OREANDA-NEWS. Fitch Rates Waukesha County, WI's GO Notes 'AAA'; Outlook Stable Fitch Ratings has assigned a 'AAA' rating to the following Waukesha County, WI general obligation (GO) notes:

--$11.5 million general obligation promissory notes, series 2016A.

The notes are being issued to finance various capital projects of the county as detailed in its capital plan, including justice and law enforcement, general administration, parks and education projects.

Fitch has also affirmed Waukesha County's Long-Term Issuer Default Rating (IDR) and GO note ratings at 'AAA'. The affirmation affects $67 million of GO promissory notes currently outstanding.

The Rating Outlook is stable.

SECURITY

The notes are payable from taxes levied on all taxable property within the county, without limitation as to rate or amount.

KEY RATING DRIVERS

The 'AAA' rating is based on the county's wealthy and diverse economic base that is likely to show strong continued growth, a modest ability to pick up untapped property taxing capacity under Wisconsin's levy cap, set alongside significant untapped sales taxing capacity, and an exceptionally low long-term liability burden. Budget management has been noteworthy for its conservatism, which Fitch expects this will remain the case.

Economic Resource Base

Waukesha County is located in southeastern Wisconsin, directly west of Milwaukee and 100 miles northwest of Chicago. The county is the third most populous in Wisconsin and one of the wealthiest. Residents have the second highest median household income and per capita income in the state.

Revenue Framework: 'aa' factor assessment

General Fund revenues grew more slowly than the rate of inflation during the decade prior to 2014, but should expand at a faster pace through 2020 as assessed values continue to rebound from a prolonged post-recessionary slump that ended in 2013. While the county's ability to raise property taxes within the tight levels set by Wisconsin's levy cap is limited, it retains the power to impose several new taxes without voter approval. A county-wide 0.5% sales tax, if adopted, would generate an estimated $35 million of new revenues per annum.

Expenditure Framework: 'aa' factor assessment

Expenditures are likely to continue growing at slightly above the pace of revenues, but Fitch believes the county has significant leeway to control the rate of expenditure growth given low carrying costs (13% -14% range) and a state collective bargaining framework that has become more favorable to management in recent years. Annual pension costs are set for continued slow growth given the Wisconsin's well-funded public pension system.

Long-Term Liability Burden: 'aaa' factor assessment

The county's aggregate debt and pension liability is small compared to its economic resource base, totaling a mere 4% of total personal income in 2015. Debt amortization is rapid with 100% of the county's GO notes maturing within 10 years. The county has no retiree healthcare liability.

Operating Performance: 'aaa' factor assessment

Fitch views the county's financial resilience as very strong due to a combination of healthy reserves and revenue sources that have exhibited low historic volatility. High resilience also stems from the county's significant gap-closing ability related to its strong control over capital spending, benefits and headcount, and significant untapped taxing capacity. Budget management during the current expansion has remained conservative. Recent draws on reserves have been planned to fund pay-go capital.

RATING SENSITIVITIES

The rating is sensitive to moves by the county to abandon its traditionally cautious budgeting framework, sizable declines in reserves and liquidity, and increases in leverage that raise the county's combined long-term liability metric outside of the 'aaa' range.

CREDIT PROFILE

Waukesha County benefits from a large economic base that includes one of the wealthiest and most well-educated workforces in Wisconsin, a diverse economy and an expanding population that will help to drive new construction growth. The last is likely to positively impact taxable assessed values and add incremental property tax levying capacity. The tax base is 76% residential. County residents numbered 389,891 as of the 2010 US Census, up 28% from 304,715 in 1990. The population has grown by approximately 1% per year since 2010. The 2015 population is estimated at 393,927. Poverty rates are low with 8% of residents living below the poverty line compared to the 14.9% US average.

Taxable assessed value declined by a cumulative 10.8% from 2008 to 2013 reflecting the weak post-recession housing market and a sharp fall-off in new construction after 2008. To offset taxable value declines during the 2008-13 period, the county raised the property tax rate from $1.79 per $1,000 of equalized valuation in 2008 to $2.15 in 2013. Property market-based declines in AV began to reverse themselves in 2014 as rising residential building permits and home values grew taxable value by 4.1% over 2013, followed by a further 2.4% growth in 2015. To offset renewed assessed valuation growth, the tax rate was reduced to $2.08 in 2014 and to $2.04 in 2015.

The commercial portion of the tax base is well-diversified with the top 10 taxpayers making up a miniscule 2.5% of taxable equalized value. Property taxes compose just over 50% of general fund revenues, and collections remain robust, averaging over 99% for the last five years. The local economy is highly diversified by sector with manufacturing (19%); retail, transport & utilities (20%); higher education and healthcare (17%) and professional & business services (15%) making up the largest components. The largest employers include Kohl's Department Stores, ProHealth Care, Quad Graphics and General Electric Healthcare. These entities highlight the county's broad diversity including an expansive retail, healthcare and technology presence.

Revenue Framework

Natural revenue growth has been below the rate of inflation since 2005, growing by approximately 1.5% per annum, as the housing market downturn strongly impacted taxable values and the county had to work within Wisconsin's restrictive annual tax levy cap to raise revenues. While it is likely that the natural pace of tax revenue growth will accelerate slightly as a function of rising home values and increased new construction, it is likely to lag the rate of inflation for the foreseeable future.

