OREANDA-NEWS. Fitch Ratings has assigned a rating of 'F1+' to the following tax anticipation notes (TANs) to be issued by DeKalb County, Georgia:

--$90,000,000 TANs, due Dec. 16, 2016.

The TANs will be sold on a competitive basis on July 12. The notes will be issued to pay current expenses of the county prior to the receipt of revenues from taxes levied or to be levied for the general fund in 2016.

In addition, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AA-';

--General Obligation (GO) refunding bonds, series 2013 at 'AA-';

--DeKalb County Public Safety and Judicial Facilities Authority's (PSJFA) revenue refunding bonds, series 2015 at 'AA-';

--Special Transportation, Parks and Greenspace and Libraries Tax District GO refunding bonds, series 2016 at 'AA-'.

The Rating Outlook on the Long-Term ratings is Stable.

SECURITY

The notes are payable from ad valorem taxes levied in 2016 and other borrowable funds available for repayment.

The PSFJA revenue bonds are a limited obligation of the authority payable from installment payments made by the county equal to debt service on the bonds. The county's obligation to make installment payments shall constitute a GO of the county backed by the levy of ad valorem taxes, without limitation as to rate or amount.

The special transportation, parks and greenspace and libraries tax district GO refunding bonds are backed by the levy of an ad valorem tax of the county without limitation as to rate or amount on all taxable property within the special transportation, parks and greenspace and libraries tax district. The special tax district consists of the geographical boundaries of the unincorporated portion of the county as such unincorporated and incorporated areas existed as of Aug. 30, 2005.

KEY RATING DRIVERS

The 'AA-' IDR and GO rating are based on the expectation for continued low debt and retiree benefit liabilities relative to the county's economic resource base and both unlimited legal revenue-raising authority and broad powers over employee-related wages and benefits that should afford the county the ability to manage through periods of economic decline. Credit weaknesses center on the county's history of inconsistent budgetary management, high revenue volatility, and only moderate reserves. The 'F1+' rating on the TANs corresponds to the county's 'AA-' IDR.

Economic Resource Base

DeKalb County is positioned immediately east of the city of Atlanta within the Atlanta-Sandy Springs-Roswell, GA metropolitan statistical area (MSA), the ninth largest MSA in the U. S. measured by population and employment. A highly educated county labor force combines with the employment breadth and growth prospects of the MSA to form an expectation for stable-to-positive economic growth over the long term. Key income measures are slightly above the state standard but modestly trail the nation. Population growth fuels a large construction and housing industry which has also been a point of vulnerability in prior periods of economic decline.

Revenue Framework: 'aa' factor assessment

Historical growth of general fund revenues has lagged that of the U. S. economy and inflation, reflecting periods of contraction in the county tax digest and property tax revenue, the dominant funding source for general fund operations. Fitch expects continued slow growth in the county's revenues; however, the county has unlimited legal ability to increase its property tax rate and levy, underpinning a strong capacity to manage fiscal challenges.

Expenditure Framework: 'aa' factor assessment

Fitch expects the pace of general fund spending growth will marginally outpace that of revenues over time given the demands placed on county services by a growing population, requiring ongoing budget management. Carrying costs related to long-term debt and retiree benefit liabilities are expected to remain manageable. A very flexible labor environment that provides the county full control over employee wages, benefits and work rules is another positive consideration.

Long-Term Liability Burden: 'aaa' factor assessment

The county's long-term liability burden is low, estimated at close to 5% of personal income. Debt levels, which account for half of the total burden, are not expected to change materially based on the pace of outstanding principal amortization, future capital needs, and issuance plans. The county recently closed its defined benefit pension plan in favor of a new hybrid plan for all new hires effective Jan. 1, 2016, which should help stabilize, at a minimum, the level of pension funding over the longer term.

