Fitch Rates Mercer County, NJ's 2016 GOs 'AA+'; Outlook Stable
--$44,935,287 general capital improvement bonds, series 2016;
--$864,713 open space and farmland prevention bonds, series 2016.
The bonds will sell on August 24 via competitive sale. Proceeds will be used to finance repayment of maturing bond anticipation notes issued to finance the cost of various capital improvements and equipment, including open space and farmland acquisitions.
In addition, Fitch affirms its 'AA+' rating on the county's outstanding series 2015 GO bonds and the Mercer County Improvement Authority's (MCIA) series 2015 lease revenue bonds, as well as the county's 'AA+' Issuer Default Rating (IDR).
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the county backed by its full faith and credit and unlimited taxing authority. The lease revenue bonds are a direct obligation of MCIA and backed by a lien on the pledged property including revenues derived from lease rental payments paid by the county backed by its unlimited taxing authority.
KEY RATING DRIVERS
Mercer County's 'AA+' IDR and GO ratings reflect Fitch's expectation for the county to maintain financial flexibility throughout economic cycles - consistent with its exceptionally strong gap-closing capacity, sound reserves, stable revenue base, and a history of strong operating performance. The county's strong financial profile reflects a wealthy property tax base, manageable expenditure growth demands and a demonstrated ability to reduce expenditures during economic downturns. Fitch expects long-term liabilities to remain low based on manageable capital needs and a history of full funding of its pension actuarially determined contributions (ADC).
Economic Resource Base
Mercer County is situated in the center of the state equidistant between New York City and Philadelphia. The county has an estimated 2015 population of 371,398. The capital city of Trenton along with Hamilton Township account for just under half of the county's population.
Revenue Framework: 'aa' factor assessment
Mercer County's revenues had a compound annual growth rate of 2.4% for fiscal 1999 through fiscal 2014, exceeding CPI but below U. S. GDP growth for the same period. Growth in revenues was derived from a combination of tax rate increases and tax base growth. Fitch expects continued slow revenue growth without tax increases reflecting an improvement in housing values, a moderate level of new improvements underway, and the county's generally solid economic underpinnings. The county has the ability to raise tax rates as necessary but is subject to a state statutory annual 2% tax levy cap with certain exceptions.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected by Fitch to be in line with to slightly above natural revenue growth over time. Carrying costs for long-term liabilities claim a moderate proportion of governmental spending. The county has adequate controls over employee headcount and wages, and has demonstrated the flexibility and willingness to cut spending during economic downturns.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch anticipates Mercer's long-term liability burden to remain low based on a manageable capital plan and history of full funding of its pension ADC. The county's overall debt and adjusted unfunded net pension liabilities associated with state-operated plans are estimated at a low 7.8% of personal income.
Operating Performance: 'aaa' factor assessment
Fitch expects the county to manage through periods of economic decline while maintaining a sound financial cushion on the basis of its high level of budgetary flexibility and history of careful financial management throughout the economic cycle.
RATING SENSITIVITIES
STABLE FINANCIAL PERFORMANCE: Fitch expects that economic and debt fundamentals will remain largely stable and that the county will continue to manage its finances to maintain an adequate reserve cushion throughout the economic cycle. The rating is sensitive to performance outside of Fitch's stated expectations
CREDIT PROFILE
The county features a broad and diverse economic base with representation from the higher education, health care, pharmaceuticals, telecommunication and financial services sectors. State government dominates Trenton's economy. Other substantial employers include Princeton University, Bristol Myers Squibb, Capital Health Systems, and NJ Manufacturing Insurance Co.
The county has a large tax base of $43.5 billion in 2016 that equals a solid $117,000 per capita. Assessed values experienced moderate, sustained declines due to the housing downturn but have increased modestly in 2015 and 2016 due to a rebound in housing prices and some commercial development. The county's tax base is diverse with the 10 largest taxpayers representing only 5% of taxable values.
The county's above-average wealth levels reflect in part the several wealthy suburban communities located within the county, including Princeton, West Windsor, Hopewell and Pennington. Per capita personal income registers 104% of the state and 130% of the national levels. Such levels are skewed downward in part due to Trenton's below below-average wealth levels (roughly 50% of state levels) and high poverty rate (26.5% for 2013). Unemployment levels have historically registered below state and national levels.
Revenue Framework
The county's primary source of revenues is derived from property taxes representing approximately 78% of fiscal 2015 current fund revenues (excluding fund balance utilized). County taxes are collected by the underlying municipalities within the county and paid to the county treasurer on a quarterly basis. The county receives its share from the first taxes collected by each municipality, assuring 100% collections.
Current fund revenues are expected by Fitch to generally track the level of inflation over time largely due to expectations for modest tax base and population growth.
