Fitch Rates Ocean County, (N. J.)'s $34M Series 2016 GO Bonds 'AAA'; Outlook Stable
--$31,100,000 general improvement bonds, series 2016;
--$3,050,000 college capital improvement bonds, series 2016.
The bonds are scheduled for competitive sale on Sept. 20. Proceeds of the bonds will finance various road and county improvement projects as well as improvements at Ocean County College.
Fitch also affirms the county's Issuer Default Rating (IDR) and approximately $394 million of outstanding GO bonds of the county and $37 million of revenue bonds issued by the Ocean County Utilities Authority (the authority) backed by the county's GO pledge at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the county backed by its full faith and credit and unlimited taxing power. The college capital improvement bonds are further supported by the benefits of New Jersey's County College Bond Act, Chapter 12 which provides that principal and interest on such bonds will be paid by the state of New Jersey.
KEY RATING DRIVERS
The 'AAA' IDR and GO ratings reflect the county's exceptionally strong gap-closing capacity, solid revenue base, and sound operating performance. The county's strong financial profile reflects a wealthy property tax base, manageable expenditure growth demands and a demonstrated ability to control expenditures during economic downturns. Fitch expects long-term liabilities to remain low based on manageable capital needs and a history of full funding of pension actuarially determined contributions.
Economic Resource Base
Ocean County encompasses 634 square miles of eastern New Jersey, including 45 miles of oceanfront and barrier islands. The townships of Lakewood, Toms River, Brick, and Jackson are located in the county in addition to popular shoreline communities Point Pleasant, Seaside Heights, and Long Beach Island. Residents benefit from access to two major employment centers with their location approximately equidistant (60-70 miles) between New York and Philadelphia. The county experienced solid population growth of 16% since 2000 and stood at an estimated 588,721 in 2015.
Revenue Framework: 'aa' factor assessment
Sound growth in operating revenues over the 10-year period through 2014 was derived from a combination of tax rate increases, tax base growth and state and federal assistance associated with Superstorm Sandy. Fitch expects more moderate revenue growth going forward without tax increases, reflective of a moderate improvement in housing values and property improvements. The county has substantial ability to raise tax rates as necessary in response to a moderate economic downturn, 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. Fixed 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 controlled expenditure growth during economic downturns.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch anticipates Ocean County's long-term liability burden to remain low based on a manageable capital plan, moderate changes in overlapping debt, 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 8% of personal income.
Operating Performance: 'aaa' factor assessment
Fitch expects the county to manage through periods of economic decline while maintaining a substantial financial cushion based on its history of sound financial management throughout the economic cycle and strong budget flexibility.
RATING SENSITIVITIES
Management Practices: Fitch expects the county's ratings to remain stable in the absence of a shift in management practices and/or policy and resultant weakening of the county's long-term operating profile.
CREDIT PROFILE
The performance of Ocean County's economy and its predominantly residential tax base (nearly 86% of total assessed valuation) relies heavily on the attractiveness of its extensive oceanfront property and popularity of its shore communities to vacationers from New Jersey, New York, and Philadelphia. Tax base growth registered 1.7% and 2.5% in 2015 and 2016, respectively, following a 17% decline between 2009 and 2014 as a result of the recession and Superstorm Sandy. The county's significant tax base of $95 billion reflects an estimated market value per capita of a high $163,000.
In addition to hospitality, the county also has a strong presence in healthcare and government serving a sizeable and growing year-round population. Wealth levels exceed national levels, but are below the state's above-average levels. In Fitch's view these strengths are weighed against risk inherent in the concentrated nature of employment related to the tourism sector and relative absence of other industry throughout the county.
Revenue Framework
The county's primary source of revenues is property taxes representing approximately 75% of fiscal 2015 current fund revenues (excluding fund balance utilized). The other primary source of revenues is derived from the state and federal government. 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 continue to be sound with growth in excess of the level of inflation over time largely due to expectations for moderate tax base and population growth.
New Jersey counties operate under two separate spending cap laws. The 1976 law limits increases in the tax levy to 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 U. S. 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. The state's tax cap laws are based on the prior year's levy and not taxable assessed values (TAV), thereby mitigating the effect of a decline in TAV.