Operating Performance: 'a' factor assessment

The county's overall financial resilience to future economic and revenue declines reflects a combination of superior inherent budgetary flexibility but relatively narrow financial reserves relative to potential revenue declines under a moderate economic downturn scenario. Recent years' operating results reflect upfront savings from debt refunding activity and underfunding of the actuarially-based pension contribution.

RATING SENSITIVITIES

Operating Stability: The IDR and GO ratings are sensitive to the county's commitment to maintain a sufficient level of reserves to counter potential periods of economic cyclicality. The ratings assume the county will manage its general fund balance position to comply with a formal one-month reserve policy throughout the cycle; results contrary to this expectation could pressure the ratings.

ST Rating Map: Short-term debt ratings are related to those of long-term obligations; a lowering of the county's IDR and GO ratings below 'AA-' could result in a reduction in the TAN rating.

CREDIT PROFILE

DeKalb County is positioned immediately east of the city of Atlanta within the Atlanta-Sandy Springs-Roswell, GA MSA. The area economy is very diverse and particularly well represented by the professional and business services sector and trade and transportation, leveraging the resources of a well-trained and educated workforce and vast network of transportation assets anchored by the Hartsfield-Jackson International Airport.

Revenue Framework

Property taxes are the dominant funding source for the county, representing roughly 60% of budgeted fiscal 2016 general fund revenue, sales tax 18% and service charges 9% of revenue. The bulk of property taxes are not received until September-November; as such, the county routinely issues TANs to provide cash for operations for a portion of its fiscal year, which begins on January 1.

General fund revenues grew at a very slow pace over the 10 years through 2014, trailing by a good margin the level of change in inflation and U. S. economic growth. A rapid rise and decline in property tax revenue during this period was driven by similar variability in the county's assessed value, and exacerbated by the county's practice of shifting portions of its unincorporated area tax rate from the general fund to other operating tax funds (see 'Expenditure Framework' section for more information). The county self-imposed a property tax cap of 21.21 mills after approving a 25.8% increase in the unincorporated area property tax rate mid-year 2011 (the adopted rate for fiscal years 2015 and 2016 was 20.81 mills).

From a legal perspective the county has unlimited revenue-raising authority, as it is not subject to an external cap or limit on its millage rate or tax levy.

Expenditure Framework

General fund expenditures are largely driven by the operation of the county civil and criminal court system, public health services, libraries, and other governmental services. Similar to other Georgia counties, the county records revenues and expenses for various services such as roads and drainage, parks, and police that are provided to unincorporated residents and other incorporated cities pursuant to intergovernmental agreements outside of the general fund. The county treats its five "operating tax funds" (general fund, fire, police, designated services (to incorporated cities), and unincorporated fund) separately from a budgeting and financial reporting point of view, but the money held in each fund is fungible.

Spending levels are expected to track changes in population and inflation and marginally outpace revenue growth over time in the absence of policy actions.

The county has full control over employee wage and benefit costs, staffing levels, and work rules as employment terms are not subject to collective bargaining or contractual agreement. However, significant reductions in funded positions have already occurred with nearly 2,100 full-time and part-time positions, or 24% of the workforce, trimmed since 2008, raising questions as to the capacity for additional cuts without sacrificing service levels.

Fixed costs for both debt and retiree pension and health care benefits are currently not a major pressure, approximating 20% of governmental fund spending. However, the growth in actuarially determined pension contributions has been a pressure on the budget, reaching $48.5 million in 2015, or close to 8% of governmental spending, from $20.9 million in 2008 or 3%. Recent pension reforms will not result in immediate savings to the county but should help moderate the pace of spending growth over the long term.

A total of $20.4 million or 3% of the adopted 2016 general fund budget is dedicated to Grady Hospital (the county is party to a contract with Fulton County and the Fulton-DeKalb Hospital Authority for the operation of the hospital, which provides healthcare to indigent residents of both counties). The funding commitment includes $7.5 million in debt service on bonds sold by the authority. The debt service on the bonds is an absolute and unconditional obligation of the county backed by the levy of a limited ad valorem tax, and included in Fitch's fixed burden analysis. The level of operating assistance provided to Grady is not mandated by law but established by the county on an annual basis.

