News Column

Fitch Rates Winston Salem, NC's GOs 'AAA'; Outlook Stable

May 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following Winston Salem, NC bonds:

--$3.9 million general obligation bonds, series 2014.

The bonds are expected to sell on June 10 through public bid. The bonds will be used to finance fire station, street, bridge and recreation improvements.

In addition, Fitch affirms the following ratings:

--$80.4 million unlimited tax general obligation (ULTGO) bonds at 'AAA';

--$31.6 million limited obligation bonds (LOBs), series 2012A at 'AAA';

--$15.1 million special obligation bonds, series 2005 and 2013 at 'AAA';

--$13.3 million COPs, 2006A at 'AA+';

--$57 million LOBs, series 2010A, 2013A and 2013B at 'AA+';

--$13.6 million COPs, series 2004A, 2004B and 2006B at 'AA'.

The Rating Outlook is Stable.

SECURITY

The ULTGOs are general obligations of the city to which its full faith and credit and unlimited taxing power are pledged.

The LOBs series 2012A represent an absolute and unconditional contractual obligation of the city, not subject to annual appropriation.

The remaining COPs and LOBs are secured by lease payments, subject to annual appropriation, and a deed of trust against certain essential and nonessential governmental assets of the city. A one-notch rating distinction from the ULTGO rating is made for the obligations with a security interest in essential governmental assets, and a two-notch distinction for nonessential assets.

The special obligation bonds are secured by a portion of the city's sales and use taxes.

KEY RATING DRIVERS

HEALTHY FINANCIAL FLEXIBILITY: Robust reserves are buttressed by a liquid balance sheet. Financial management is strong, and budgeting practices are conservative.

SOUND ECONOMIC PROFILE: The city is a regional hub for health care, higher education, and biotechnology, which add diversification from its traditional manufacturing concentration. Economic indicators trend slightly below state and national averages.

MANAGEABLE DEBT BURDEN: Overall debt levels are moderate, and principal payout is rapid. Costs related to debt service and retirement benefits consume a manageable share of annual spending.

'AAA' LOBs: Lease payments on the 'AAA'-rated LOBs are not subject to appropriation; they represent an absolute and unconditional obligation of the city payable from its general fund, and the city may levy taxes to meet its payment obligation subject to statutory limitations. There is ample margin under this limitation.

SPECIAL OBLIGATION RATING: The 'AAA' rating on the special obligation bonds reflects the exceptional coverage provided by pledged sales tax revenues at 7.2 times (x) in fiscal 2013.

LOBS WITH APPROPRIATION RISK: The rating assigned to the other LOBs reflects appropriation risk in addition to the level of essentiality of the assets securing bondholder repayment.

RATING SENSITIVITY

MAINTENANCE OF STRONG RESERVES: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The 'AAA' GO rating and Stable Outlook reflect Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The City of Winston-Salem, with an estimated 2012 population of 234,349, is the seat of Forsyth County in northwestern North Carolina and is a major economic and commercial center in the state.

MAINTENANCE OF STRONG RESERVES, HIGH LIQUIDITY

Reserve and liquidity levels remain ample, reflecting the city's strong financial position. For fiscal 2013, the general fund's unrestricted fund balance was $34 million, an ample 19.8% of spending. The restricted portion of the general fund balance includes a statutory reserve for stabilization of $12.9 million (7.5% of spending), which Fitch considers an available source for operations, if necessary. General fund cash and investments of $41.8 million in fiscal 2013 represents almost three months of operating expenses.

The city has remained in compliance with its prudent unassigned fund balance policy of 12.5% of estimated general fund expenditures. The city had operating surpluses in each of the past four fiscal years, with general fund balance growing from $37.2 million at the close of fiscal 2009 to $47.2 million at the close of 2013. Positive financial results have been achieved through prudent fiscal stewardship, evidenced by management's willingness to combine recurring revenue and expenditure actions as necessary to stabilize city finances.

FISCAL 2014 BUDGET AND PROJECTIONS

The fiscal 2014 budget includes a $2.2 million fund balance appropriation for nonrecurring items, a subsequent mid-year appropriation of $4 million for transfers to the internal service funds (ISF) to increase ISF reserves, eliminates 52 positions and funds a 1.5% merit pay increase. The millage rate increased to $5.3 per $1,000 AV, which is 1.25 cents less than the revenue neutral rate. The rate increase offsets the revaluation that reduced the total value of real property in the city by 8.8%.

