News Column

Fitch Rates Wilmington, NC's Limited Obligation Bonds 'AA'; Outlook Stable

June 27, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following rating:

--$22,085,000 refunding limited obligation bonds (LOBs), series 2014A rated 'AA';

--$2,305,000 taxable refunding LOBs, series 2014B rated 'AA'.

The bonds will be sold on a negotiated basis on July 10 to refinance a portion of the city's series 2005A certificates of participation (COPs) for debt service savings. The savings will primarily be applied to the city's irrevocable other post-employment benefits (OPEB) trust.

In addition, Fitch affirms the following ratings:

--$30.1 million in general obligation bonds (GOs) at 'AA+';

--$152.2 million in COPs and LOBs at 'AA'.

The Rating Outlook is Stable.

SECURITY

The city's LOBs and COPs are payable from installment payments made by the city, equal to debt service, subject to annual appropriation. To secure its obligation to make installment payments, the city delivered deeds of trust on essential and non-essential governmental facilities, including the city's police headquarters, fire station facilities, and the convention center (series 2005A, 2008A&B, 2010A&B) and operations center, fire station facilities and the command center (series 2012).

The GO bonds are secured by the city's full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: Three consecutive years of operating surpluses have built strong reserves, which together with detailed financial forecasting and budget monitoring continue to support stable operations.

COPS/LOBS NOTCHING: The 'AA' rating on the COPs and LOBs is one notch lower than the city's GO rating reflecting the lesser long-term commitment to repayment, principally evidenced by the city's obligation to annually appropriate installment payments. The rating also considers that a satisfactory amount of essential governmental assets are subject to a deed of trust and surrender should the city fail to make an installment payment.

REGIONAL ECONOMIC HUB: The city serves as the economic center for southeastern North Carolina. Business enterprises are diverse, while a large government and health care presence enhances stability. Income metrics are below average.

AVERAGE LONG-TERM LIABILITIES: The overall debt burden and principal payout are average, and pension and OPEB costs are affordable. Future capital needs are manageable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including maintenance of favorable operating reserves. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Located on the eastern coast of North Carolina, the city serves as the county seat for New Hanover County. The city is on the Cape Fear River approximately 30 miles from the Atlantic Ocean and is home to the state's largest port. The city's population growth outpaces the state and nation, with 2013 population of 112,067.

DIVERSE ECONOMY SERVES AS REGIONAL HUB

The city's diverse economy serves as a regional hub for the southeastern portion of the state with a mixture of high-tech manufacturing, government, telecommunications, transportation, filmmaking/entertainment, health care, and tourism. The largest taxpayer is Corning's fiber optic plant (1.8% of tax base) and the second largest taxpayer is the global headquarters of a pharmaceutical contract research organization for discovery and development.

A teaching hospital and regional tertiary care center provide a strong medical presence in the city. Substantial new development is recently completed or underway in the city's downtown, including construction of several hotels near the city's convention center. Poverty and median household income metrics are weak, although per capita income approximates the nation's, indicating the presence of high-wealth residents pulling up the average.

HEALTHY FINANCIAL OPERATIONS

Reserves and liquidity levels remain ample, reflecting the city's sound financial profile. In each of the past three fiscal years the city boosted general fund reserves. At the close of fiscal 2013, the unrestricted general fund balance totaled $30.6 million, equal to a strong 38% of spending. The city's fund balance policy requires a minimum unreserved fund balance equal to a prudent 15% to 20% of the current operating budget. In evaluating the city's overall financial flexibility, Fitch also gives credit to the statutory stabilization reserve which is generally composed of accounts receivable not offset by deferred revenue. In fiscal 2013 this reserve totaled $11.2 million or 13.9% of spending.

Property taxes are the largest single revenue stream for the general fund, accounting for approximately 59% of total sources. Revaluation of real property is required at least once every eight years by state statute and the city's tax base declined 10.5% in the fiscal 2013 revaluation. The city raised the tax rate to achieve growth in the total levy. Fiscal 2013 results also reflect favorable sales tax results with collections up 5.1% from the previous year.

MODERATE USE OF FISCAL 2014 RESERVES

An essentially balanced budget was adopted for fiscal 2014 but mid-year budget amendments for one-time expenditures necessitated appropriations of fund balance, largely for ice storm related expenditures and a downtown waterfront land purchase. The city conservatively estimates to close the year with a $2 million use of reserves. Sales tax collections are strong and reserve use is expected to be more moderate.

PROPOSED FISCAL 2015 BUDGET MAINTAINS FINANCIAL STRENGTH

The proposed 2015 budget includes a modest $610,000 appropriation of reserves for economic development incentives and funding of transit reserves. The budget reflects an overall wage increase of 4% and a tax rate increase from $0.45 per $100 assessed value (AV) to $0.46. The tax rate would remain very low relative to the statutory cap of $1.50 per $100 AV, well within the state norms.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt ratios are average at 2.6% of taxable AV and $3,008 per capita. Amortization is also average. The fiscal 2015-2017 CIP totals $86 million and reflects a financing strategy implemented in fiscal 2013 dedicating $0.05 of the property tax rate for capital needs, with 80% for debt service and 20% for pay-as-you-go projects. The city is planning a $44 million GO bond referendum for November 2014 for street, sidewalk and transportation improvements, with issuance occurring over seven years. The city also expects to continue issuance of installment financing bonds for new projects.

The city participates in the statewide Local Governmental Employees' Retirement System (LGERS). The pension plan as a whole is a very well-funded at 97.1% as adjusted by Fitch to a 7% investment return. For fiscal 2013, the city's $3 million contribution was a manageable 2.6% of governmental spending. Total carrying costs including pension, debt service and OPEB are on the high end of mid-range at 23.3% of general government spending. The OPEB unfunded liability was $51.6 million (0.4% of the market value of real property) at Dec. 31, 2011.

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.

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=836955

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, Inc.

Primary Analyst

Patricia McGuigan, +1-212-908-0675

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Andrew Hoffman, +1-212-908-0527

Analyst

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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