OREANDA-NEWS. Fitch Ratings affirms the 'AA' ratings of the following Pennsylvania Economic Development Financing Authority (PEDFA) bonds:

--$97.2 million junior guaranteed parking revenue bonds series 2013B (Dauphin County, PA guaranteed);
--$68.5 million junior guaranteed parking revenue bonds series 2013C (Assured Guaranty Municipal Corp. [AGM]) insured and Dauphin County, PA guaranteed).

The Rating Outlook is Stable.

SECURITY

For the series B and C bonds, Dauphin County has pledged its full faith, credit and taxing power to budget, appropriate and to pay timely all debt service. The county guarantee on the series C bonds is in the event that AGM fails to make debt service payments. Additionally, the PEDFA series B and C bonds are payable from parking revenues after operating expenses and series A senior debt service.

The PEDFA senior series A bonds, approximately $121 million principal amount, are payable from gross parking revenues (see 'Fitch Affirms PA Economic Development Financing Auth's Sr. Parking Revs at 'BBB-''dated Dec. 2, 2015 for more details).

KEY RATING DRIVERS

COUNTY CREDIT CHARACTERISTICS: The ratings on PEDFA's 2013B and C bonds are based on the underlying credit characteristics and guarantee provided by Dauphin County. Rating changes are linked to shifts in the county's credit quality as opposed to fluctuations in parking tax revenues.

STABLE ECONOMIC BASE: Substantial state and federal government employment, complemented by manufacturing and tourism, supports average income levels and unemployment rates. Fitch expects the county economy to remain stable with a continued slow recovery in the city of Harrisburg.

SOUND RESERVES DESPITE RECENT DRAWS: The county continues to maintain sound reserve levels through conservative budgeting practices, despite drawdowns attributable to incinerator related obligations and more recently to operating imbalances. The rating incorporates Fitch's expectation that the county will regain structural balance.

STABLE PROPERTY TAX BASE: Property values have been stable over the past seven years and support the county's high reliance on property tax revenues. The county benefits from significant tax rate raising flexibility.

SIZABLE CONTINGENT LIABILITIES: Low overall carrying costs could be pressured over the longer term by significant contingent liabilities. Modest future borrowing needs and reasonable pension costs offset an above-average debt burden.

RATING SENSITIVITIES
BALANCED OPERATIONS AND SOLID RESERVES: The rating assumes that the county will structurally address operating shortfalls while maintaining solid reserves. Failure to do so could pressure the rating.

CONTROLLED DEBT SERVICE COSTS: Large, sustained calls on the county to make the debt service payments on its contingent liabilities could pressure the county's operating profile.

CREDIT PROFILE
The county is located 105 miles west/northwest of Philadelphia and includes the city of Harrisburg, which is the state capital. The 2010 U.S. Census recorded the county's population at 268,100, an increase of 6.5% since 2000. The subsequent 1.2% increase to 271,453 reflects Fitch's expectation for slower growth.

DIVERSE ECONOMY & TAX BASE WITH AVERAGE WEALTH LEVELS

The county's well-established economy is an urban/rural mix, anchored by the government sector and complemented by education and health services, trade and transportation and tourism. The county's unemployment rate of 4.2% in August 2015 remains slightly below the state and national averages of 4.6% and 4.8%, respectively, driven by sustained employment growth. Wealth levels hover around the state and national averages, with slightly low median household income contrasting with per capita personal income a bit above average.

Taxable assessed value (TAV) has remained stable over the last several years, with modest growth expected over the longer term. The tax base has little concentration in any sector or taxpayer. The top 10 taxpayers represent a modest 6.3% of 2014 TAV. Total property tax collections are strong, averaging over 99% for the last five years.

SOUND RESERVE LEVELS DESPITE DRAWDOWNS

Recent financial operations have been mixed, although reserves remain solid. The county's guarantee of debt service related to the Harrisburg incinerator project resulted in the county contributing roughly $50 million for both debt service and operations since 2009.

The elimination of the incinerator obligation in 2013 relieved significant pressure on county operations, although some application of reserves has occurred since then to meet operational needs. Nevertheless, the available fund balance remains solid. The current rating incorporates the expectation that the county will achieve structural balance in the intermediate term while maintaining solid reserves.

The county maintains strong tax-rate-raising flexibility if needed; property taxes comprise approximately two-thirds of revenues. The county's overall tax millage rate has remained flat for more than a decade, and expenditures have been controlled through cost-cutting measures that include workforce reductions through attrition, consolidation of departments, and selective outsourcing.

Fiscal 2014 ended with a general fund surplus of $7.1 million after transfers and other financing sources/uses, equal to 4% of spending. The surplus represented a return to positive operations after incinerator-related deficits in fiscal years 2012 and 2013. Available fund balance, which adjusts for bond proceeds, equaled 16.4% of spending, the highest level since fiscal 2011.

