News Column

Fitch Affirms Beaufort County, SC's GOs at 'AA'; Outlook Stable

August 15, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Beaufort County, South Carolina's (the county) bonds as follows:

--$42.6 million outstanding general obligation (GO) bonds, series 2006, 2006B, 2007, and 2007B at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the county's irrevocable pledge of its full faith, credit, resources and ad valorem taxing power without limit as to rate or amount.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: Reserve levels in the county's general fund are strong and the county has posted only one operating deficit in the general fund in the past six fiscal periods. The budget is largely funded by the levy of property taxes, which are subject to a moderately restrictive statutory tax cap.

STRONG MILITARY, TOURISM PRESENCE: The local economy has remained relatively stable and is anchored by a strong and growing military presence. Tourism is also a large economic driver for the county, driven by Hilton Head Island and a large contingency of vacation homes. Low unemployment and above-average wealth levels support stability.

FAVORABLE DEBT PROFILE: Debt levels are moderate, amortization is rapid, and long-term obligations related to pension and other post-employment benefit (OPEB) costs are manageable.

RATING SENSITIVITIES

CONTINUED FINANCIAL STABILITY: General fund revenue has been relatively flat over the past several years and the county appears to have decreasing expenditure flexibility to balance the fiscal 2015 budget. Fitch believes that this could potentially strain the county's presently strong financial resources over the intermediate term if unchanged.

CREDIT PROFILE

The county is located just north of the Georgia border and is home to Hilton Head Island. The county's 2013 population was 171,838.

STRONG RESERVE POSITION

The county's general fund position has continued to strengthen with fiscal 2013 operations adding $1.9 million to reserves, raising unrestricted fund balance to a sound $22.2 million (23% of general fund expenditures) at fiscal yearend. Preliminary fiscal 2014 estimates show the county adding an additional $1 - 1.5 million to general fund balance. The county recently formalized a 30% total general fund balance policy. Total general fund balance was 25.1% at fiscal yearend 2013; management's goal is to continue adding at least 0.5% to general fund balance each year until reaching the minimum compliance level of 30%.

STAGNANT REVENUE CONSTRAINS BUDGET

Property taxes account for 75% of general fund operating revenue in fiscal 2013. The tax base is very affluent, as reflected in a market value per capita of roughly $190,000. Tax collections are adequate and the tax base does not feature any significantly large property owners. Act 388 limits growth in property taxes based on CPI and population growth, which somewhat limits the county's financial flexibility. The county has only raised the millage rate once in the past six consecutive fiscal periods and, based on unused tax capacity, the county estimates that it retains about 8% to 9% in flexibility with the current millage rate for fiscal 2015.

General fund revenues have been fairly stagnant the last several years. The county enacted furloughs, implemented a hiring freeze, and reduced pay-go capital spending in response. The county has cut expenditures by a cumulative 5.3% from fiscal 2010 to fiscal 2013; over the same time period, general fund revenue posted some minor negative variance but remained relatively flat.

The fiscal 2015 budget appears to be somewhat tighter for the county, driven largely by a $1.6 million increase in various employee benefit costs. The budget is balanced with a $750,000 appropriation of fund balance (which is not a new tactic for the county) and an assumption that 4.5% of the county's full time employees will be lost to attrition, a rate which does not appear consistent with the county's historical performance. Given the county's demonstrated ability to implement midyear budget adjustments and overall financial strength, Fitch believes that the county is well-positioned to handle some unfavorable variance to the budget during fiscal 2015.

STRONG ECONOMY WITH TOURISM AND MILITARY CONCENTRATION

The county consists of numerous islands, including the popular resort community of Hilton Head. Tourism and seasonal residents drive much of its economy, along with several large military facilities. The county's resident income levels remain healthy, with per capita and median household income levels that outperform the state and nation.

The significant military presence, including Parris Island Marine Corps Recruit Depot, the Marine Corps Air Station, and the U.S. Naval Hospital, has been stable. The Marine Corps Air Station expanded its operations in June 2014 upon receipt and deployment of the F-35B joint strike fighter jet. While the county's military sector was not significantly affected by the last base realignment initiative, potential exists for future military reorganization to affect operations.

A large decline in assessed value (AV) from fiscal 2013 to fiscal 2014 was the result of the county's five-year revaluation cycle. The last revaluation in 2009 did not incorporate much of the negative recession-driven housing market effects. The county's millage rate was increased to provide for a revenue neutral tax levy for fiscal 2014 levy. The county anticipates modest near-term tax base growth which Fitch views as a reasonable expectation given a slowly improving housing market.

FAVORABLE DEBT PROFILE

Fitch expects the county's overall debt burden to remain moderate given modest needs and rapid amortization. Overall debt is low at 2.1% of market value but higher on a per capita basis at $4,065 given a large seasonal population (population of Hilton Head Island balloons from 38,000 to a peak of 250,000 in the summer).

Carrying costs for debt service (12.4% of governmental expenditures in fiscal 2013) and retirement benefits (3.2% and 0.3% for pension contributions and other post-employment benefits (OPEB), respectively) are affordable and partly reflect the fairly aggressive repayment of outstanding debt (67% retired in 10 years). The county provides pension benefits through state-administered plans and funds 100% of its required contribution. Fitch-adjusted state retirement system funding levels were low at 61.4% for general employees and 67.4% for police as of the July 1, 2012 valuation. The county's OPEB plan was closed to new employees in 2008 in order to limit liability growth, and the unfunded OPEB liability in fiscal 2013 was a negligible percentage of county market value.

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, and Zillow.

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=852534

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

Brendan Scher

Analyst

+1-212-908-0686

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Maria Coritsidis

Director

+1-212-908-0514

or

Committee Chairperson

Michael Rinaldi

Senior Director

+1-212-908-0833

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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