Wisconsin counties have limited independent ability to raise property taxes due to an annual cap on the levy adjusted for new construction-generated growth. Counties also retain unused taxing capacity left over from the prior year if a county does not increase the levy up to the maximum. The available "headroom" under the cap tends to be slender - sometimes only a few hundred thousand dollars - but since it excludes GO debt service, Fitch views it as being slightly less restrictive than it first appears.

Counties also retain some flexibility to raise locally-controlled revenues such as fees and service charges, and may impose certain new taxes without holding a vote.

Waukesha County maintains a high degree of excess taxing power through its ability to levy a county-wide 0.5% sales tax without voter approval. The tax would generate an estimated $35 million a year of new revenues if imposed, equal to 22% of 2015 general fund revenues. Most other Wisconsin counties (62 out of 72) availed themselves of this option decades ago, but Waukesha has kept this option open if all other budget-balancing tools should become exhausted.

Expenditure Framework

Among the services the county provides are public safety, courts and law enforcement administration, parks and recreation, health and human services, public works and road maintenance, and a federated county library system. Public health and social services account for the largest share of general fund expenditures (44%). These functions are paid for substantially with moneys received from the State of Wisconsin to fund mandated public service programs. Justice and public safety make up the second-largest share of expenses at 36%.

The pace of spending growth is slightly above the rate of revenue growth in the absence of continuous policy actions and adjustments to align spending with revenues.

Waukesha County's main expenditure items contain a high degree of flexibility. Aside from mandated social service programs, the county's main expenses derive from spending on public works, parks, and public safety. Since 20% of its capital program is cash-funded, the administration has significant flexibility to reduce capital spending as a gap-closing measure in any fiscal year. The county also has control over various aspects of spending related to the social programs it administers, including staffing and some aspects of program design. In terms of collective bargaining, the county has only one remaining bargaining unit for public safety personnel, a reduction from seven bargaining units prior to changes in the state's public sector bargaining laws enacted in 2011. This enables the county to independently establish wages, hours and conditions of employment for the majority of its staff. The county has an agreement in place with the public safety union that runs through 2017.

Carrying costs are very manageable, with debt service and pension contributions accounting for 12.4% of spending in fiscal 2015, in line with recent history. Amortization of existing debts is rapid with over 90% of debts maturing within 10 years. The county has no other post-employee benefits, or OPEB liability, which Fitch views as a credit positive.

Long-Term Liability Burden

The county's long-term liability burden is modest when compared to the breadth of its economic resources. As calculated by Fitch, Waukesha County's long-term debt and pension liability equals a modest 4% of county personal income. The debt burden includes $895 million of long-term debts of overlapping local government units. The county's $78 million of direct debt, including the current $11.5 million issue, accounts for 8% of total long-term liabilities. The administration's future debt plans are modest, with an estimated $69 million in new bonds to be issued between 2016 and 2020 to fund a portion of the county's $105 million five-year capital plan. All in all, the future trajectory of the county's long-term liability burden is likely to be driven by the pace of debt issuance of overlapping local governments (e. g. cities and towns), the debt of which are supported by a common tax base.

County employees participate in the Wisconsin Retirement System, a cost-sharing multiple employer defined benefit pension plan. As of December 31, 2014, the plan was fully-funded on an actuarial basis with a 7.2% annual rate of return assumption, and 104% funded on a market value of assets basis. When adjusted by Fitch to reflect a discount rate of 7%, the plan is still approximately 97.8% funded on an actuarial basis. The county continues to fully fund its actuarially-determined annual pension contribution. In addition, the county does not provide or subsidize material post-employment health benefits for its retirees. As mentioned above, the county has no OPEB liability as retirees are eligible to participate in a health plan for which they pay the full annual premium.

Operating Performance

Fitch believes the county's financial resilience through downturns to be very strong, due in part to its relatively low revenue volatility given the stability of its property tax levy, coupled with an historically high collection rate. In addition to having significant untapped taxing capacity, the county's demonstrated ability to control expenditures during periods of negative or flat revenue growth indicates substantial gap-closing capacity. We believe management's ability to negotiate effectively with the bargaining units, defer capital spending and redesign program administration would allow it to rein in costs and retain the bulk of its fiscal reserves during a downturn. Waukesha County's financial reserve cushion remains considerable. In Fitch's view, the county would be more than capable of sustaining reserves above the 'aaa' minimum safety margin of 2% during a typical US economic recession.

Waukesha County has stuck to its established internal policies during the present and prior economic expansions in order to sustain or rebuild fiscal reserves while, at the same time, keeping up with needed capital spending to maintain the county's public infrastructure such as courthouses and roads. Draws on general fund reserves in fiscal 2013 and 2014 were planned in advance in order to fund pay-go capital. These draws did not concern us at the time as reserves were well above the county's own target of maintaining unassigned fund balance at between 15% and 16% of general and special revenue fund expenditures with an absolute floor of 11%. The county has maintained available general fund balance well above these levels in recent years. In fiscal 2015, operations concluded with a $2.3 million general fund operating surplus that resulted in available reserves of $49 million, equal to 30.7% of revenues.

The fiscal 2016 modified budget increased by $8 million, or 2.9% overall, from fiscal 2015. General fund expenditures are set to rise by a slightly lower 2.5%. The modest rise in spending - at just above the 10-year rate of inflation (i. e. 2.3%) - is being driven by more generous state transfers (a $4 million bump-up) to fund social services paid for by the general fund, and by incremental increases in property taxes and other general revenue sources that will augment revenues by an additional $4 million. Increased capital spending connected with a major renovation project involving the county courthouse accounts for about half of increased appropriations in fiscal 2016.