For fiscal 2015, the county budgeted a $5.7 million use of general fund balance for operational needs. Year-to-date results indicate positive revenue and expenditure variances. The county has managed its liquidity well despite the lack of a state budget, paying its providers even as it awaits around $25 million in state reimbursements. Current county projections point to fund balance use of around $3 million for the year.

The proposed fiscal 2016 budget incorporates a $9 million fund balance appropriation for general uses, although county officials anticipate the approved adopted budget will include a reduced appropriation amount. Even with the anticipated fund balance use, the county expects to exceed its policy of retaining reserves equal to 45 days operating cash, or approximately $20 million. Fitch believes the county's sound reserve position provides it with substantial financial flexibility and is critical to maintaining the current rating.

MANAGEABLE DEBT PROFILE

Overall debt levels are high at $6,210 per capita and 9.4% of market value, attributable largely to overlapping debt. Amortization is slightly below average, with 45.7% of principal retired within 10 years. The debt profile is reasonably conservative. The county's remaining forward swap will terminate with an upcoming refunding, while capital appreciation bonds equal only a small proportion of the debt portfolio.

The county does not publish a capital improvement plan. Intermediate term debt plans are limited to the planned refunding, which will wrap around existing debt. The county will consider issuing tax anticipation notes sometime during the year if the state does not adopt a budget.

SIZABLE CONTINGENT LIABILITIES
The county has guaranteed a number of debt issuances, including $166 million for the PEDFA junior bonds. Past payments have been material but have not pressured operations. Fiscal 2015 will conclude with just one payment, $1.5 million on behalf of Harrisburg University. Based on the university's representations, the county anticipates that the university will fully support its debt after a planned $1 million county payment in fiscal 2016.

ADEQUATELY FUNDED PENSION PLAN; LOW CARRYING COSTS

The county-operated pension plan is adequately funded at 86.3% as of Dec. 31, 2014, based on a 7.5% rate of return. Under Fitch's more conservative 7% rate of return assumption, the approximate funded ratio drops to a still adequate 81.8%. The county traditionally makes 100% of its annual required contributions (ARC), which in fiscal 2014 was a manageable 2.6% of total governmental spending. Other post-employment benefit (OPEB) costs are limited due to the elimination of most retiree health benefits over the past five years. The county makes pay-as-you-go payments ($1.1 million in fiscal 2014), and had a modest unfunded actuarial accrued liability of $19.7 million as of Jan. 1, 2015.

Carrying costs for debt service, pension and OPEB equaled a low 11.9% of fiscal 2014 total governmental spending and partly mitigates the potential exposure to subordinate parking revenue bond debt service payments. Other contingent liabilities are currently limited but have been larger in the past.

WEAK LEGAL COVENANTS FOR PEDFA JUNIOR BONDS
The PEDFA rate covenants require only sum-sufficient revenues to cover current expenses, debt service and various other fees and expenses, and a minimum 125% coverage of all bond debt service from revenues net of only current expenses. Fitch believes amounts payable after current revenues and all debt service may be integral to the overall positive performance of the parking facility. Additionally, a rate covenant violation is not considered an event of default.

There is no additional bonds test (ABT) for the junior bonds. The ABT for the series A senior bonds requires demonstrated 3.0x debt service coverage of only the current and proposed senior bonds based on projected gross revenues. Any additional debt, senior or junior, is subject to consent by the county and AGM. Debt service reserve funds are sized at maximum annual debt service (MADS) and funded through series-specific sureties provided by AGM.

COVERAGE BELOW COVENANTED LEVELS

Difficulties and delays in collecting enforcement revenues have resulted in revenue collections that have not met budget expectations. Unaudited fiscal 2014 results were approximately 14% under budget, which was partially offset by operating expenses also being under budget. However, the all-in debt service coverage ratio for fiscal 2014 was only 1.22x (net revenues, inclusive of the series B&C debt service), slightly below the 1.25x covenant (not an event of default).

Year-to-date performance through Sept. 30, 2015 continues to be weaker than budget. All-in debt service coverage through Sept 30, 2015 was 1.13x and Fitch assumes year-end results will show coverage below the 1.25x covenant minimum. The issuer has appointed a management consultant, as is required under the trust indenture given the covenant default in 2014, to make recommendations related to fees and operating expenses in order to bring financial results in-line with the rate covenant.

Fitch will continue to monitor any proposed changes to the rate structure. Management has stated that the ticketing and enforcement process has been corrected and tickets are currently being processed as expected.

Even though coverage has been lower than expected, debt service payments are current on the bonds and the county has not been called upon to exercise its guarantee. Fitch stress scenarios demonstrate the potential for parking revenues to be insufficient to cover debt service. Future failures to meet coverage covenants or the need for county to exercise its guarantee would not alone result in a downgrade, given that the rating reflects the county's guarantee and not the adequacy of the pledged revenues.