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. Expenditures mandated as a result of certain emergencies are also exempt. Local governments may bank that portion of the maximum tax levy that is not used for a period of three years. The county reports it has $13.5 million (4% of the total 2016 tax levy) in banked capacity available to be utilized 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, health and welfare programs funded mostly through state and federal grants, and its law and justice department (county clerk, county prosecutor and county sheriff). Other expenses are associated with the county's college and vocational schools and recreational facilities.
The tax levy and spending limitations laws referenced earlier limit increases in annual appropriations with certain exceptions, generally aligning the pace of revenue and spending growth over time. Fitch would expect the county's overall spending needs will increase in the future at a pace slightly above natural revenue growth.
Fixed costs for debt service, pension and other post-employment benefits (OPEB) represent a moderate 18% of fiscal 2015 current fund spending. Fitch expects fixed costs to remain close to this level as manageable debt plans are in place for the near term. Pension funding, currently 4% of spending, is likely to require moderate annual increases due to current funded levels. The county is required to make full, actuarial contributions to the state administered pension plans except under very limited circumstances, unlike the state itself. The county's debt amortization, including this issue, is very rapid with 72% of principal paid off over 10 years.
Employee contracts for law enforcement positions are subject to binding arbitration but a state law passed in conjunction with the 2% spending cap law 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 the terms of the NJ State Civil Services Rules and Regulations.
Long-Term Liability Burden
Long-term liabilities for debt and unfunded pensions represent a low 8% of personal income. About 19% of the liability is in the form of the county's direct debt, with 60% from overlapping debt. The county's proportional share of the unfunded liability related to two state-administered pension plans, the Public Employees' Retirement System (PERS) and the Police and Firemen's Retirement System (PFRS), reflects the combined net liability of both the state employee portion and local component of the plans, based on recent GASB 67 reporting by the plans. Fitch considers this approach to be conservative as the state employee portion of the plans makes up the bulk of the liability due to their low funded status, requiring a lower adjusted discount rate to be used in the valuation of the aggregate liability.
The local components of PERS and PFRS have an estimated aggregate funded ratio of 68% as of July 1, 2015, adjusted by Fitch to assume a 7.0% 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 $10.8 million in 2015 (2.6% of current fund spending).
Operating Performance
The county has experienced variable operating results the past seven years reflective of an increase in expenditures related to Superstorm Sandy in 2012 and recessionary revenue declines in 2009. The county approved an emergency appropriation of $65 million in 2012 for storm relief efforts and received subsequent federal and state assistance grants related to cleanup efforts, resident displacement and essential services in years 2013 and 2014, contributing to increased revenues and expenses in those years. The county's willingness to increase its tax rate combined with careful expenditure management has played a significant role in supporting financial stabilization. Annual tax rate increases averaged better than 6% for 2010 through 2014 offsetting declines in the tax base during that period. The county's tax burden remains among the lowest in the state despite the tax rate increases.
Operating results for 2015 reflect a surplus of $7.1 million (net of appropriated fund balance) or 1.7% of spending resulting in an ending current fund balance of $43.5 million (10.3% of spending). The positive results reflect primarily the lapsing of previously appropriated reserves and revenues exceeding expenditures.
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. With the inclusion of appropriation reserves for comparability, encumbrance reserves and reserves for receivables, which is more in line with GAAP accounting, total unrestricted reserves are a high 22% of spending at $93 million.
During the most recent downturn, the county demonstrated its ability to reduce spending through cost controls and hiring freezes, and Fitch expects management would take similar appropriate actions to maintain its strong financial resilience in future downturns. At times of economic recovery, the county generally takes actions to restore reserves
The county's $400 million budget for 2016 includes a tax levy increase of 2.9%, or $9.4 million in additional revenue, but only a 0.5% increase in the tax rate due to new growth in the tax base. The county has entered into shared services agreements with other governmental agencies helping to generate new recurring revenues and also benefits from park and recreational facilities which generate user fees helping offset increases in operating costs.
The budget assumes the use of $16.5 million in fund balance, slightly higher than the $16 million budgeted in 2015. The county has a historical practice of using a portion of fund balance to balance its budget at adoption but typically does not use all of it due to conservative budget practices. Based on operating results to date, management is projecting a modest decline in reserves but to a level around 10% of budget, which is management's target balance. The total financial cushion is expected to be largely unchanged.
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