SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following King County, Washington new debt issuance:
--$170.9 million limited tax general obligation (LTGO) refunding bonds, 2015, series E.
The bonds are scheduled to price via competitive bid on Dec. 7, 2015. Proceeds will be used to refund outstanding debt for interest savings.
The Rating Outlook is Stable.
On Sept. 10, 2015, Fitch published an exposure draft of revised state and local government tax-supported criteria. Fitch expects that final criteria will be approved and published by Jan. 20, 2016, at which time Fitch will assign Issuer Default Ratings (IDRs) to all state and local government tax-supported issuers. The IDR will equal the current unlimited tax general obligation (ULTGO) debt rating. With the assignment of IDRs, Fitch will no longer make a rating distinction between unlimited tax and limited tax general obligation pledges. For the small number of issuers with a current rating distinction between the liens, including King County, the LTGO rating will rise to the ULTGO level. King County's ULTGO rating is 'AAA' with a Stable Outlook.
SECURITY
The bonds are general obligations of the county, supported 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 LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction, and a rate cap of $1.80 per $1,000 of taxable assessed value (TAV).
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: General fund balances and cash levels remain healthy, and the county's strong financial position is supported by long-term planning and robust financial management policies.
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. The local economy has performed strongly over the last several years with steady growth in employment levels and home prices.
POTENTIAL 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.
MANAGEABLE LIABILITIES: Overall debt levels are low to moderate and liabilities for retiree benefits are manageable. Carrying costs for debt service, pensions, and other post-employment benefits (OPEBs) are low.
RATING SENSITIVITIES
BALANCED OPERATIONS: The rating is sensitive to the county's ability to maintain balanced operations despite revenue constraints. A material decline in the county's financial flexibility and reserves relative to historical and policy levels, while not anticipated, could pressure the current rating and/or Outlook.
CREDIT PROFILE
SOUND FINANCIAL POSITION
The county's financial position remains sound, with strong liquidity and healthy reserves. General fund budgets are balanced and the county typically records operating surpluses. Rising expenditures for public safety contributed to an operating deficit of 1.7% after transfers in 2014, lowering unrestricted fund balance to a still healthy 13.9% ($101.1 million) of general fund spending. The county maintains a policy target for undesignated year-end budgetary fund balance at 6.5% of certain general fund revenues ($35.3 million in 2014), in addition to a $20.1 million rainy day reserve, and continues to meet these goals.
General fund tax revenues have performed strongly in recent years, rising at a 4.3% compound annual growth rate between 2010 and 2014. Total general fund revenues and transfers in increased by 2.1% per year over this same period, matching growth in expenditures and transfers out of 2.1%.
The county's 2015-2016 biennial budget is balanced and management reports break-even results for the year to date.
TAX LIMITS CHALLENGE FUTURE BALANCE
General fund revenues are constrained, despite recent gains, by statutory limits on property tax revenue growth. The property tax levy in Washington State is generally restricted to 101% of prior year levels plus revenues from new construction, limiting growth for the county's major source of funding. Property tax accounted for 45% of total general fund revenues in 2014.
Management continues to address this challenge through ongoing expenditure controls and efforts to gain voter approval for dedicated property tax levies to support specific spending requirements, such as parks or human services. In addition, county budgets regularly address substantial gaps between funding sources and needs through targeted spending reductions. The county has also had notable success in reducing annual expenditure growth through increased efficiency.
Management's efforts to match expenditure and revenue growth have been successful in recent years, but ongoing structural balance may prove difficult to maintain in the absence of revenue reforms.
DIVERSE ECONOMIC BASE
King County benefits from a diverse economy and tax base that encompasses 29% of the state's population. Major private employers include Boeing, Microsoft, and Amazon 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 property values are high at approximately $202,000 per capita.
King County performed better than many regions nationally in the last recession and has experienced steady employment gains since 2010. The county unemployment rate of 3.9% in September 2015 was well below the 4.8% national rate, and total employment levels are 7% higher than the pre-recession peak. October 2015 home values reported by Zillow.com increased by 8.7% compared to one year earlier and assessed values rose to record levels in 2015, overcoming losses experienced during the recession.
LOW DEBT; MANAGEABLE PENSIONS
The county's debt burden remains low with overall debt at 1.8% of TAV. Amortization is quicker than average with approximately 69% 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 debt and retirement benefits were low at approximately 10.5% of governmental expenditures in 2014.
Date of Relevant Rating Committee: Sept. 3, 2015.
Additional information is available at 'www.fitchratings.com'.
As noted above, Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and Zillow Group.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
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
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994336
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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