Fitch Affirms Jefferson County, AL's Series 2013 GO Warrants at 'BBB-'; Outlook Stable
--$79.0 million GO warrants series 2013.
Fitch has also affirmed the 'BBB' rating on the county's implied unlimited tax general obligation (ULTGO) security.
The Rating Outlook is Stable.
SECURITY
The series 2013 GO Warrants are general obligations of the county supported by its full faith and credit. No legally available revenues, however, are specially pledged for payment.
KEY RATING DRIVERS
POST-BANKRUPTCY CHALLENGES: Emerging from bankruptcy in December, 2013, the county still faces numerous challenges which could spill over into general operations including a sewer system with very high leverage ratios, an above average cost structure and ongoing litigation.
LACK OF HOME RULE AUTHORITY: The county's lack of authority over revenue decisions is a major credit concern, as all decisions regarding county revenues are left to the state. The inability to manage its revenue base restricts the county's financial flexibility and creates ongoing uncertainties as to future state actions which could be detrimental to county operations.
EXCEPTIONAL RESERVE BALANCES: Finances are characterized by unusually large reserve and liquidity balances, which have been maintained despite the severe revenue shortfalls. Management implemented severe expenditure cuts to offset the revenue declines. The reserves provide the county with a degree of flexibility partially offsetting its constrained revenue and spending options.
MANAGEABLE LONG TERM LIABILITIES: Debt levels are moderate and direct debt is rapidly amortized. The pension plan is fully funded. Overall carrying costs are high due to limited obligation school warrants paid from a dedicated sales tax. The county's burden net of school warrants is manageable.
REGIONAL ECONOMIC CENTER: The county's economy is broad and relatively diverse anchored by its largest employer, the University of Alabama at Birmingham. Key sectors include education, healthcare, retail trade and professional and business services supplementing its traditional manufacturing activities. Employment growth has lagged despite some positive economic developments. Wealth indices are significantly below the national averages.
ONE NOTCH DIFFERENTIAL: The security for the series 2013 GO warrants lacks a legally dedicated unlimited property tax pledge resulting in the one notch rating distinction from the implied ULTGO. The lack of a tax pledge makes the series 2013 GO warrants effectively a general fund obligation of the county.
RATING SENSITIVITIES
BALANCED OPERATIONS: The county's sizable reserves are a key credit strength given the lack of revenue control and limited spending flexibility following steep cuts. Failure to maintain balanced operations that preserve sound reserves could put negative pressure on the rating.
NON-COMPLIANCE WITH ADJUSTMENT PLAN: The rating would likely be downgraded if the county fails to comply with the terms of the plan of adjustment.
SEWER OPERATIONS STABILIZATION: Stabilization of the county's sewer operations would reduce the threat of another county bankruptcy and could lead to upward movement in the GO rating.
CREDIT PROFILE
The county is located in the north-central portion of the state and encompasses 1,111 square miles. The county's population of approximately 661,000 has been relatively static since at least 2000. The city of Birmingham (GO rated 'AA' with Stable Outlook) is the county seat and largest city in the county and the state.
THE COUNTY CONTINUES TO FACE CHALLENGES
Emerging from bankruptcy in December, 2013, the county still faces numerous challenges including a sewer system (Senior Lien Sewer Revenue Bonds rated 'BB+' and Subordinate Lien Sewer Revenue Bonds rated 'BB' with a Stable Outlook) with very high leverage ratios, an above average cost structure and ongoing litigation regarding the bankruptcy court's future ability to enforce the approved sewer system rate structure. Fitch notes that the GO warrants are fixed rate obligations, mitigating the risk of repayment acceleration which led to the default of variable rate GO warrants prior to the bankruptcy. Ongoing compliance with the plan and resolution of remaining legal issues leading to stabilization of the sewer system could improve the ratings on the county's GO bonds.
INFLEXIBLE REVENUE STRUCTURE
County finances are hampered by an inflexible revenue structure due to its lack of home rule; any revenue enhancement requires legislative approval. Furthermore, state actions have adversely affected the county's credit as amply demonstrated by the legislature's repeal of the occupational tax in 1999 with eventual affirmation by the courts in 2011. The tax had once provided over 40% of funding for the county's general administration and sheriff activities and the legislature failed to approve a satisfactory substitute. The county will continue to be exposed to unforeseen actions at the state level.
In response to the loss of the occupational tax as well as reduced property tax and other revenues, officials were forced to slash operations to conform to the much reduced revenue flow. Between fiscals 2008 and 2014, general fund operating spending fell by over 46%. Management eliminated over 1,200 positions or 33% of the county's workforce through a combination of layoffs and attrition, reduced services and sharply pared capital maintenance and repair spending.
EXCEPTIONAL RESERVES MITIGATE REVENUE AND SPENDING CONSTRAINTS
The county has maintained a very sizable and expanding level of reserves since fiscal 2010. The county's elevated fiscal balance is a key credit strength mitigating its inability to control revenues and limited remaining spending flexibility. Reserves were bolstered in fiscals 2010 and 2011 with the receipt of $50 million from JP Morgan as a result of its settlement with the Securities and Exchange Commission over illegal payments to government officials. Remaining settlement payments of $25 million were received in fiscal 2011. Operating results since have further added to already elevated fund balances. Maintenance of superior reserves provides a crucial cushion against future unanticipated spending and cost pressures.
