumption for 7%. The sworn officer's plan has a limited number of beneficiaries (207 in fiscal 2014) and is funded by the city on a pay-go basis. The Fitch-adjusted unfunded actuarial accrued liability (UAAL) for both plans is $157.2 million or a very low 0.2% of the city's market value.
Although the funded level of LGERS has declined it remains nearly fully funded at a reported 94.2% as of Dec. 31, 2013.
Eligible retirees also receive health coverage through a city administered plan; benefits provisions and contribution amounts are established by the city council. The city has made significant annual contributions to a trust fund to pre-fund its future retiree health coverage liability; the trust reported an actuarial value of assets of $44.1 million in FY 2014 (resulting in an 18% funded ratio). Costs for debt, pension, and retiree health are manageable at 19% of FY 2014 governmental fund spending.
CATS' LIGHT RAIL EXPANSION
CATS is an enterprise fund of the city of Charlotte, established in 1999 to manage, operate, and develop a regional mass transportation system serving Mecklenburg County, Charlotte, and six surrounding towns in North and South Carolina. CATS is undertaking a $1.16 billion 9.3-mile extension of the existing Blue Line light rail service from 7th Street in Uptown Charlotte north to the campus of The University of North Carolina at Charlotte (UNCC). According to the city the project is on budget and on schedule for completion by the summer of 2017.
Full funding grant agreements with the Federal Transit Administration (FTA) and North Carolina Department of Transportation (NCDOT) will fund $580 million and $299.1 million of the project cost, respectively, with the remaining $281 million funded by the city. The city is entering into the TIFIA loan agreement to cover a portion of its project cost, with the remainder largely funded on a pay-as-you-go basis. The city provided interim financing for the project, which Fitch currently includes in its debt ratios, with the issuance of its $123 million of transit COPs, series 2013 and $300 million of COPs privately placed with Bank of America Merrill Lynch (BAML). The private placement functions as a line of credit which the city draws on as construction costs accrue. The city anticipates repaying the temporary financings from proceeds of the FTA and NCDOT grants.
CATS benefits financially from the receipt of a permanent one-half-cent local sales tax approved by voters in November 1998 (the public transportation tax). The public transportation tax generated $71.2 million in revenue in fiscal 2014 or 62% of total operating revenue. Revenues from the public transportation tax are dedicated to funding public transit initiatives. These revenues are not pledged to owners of the transit COPs; however, in a policy adopted on Nov. 10, 2003 and reaffirmed on Dec. 19, 2007, the city determined that the public transportation tax would first be used for all annual CATS-related debt service prior to operating costs of the system. Liquidity is very strong - the CATS operating fund maintains a cash balance of $100 million by policy.
Fitch has affirmed the following series of Charlotte GO bonds at 'AAA':
--Series 2002B;
--Refunding series 2005, 2005A, and 2005B;
--Refunding series 2008;
--Refunding series 2009B and 2009C;
--Refunding series 2012A;
--(Taxable) series 2013A;
--Refunding series 2013 B;
--Refunding series 2014A;
--Refunding series 2015A.
Fitch has affirmed the following series of Charlotte COPs (transit projects) at 'AA+':
--Series 2005E;
--Refunding series 2008A;
--Series 2013B;
--Refunding series 2013C;
--Refunding series 2015B.
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, and IHS Global Insight.
Applicable Criteria
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990300
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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