The city is projecting to close the year with better than budget operations. The projected year-end operating results reflect a $3 million net operating deficit after transfers, leaving a sizable unrestricted fund balance of $31 million.

The proposed fiscal 2015 budget includes a one-cent increase in the property tax rate, mainly to offset the new state wide exclusion of proprietary software from the property tax base. The proposed budget is balanced with a $4.3 million use of reserves, approximately half of which is for non-recurring capital expenditures. The budget reflects a merit pay increase of 2% and expenditure savings from increased productivity from additional automated refuse trucks as well as reductions in supplies and contracted services.

CONTINUED DIVERSIFICATION OF LOCAL ECONOMY

Healthcare services, biotechnology, and higher education drive the local economy. Wake Forest Baptist Health (WFBH) and Novant hospitals are the second and fourth largest hospitals in the state, respectively, and are the city's top employers, with over 20,000 employees in aggregate. The Wake Forest Innovation Quarter, located in downtown Winston-Salem on 200 acres, houses an estimated 50 private companies, as well as Wake Forest University departments, with over 1,017 employees. Wake Forest, Winston-Salem State University, NC School of Arts, and Forsyth Technical Community College are all located within city limits and have a combined total enrollment exceeding 20,000 students.

Manufacturing plays a significant role in the economy even though it is no longer the city's primary source of jobs. Among the larger taxpayers is Reynolds American Inc., whose headquarters are in the city, but closed its last manufacturing plant during 2012.

MIXED ECONOMIC INDICATORS, BUT DOWNTOWN DEVELOPMENT HOLDS PROMISE

Economic indicators for the city are mixed. The city's March 2014 unemployment rate of 6.1% is comparable to the nation and outperforms the state. Wealth indicators are on par with those of the state and approximately 11%-22% below those of the U.S.

Taxable values have seen some fluctuation in recent years, but are essentially flat from the fiscal 2008 level. The city is now seeing a resurgence of downtown development, including several multi-family and mixed use development projects. The recent sale of a historic RJ Reynolds building to a developer planning a hotel/apartment conversion continues that trend.

MODERATE DEBT LEVELS, MANAGEABLE CARRYING COSTS

Overall debt levels are moderate ($2,464 per capita and 2.9% of market value), including the sizable overlapping debt of Forsyth County (more than half of the total burden). The city's outstanding direct debt consists predominately of LOBs, COPs and GOs. Debt payout is above average. The city intends to enter into $76 million of installment financing contracts in fiscal 2015 to finance improvements to the convention center, renovation of a former train station into a city transportation facility, and for general government equipment. In addition, the City Council is considering seeking voter authorization for $139 million in November 2014; if approved, issuance would occur in three series with the first issuance in fiscal 2016.

Historically, the city has issued variable-rate debt for short-term equipment deals. Variable-rate debt outstanding totals a manageable $16 million and is privately placed with no put option, thus eliminating the need for liquidity support.

Fiscal 2013 carrying costs related to debt service and retirement benefits were a sizable 23.6% of governmental spending. General employees are members of the North Carolina Local Government Employees' Retirement System (NCLGERS), and police officers are members of the city's Winston-Salem Police Officers' Retirement Fund (WSPORF). The state plan is well funded and in 2013 the city issued debt to stabilize its local WSPORF plan. Preliminary actuarial results report a funding status of almost 87%. The WSPORF plan was closed to police officers hired after Dec. 31, 2013.

OPEB liabilities do not represent a significant cost pressure. At the close of fiscal 2013 the UAAL was reported at $57 million and the OPEB trust funded ratio was 41%.

Additional information is available at 'www.fitchratings.com'.

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, National Association of Realtors, RealEstate Business Intelligence.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832348

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

or

Primary Analyst

Patricia McGuigan, +1-212-908-0675

Director

Fitch Ratings, Inc.

33 Whitehall St.

New York NY 10004

or

Secondary Analyst

Andrew Hoffman, +1-212-908-0527

Director

or

Committee Chairperson

Arlene Bohner, +1-212-908-0554

Senior Director

Source: Fitch Ratings


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