News Column

Fitch Rates Cary, NC's GOs at 'AAA'; Outlook Stable

February 11, 2014

Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds of the town of Cary, NC:

--$75.7 million GO public improvement bonds, series 2014.

The bonds are scheduled for a competitive sale on Feb. 18. Proceeds will finance street, recreation facility, fire station and wastewater system improvements.

In addition, Fitch affirms the following ratings:

--$139.39 million GO bonds series 2006, 2009A, 2009B, 2010A, 2010B at 'AAA';

--$12.21 million limited obligation refunding bonds (LOBs), series 2010 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by a pledge of the full faith, credit and unlimited taxing power of the town.

The LOBs are secured by payments made by the town under an installment financing agreement (the agreement) in an amount sufficient to meet debt service requirements on the debt, subject to annual appropriation of the town. The LOBs are additionally secured by a deed of trust granting a lien on properties within the town hall campus.

KEY RATING DRIVERS

SUPERIOR FINANCIAL FLEXIBILITY: Financial flexibility is exceptional, including very high reserve levels and balance sheet liquidity, and ample revenue raising capacity. The town has a track record of conservative budgeting that consistently yields surplus operating results.

STRONG ECON'OMIC BASE: The town's economy is strong and has excellent long-term potential for continued growth and development, combining the stability of the nearby state capital and a large higher education sector with the specialized high-technology industry.

MODERATE DEBT AND SOUND POLICIES: The overall debt burden is moderate while the town continues to adhere to conservative financial and debt policies.

SOUND LEASE ASSET ESSENTIALITY: The LOB rating is notched down from the town's GO rating, which reflects Fitch's assessment of the risk of non-appropriation, limited bondholder remedies in the event of a default, and the essential nature of the town properties subject to the deed of trust.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the town's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Cary is located in central North Carolina, directly west of Raleigh, the state capital. The town has an estimated 2012 population of 145,693.

STRONG ECONOMIC BASE

Cary's economy benefits from strong local commercial and employment bases as well as its proximity to Raleigh and the Research Triangle Park, a campus of 17 biotechnology firms with roughly 49,000 jobs.

The town's commercial presence includes SAS Institute, Inc., the world's largest privately held software company, as well as other technology and medical related employers. MetLife is opening a technology center in the town that will employ roughly 1,300 high- salary positions and is expected to generate roughly $350,000 in additional tax revenues annually.

The area is also home to several colleges and universities and major healthcare facilities, which tend to attract private-sector investment.

The town's unemployment rate has decreased to 4.1 percent in November 2013 and remains well below state and national averages. Income levels are well above state and national averages, reflecting the town's highly educated workforce.

SUPERIOR FINANCIAL FLEXIBILITY

Financial management is very strong, as evidenced by high fund balances, stringent fiscal policies and conservative budgeting. Fiscal 2013 ended with a general fund net operating surplus after transfers of $3.4 million (2.7 percent of spending). The unrestricted general fund balance increased to $71.6 million, or 56.9 percent of spending. The town's reserve by state statute, which is primarily to offset accounts receivable, is a source of additional financial flexibility. This reserve totaled $18.6 million, or an additional 14.8 percent of general fund spending.

The town's fiscal 2014 budget has increased by $10 million, or over 8 percent, year over year. The budget includes an appropriation of fund balance of $10.6 million, largely attributable to $10 million spending for one-time capital projects. The town historically practices conservative budgeting. Preliminary estimates for fiscal 2014 are positive and revenues and expenditures look to be on a trajectory similar to fiscal 2013, which ended in surplus operations.

The town's budget includes $6 million to cash defease an existing series of GO bonds. An ad valorem tax rate increase of $0.02 is included in the budget, increasing the tax rate to $0.35 per $100 assessed valuation (AV) (considerably lower than the $1.50 per $100 AV statutory cap). An additional $0.02 tax rate increase is expected in the fiscal 2016 budget. The town's tax rate continues to be regionally competitive as these are the first tax rate increases since 1990.

MODERATE OVERALL DEBT

Overall debt levels are moderate at 2.1 percent of market value and approximately $3,165 per capita. Debt ratios should remain affordable given the town's very limited future borrowing plans and healthy pace of principal amortization.

Variable rate debt of $38.3 million accounts for a high 26 percent of the town's net direct debt. The variable rate bonds serve as a hedge against the town's short-term cash and investment portfolio. The town conservatively budgets its variable rate interest expense, and its robust reserves and broad revenue flexibility further serve to mitigate this risk.

LIMITED OTHER LONG-TERM LIABILITIES

The majority of town employees participate in the well-funded North Carolina Local Governmental Employees' Retirement System (LGERS), a cost-sharing multiple-employer plan. The town also administers a single-employer pension plan to provide retirement benefits to qualified sworn law enforcement officers. The town's total fiscal 2013 pension contribution was an affordable $4.7 million or 0.28 percent of governmental spending.

The town offers other post-employment benefits (OPEB) and fully funds its costs on a pay-go basis. In fiscal 2013, the town contributed $817,221 towards its OPEB costs, equal to 0.56 percent of total spending and 14.5 percent of the ARC ($5.6 million). Full funding of the fiscal 2013 ARC would consume 3.91 percent of spending. Total carrying costs for debt service, pension and OPEB combined equal a low 12.7 percent of governmental fund expenditures.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

Additional information is available at 'fitchratings.com'.

((Comments on this story may be sent to newsdesk@closeupmedia.com))


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