News Column

Fitch Rates King County, WA's $51MM LTGOs 'AA+'; Outlook Stable

June 25, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following King County, Washington new debt issuance:

--Approximately $51 million limited tax general obligation (LTGO) bonds, 2014, series C.

The bonds are scheduled to price via competitive bid on July 14, 2014. Proceeds will be used to refund outstanding debt for interest savings and to provide long-term financing for various solid waste capital projects.

In addition, Fitch affirms the following ratings:

--$137.3 million outstanding unlimited tax GO (ULTGO) bonds at 'AAA';

--$1.6 billion outstanding LTGO bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, secured by an irrevocable full faith, credit, and resources pledge to levy an ad valorem tax sufficient (together with all other legally available monies) to pay debt service. The county's pledge on LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction, and a rate cap of $1.80 per $1,000 of taxable assessed value (TAV).

KEY RATING DRIVERS

RESILIENT ECONOMY: King County retains a sound economic base due to its role as a regional economic center and above-average wealth and income levels. Employment has seen steady improvement over the past three years and recently surpassed pre-recession peaks. Assessed values for 2014 experienced strong growth following four years of declines and recent home price increases point to further gains.

SOUND FINANCIAL POSITION: General fund balances and cash levels remain healthy and increased in 2012. Unaudited results for 2013 reflect continued positive operations, which appear likely to continue in 2014 based on year to date results.

STRUCTURAL IMBALANCE: The county will be challenged to maintain structural balance over the longer term due to ongoing cost pressures and constraints on revenue growth. The county is property tax dependent in a state with restrictive property tax levy growth limits. Recent efforts to address this imbalance through efficiency measures have shown positive results but could prove difficult to maintain on a permanent basis.

STRONG MANAGEMENT: The county's strong management is reflected in its commitment to long-term planning, adherence to council-adopted financial management policies, and low debt burden.

RATING SENSITIVITIES

BALANCED OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics, including the county's ability to maintain balanced operations despite revenue constraints. A material change in the county's financial flexibility and reserves relative to historical levels, while not anticipated, could pressure the current rating and/or Outlook.

CREDIT PROFILE

DIVERSE ECONOMIC BASE

King County benefits from a diverse economy and tax base that encompasses almost 29% of the state's population. Major private employers include Boeing and Microsoft and the regional economy is also supported by a substantial military presence. The county includes the Pacific Northwest's largest city, Seattle, and serves as a regional economic center. Wealth and income levels are well above national averages, and property values are high at approximately $176,000 per capita.

King County performed better than many regions nationally in the recent downturn and has experienced steady employment gains during the past four years. The county unemployment rate of 5.2% in March 2014 was well below the 6.8% national rate, and total employment levels recently surpassed pre-recession peaks. April 2014 home values reported by Zillow.com for the Seattle metropolitan area increased by 11.8% compared to one year earlier and assessed values rose by 8.2% countywide in 2014 after four years of declines.

CONTINUED PROGRESS IN ADDRESSING STRUCTURAL IMBALANCE

King County's general fund fared better during the recent downturn than general economic indicators might suggest. Total revenues increased at a modest average annual rate of 0.9% between 2008 and 2012, while the county impressively held spending stable. In addition to ongoing savings from labor cost reductions achieved during this period, the county has sought to reduce costs by 3% per year on an ongoing basis through efficiency improvements. Key efficiency gains to date have included reductions in employee health insurance costs, office space consolidation, and correctional psychiatric care improvements.

Such efficiency efforts respond to legal limits on growth in property tax, the general fund's largest source of revenue, and are intended to address the structural imbalance between projected revenue and expenditure growth. Voter-approved property tax levies for specific purposes, such as parks or criminal justice, have also helped the county to reduce demands on its general fund in recent years, but Fitch believes out-year gaps could prove challenging to manage.

CONTINUED STRONG OPERATING RESULTS

Management reports continued positive operating margins for the fiscal year ending Dec. 31, 2013 based on unaudited results. The county's audit for 2013 is expected to be released prior to issuance. A planned drawdown of approximately $31 million (4.8% of 2012 spending) for a legal settlement will reduce total general fund reserves, but was offset by approximately $12 million of combined expenditure reductions and revenue increases. The county continues to exceed its policy targets for available fund balance and Fitch expects unrestricted balances to remain healthy at 15% of general fund spending or higher.

The county's budget for 2014 is balanced and recent revenue forecasts suggest the county is on track for a fifth consecutive year with positive operating results. Management has preliminarily identified a $30 million gap in the county's two-year general fund budget for 2015 and 2016, equivalent to about 2% of anticipated spending. Fitch expects the county to address this gap, as in prior years, through a combination of efficiency improvements, revenue increases, and expenditure reductions.

LOW DEBT; MANAGEABLE PENSIONS

The county's debt burden remains low with overall debt at 1.8% of TAV. Amortization is quicker than average with approximately 66% of direct debt repaid in 10 years. Pension liabilities are manageable and reflect historical strong funding levels for most state-sponsored plans. Other post-employment benefit liabilities are relatively minor as most retirees must pay for the cost of their participation in the county's group insurance plan. Carrying costs for debt and retirement benefits are low at approximately a combined 9% of governmental expenditures in 2012.

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, IHS Global Insight, and Zillow.com.

Applicable Criteria and Related Research:

--'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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836532

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

Primary Analyst

Stephen Walsh, +1 415-732-7573

Director

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

Alan Gibson, +1 415-732-7577

Director

or

Committee Chairperson

Amy Laskey, +1 212-908-0568

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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