Long-Term Liability Burden

The county's long-term liability burden is a low 4.6% of personal income and is expected to remain well within the 10% threshold that Fitch considers consistent with an 'aaa' assessment. General government capital needs identified through 2019 are manageable and not expected to be debt financed. The county's pension burden should improve over the longer term as the county closed its defined benefit plan to new hires effective Jan. 1, 2016 in favor of a hybrid plan that increases employee contributions, reduces employee benefits, and extends the retirement eligibility age.

Operating Performance

The three-year scenario revenue estimate generated by Fitch's analytical sensitivity tool (FAST) depicts a high level of revenue volatility and a negative general fund balance position equal to -1% of spending in year one of the scenario analysis absent offsetting policy action. Fitch believes the level of revenue volatility depicted in the scenario analysis to be overstated due to the county's practice of redistributing a portion of its millage rate between the five operating tax funds on an annual basis. For example, in fiscal year 2014 general fund revenues declined by more than $41 million or 14.9% even as taxable values increased, as the county lowered the general fund millage to 8.2 mills from 10.7 mills; the bulk of the general fund millage reduction was used to increase the special tax district - police services millage rate. The county also changed its accounting for indirect cost allocation resulting in offsetting reductions in revenue and expenses in fiscal 2014.

Fitch's operating performance assessment is based on an expectation the county will manage its financial operations in a manner that complies with its own formal one-month fund balance policy. Fitch believes this level of financial cushion to be commensurate with an 'a' assessment, taking into consideration the county's high budgetary flexibility due to its broad legal revenue-raising powers and ability to control key spending areas. Concerns about the county's ability or willingness to maintain this financial cushion would likely pressure the rating all other factors being equal. Fitch's view of the county's operating performance will focus on the general fund as the primary operating fund, but also consider the other four operating tax funds given the nature of their respective operating responsibilities and revenue streams.

The county's recent financial history is marked negatively by consecutive operating deficits after transfers in the general fund from fiscal years 2006-2010 and year-end general fund balance deficits from fiscal years 2008-2011. The unrestricted fund balance in the general fund reached a low mark of -$33.8 million in 2010 or -13% of spending. The general fund ended fiscal 2014 with an unrestricted fund balance totaling $16.5 million or 6.9% of spending. The improved financial position follows four consecutive years of operating surpluses aggregating $59.7 million from fiscal years 2011-2014. The 2011 tax rate increase was a major factor in the financial turnaround; however, during this recovery period the county also underfunded the actuarially determined contribution to its single-employer defined benefit pension plans by a total of $18.6 million. County officials attribute the pension underfunding to variances in the workforce and payroll assumed by the actuary and the actual experience. Corrective action was taken for 2015 and 2016 resulting in an $8.6 million increase in the actuarially determined pension payment, which the county has fully funded in the budget.

The county also took $6 million and $7.5 million of savings from a 2013 refunding transaction in 2014 and 2015, respectively, which had the effect of increasing debt service by roughly $1.6 million annually from 2016-2020 (the 2013 refunding transaction still yielded positive net present value savings for the county).

Unaudited financial statements for fiscal year 2015, which ended on Dec. 31, are not yet available. The county has reported that the finalized tax digest for fiscal 2015 was much stronger than originally anticipated in the budget, resulting in an approximate $17 million increase in the general fund balance on the year. However, the 2016 budget redistributes a portion of the countywide unincorporated millage rate from the general fund to the police fund - the result being a reduction in the general fund balance near equivalent to the surplus generated in the preceding year. The general fund balance would equal 8.3% or one-month of spending at year-end based on the budget. The county prepares monthly financial reports comparing actual revenues, expenditures and encumbrances with budgeted amounts and maintains there have been no unusual budgetary variances based on year-to-date results.