New Jersey counties operate under two separate spending cap laws. The 1976 law limits increases in the tax levy by the lesser of 2.5% or an inflation index - the Implicit Price Deflator for State and Local Government Purchases of Goods and Services computed by the United States, Department of Commerce; however, increases up to 3.5% in the tax levy are allowed by adoption of a resolution of the county freeholders whenever the index is less than 2.5%. A second test effective since budget year 2011 limits growth in the tax levy to 2%, which is the level of growth that Fitch applies for the purposes of assessing independent legal revenue raising capacity.
Importantly, each test includes exemptions from the caps for the value of new construction and additions to the tax base, increases in debt service, certain increased pension contributions and healthcare costs, and expenditures mandated as a result of certain emergencies. Local governments may bank that portion of the maximum tax levy that is not utilized for a period of three years. The county reports it has $3.6 million (1.4% of the total 2016 tax levy) in banked capacity available to be used for its 2017 budget, if necessary.
Expenditure Framework
Employee related salaries, wages and health insurance and retirement programs drive the county's costs. The county budget funds a mix of administrative functions, public safety related to its correctional facility, transportation related functions, and its law and justice department (county clerk, county prosecutor and county sheriff). The county manager retains general control over centralized functions such as hiring, wages, and purchasing regulations.
The tax levy and spending limitations laws referenced earlier limit increases in annual appropriations which should generally align the pace of revenue and spending growth over time.
Fixed costs for debt service, pension and other post-employment benefits (OPEB) represent a moderate 19% of fiscal 2015 projected current fund spending, without consideration of self-support. Fitch expects fixed costs to remain close to this level as no material debt plans are in place for the near term and pensions are likely to see moderate annual increases due to current funded levels.
Employee contracts for law enforcement positions are subject to binding arbitration but a state law passed in conjunction with the 2% spending cap law in 2010 imposes a 2% cap on arbitration awards. The provision was extended in 2014 and is in effect through Dec. 31, 2017. Management has the flexibility to impose layoffs and furloughs if necessary pursuant to terms of its employee contracts.
Long-Term Liability Burden
Long-term liabilities for debt and unfunded pensions represent a low 7.8% of personal income. Direct and overlapping debt accounts for 88% of the burden with the balance representing an estimate of the county's proportional share of the unfunded liability related to two state-administered pension plans, the local components of the Public Employees' Retirement System (PERS) and the Police and Firemen's Retirement System (PFRS). PERS and PFRS have an estimated aggregate funded ratio of 68% as of July 1, 2015, adjusted by Fitch to assume a 7% investment rate of return in place of the plans' 7.9% rate.
OPEB is offered through the state's plan and the county makes pay-as-you-go payments as required by the state. The county paid $9.1 million in 2015 (2.8% of current fund spending).
Fitch expects long-term liability levels to remain low given the county's moderate borrowing plans and full funding of its pension ADC. Additionally, GO debt amortization is rapid with 77% of principal paid off over 10 years.
Operating Performance
Fitch expects the county will continue to maintain sound reserve levels throughout economic cycles given its historically stable revenue performance, high level of inherent budget flexibility, and demonstrated commitment to maintaining adequate reserves. The county has experienced steady growth in revenues largely driven by its ability and willingness to adjust its tax rate to maintain an adequate tax levy to support operations, mitigating swings in taxable values. Local collections from its municipalities also guaranty 100% collections of its tax revenues.
During the most recent downturn, the county demonstrated its ability to reduce spending through cost controls and staff reductions, and Fitch expects management would take the same actions to maintain its strong financial resilience in future downturns. At times of economic recovery, the county generally takes actions to restore reserves.
Results for year-end 2014 show the county ending with a modest operating surplus negating the need to use any of the $12 million of appropriated fund balance. The county has a historical practice of using close to 50% of fund balance to balance its budget at adoption but tends to not have to use it due to conservative budget practices. The current fund balance increased to $21 million at fiscal 2014 year-end, or approximately 7% of spending. With the inclusion of appropriation reserves, encumbrance reserves and reserves for receivables, as is more in line with GAAP accounting, total unrestricted reserves are 12% of spending.
The county uses a cash/modified accrual basis of accounting in accordance with state requirements as opposed to GAAP accounting. When compared to those issuers who use GAAP accounting, the cash/modified accrual basis usually results in lower fund balance levels due to the typically larger current fund expenditure base and the requirement to carry over unexpended appropriation reserves for an additional year.
Unaudited results for 2015 depict a $1.7 million (0.5% of spending) decrease in the current fund balance for the year. Current fund balance is projected to end at $19.3 million, or 6% of spending. Combined with other available reserves described above, unrestricted reserves are projected to be 13% of spending.
The 2016 budget appropriates $10 million of fund balance, $2 million less than in the 2014 and 2015 budgets. A modest tax rate increase was made to cover increases primarily in pensions, health benefits and debt service. The county's tax levy was $5.1 million (1.6% of budget) under the tax cap and such monies are available for the 2017 through 2019 budget years.
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