STRONG OPERATING RESULTS FOR FISCAL 2014
The county reported an $8.5 million general fund net surplus for fiscal 2014, the third consecutive year of surplus operations. The positive result lifted unrestricted general fund balance to $102.2 million or a robust 69% of spending. General fund operations benefitted from general government spending which was $18.4 million or 17% under budget. Partially offsetting the savings was public safety spending which totaled $10 million above budget. At least part of the positive spending variance was attributable to budgeting for vacant positions which were not filled.
PROJECTED BALANCED FISCAL 2015 OPERATIONS
The fiscal 2015 general fund budget of $160 million represents a 5% hike in spending over the fiscal 2014 budget. Further reductions in legal costs related to the bankruptcy are more than offset by a boost in costs for jails, general services and Medicaid. A 2% cost of living increase adjustment (COLA) in salaries is also included; the first COLA rise since before the recession. The jump in costs is offset by higher transfers from the bridge and public building fund which augment modest budgeted growth in revenues. Budgets are conservatively drawn as the county budgets full salaries for the entire year for all positions including vacant positions which may not be immediately filled. Management projects fiscal 2015 actual results to be structurally balanced.
FISCAL 2016 BUDGET
The county's fiscal 2016 general fund budget projects a $38 million use of fund balance. General fund spending rises to $179 million, a 12% increase over the fiscal 2015 budget. Chief drivers of the elevated spending include funds to purchase land for economic development and higher costs for sheriff operations and information technology. Given the county's recent pattern of conservative budgeting, Fitch expects actual results to be significantly better than budget. Even if the budgeted drawdown is fully realized, unrestricted reserves would remain healthy at about 45% of general fund expenditures.
Management is expecting to receive a substantial influx of additional revenues through a proposed refunding of the limited obligation school warrants (school warrants). The outstanding school warrants are payable from a dedicated one cent sales tax whose proceeds are restricted to debt service or school-related capital projects. This year, the state legislature approved a replacement one cent sales tax for the county which will be used to pay debt service on the refunding school warrants. The sales tax would be levied for as long as the refunding school warrants are outstanding which under the latest proposal would be 2045. However, implementation of the replacement sales tax and the school warrant refunding is currently pending due to litigation.
The replacement sales tax will afford the county more flexibility as the proceeds can be used for general purposes, including county operations, after payment of debt service. The statute provides that excess revenues up to $36 million would be first deposited into the county's general fund followed by distributions for schools, community service fund, the Birmingham-Jefferson County Transit Authority and the Birmingham Zoo. Any remaining funds go back to the county. Officials intend to use the monies to fund capital projects, mostly roads and economic development, although they are not restricted to capital.
REGIONAL ECONOMIC CENTER
The county is the economic center of the Birmingham-Hoover metropolitan statistical area (MSA). The area economy has diversified over the past several decades from a focus on steel production to one based on a combination of healthcare, banking and professional services, retail trade as well as some heavy industry. The University of Alabama at Birmingham (UAB) is the largest employer with 21,550 jobs while UAB's medical school is the primary driver of the county's growing healthcare sector. The presence of the university has also fostered an active and expanding high tech hub in medicine, telecommunications, engineering and aerospace. Other leading employers include Regions Financial Corporation, AT&T, St. Vincent's Health System and Baptist Health System.
STATIC EMPLOYMENT TRENDS
County employment trends have been stagnant recently with a 0.2% annual gain in jobs in 2013, a 0.5% drop in 2014 and employment for 2015 up 0.8%. Employment growth perked up more recently with August 2015 employment at 1.6% above the prior year level. The county's August 2015 unemployment rate of 6.1% was lower than the state rate (6.5%) but remains higher than the national average (5.2%). The county reports a number of residential and commercial developments underway, including a $500 million expansion by auto supplier Kamtech, which should have a positive impact on employment.
County wealth levels exceed the state norms but fall somewhat below the national averages. Since 2008, per capita income and median household income levels have declined relative to those of the state and nation. Educational attainment rates are above the national norms, typical of localities with a large university presence.
Housing values weakened significantly during the recession and recovery has been uneven. Values declined by nearly 17% between October 2007 and January 2012, according to Zillow Group. Home prices have generally trended upwards and more recently have shown solid growth. August 2015 home values were up 5.2% year over year. Net assessed values dropped slowly but consistently between fiscal 2008 and fiscal 2012 for a cumulative contraction of 5.5%, however, fiscal 2013 and 2014 rebounded with gains of 1.7% and 2.0%, respectively.
MANAGEABLE LONG TERM LIABILITIES; HIGH CARRYING COSTS
Debt levels are generally moderate both on a market value and per capita basis. Amortization of direct debt is rapid with 84% of principal retired within the next ten years. However, debt service costs relative to operations is extremely high at 36.5% of governmental spending. This is largely attributable to debt service on the outstanding $596 million school warrants, which is reported on the county's financial statements although school operations of the various school districts are reported separately. Carrying costs net of school warrants are less burdensome at about 12.5% of fiscal 2014 governmental fund spending. Capital needs are manageable and officials have no plans to issue additional GO warrants for the foreseeable future.
Retirement obligations are not a pressure. The county administers its own defined benefit pension plan covering most employees. The plan is exceptionally well funded at over 105% using a conservative 7% discount rate and annual pension costs are manageable relative to spending. Retiree health insurance costs are subsidized by the county. This other post-employment obligation (OPEB) is funded on a pay-go basis. The plan's unfunded actuarial, accrued liability of approximately $77.3 million is moderate, representing less than 1.0% of taxable values.
Комментарии