News Column

Fitch Rates Essex County, NJ's GOs 'AA' and BANs 'F1+'; Outlook Stable

September 4, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds to be issued by the County of Essex, NJ (the county):

--$20,400,000 general improvement bonds, series 2014A;

--$2,100,000 county vocational school bonds, series 2014B (New Jersey School Bond Reserve Act);

--$2,500,000 county college bonds, series 2014C (County College Bond Act);

--$2,500,000 county college bonds, series 2014D (County College Bond Act).

Fitch also assigns a rating of 'F1+' on the county's $66,745,000 bond anticipation notes (BANs), series 2014.

The bonds and BANs will be sold competitively on Sept. 11. Proceeds of the bonds will finance various capital improvements for the county, the Essex County College (the college), and the Essex County Vocational School (the vocational school). The BANs will temporarily finance and refinance various capital improvements for the county and vocational school.

Fitch also affirms the 'AA' rating on the following:

--$106.1 million outstanding county GO bonds;

--$452.1 million outstanding Essex County Improvement Authority (county guaranteed) bonds.

A list of the individual Fitch-rated series of bonds is provided at the end of this press release.

The Rating Outlook is Stable.

SECURITY

The GO bonds and the BANs are backed by the county's full faith and credit and unlimited taxing authority. The county unconditionally and irrevocably guarantees the payment of the Essex County Improvement Authority (ECIA) bonds and has pledged its unlimited taxing authority to bondholders.

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: The county has maintained a relatively stable financial position over an extended period, reflecting a combination of careful expenditure management and measured recurring revenue increases. Reserves continue to improve and are adequate for the rating, but do not afford the county significant capacity to address unforeseen budgetary challenges.

BROAD AND DIVERSE ECONOMY: The county remains an important hub for commercial activity, transportation, education and healthcare, and further benefits from its participation in the significantly sized New York-Newark-Jersey City metropolitan statistical area.

MIXED ECONOMIC INDICATORS: Income and employment metrics are generally at or below average, reflecting the presence of both an urban core and wealthy suburban communities.

MANAGEABLE DEBT AND CAPITAL NEEDS: Overall debt levels are moderate and should remain so based on future borrowing and capital needs and the very rapid retirement of outstanding debt. Rising costs associated with pension and healthcare is a driver of spending growth; however, the cost of servicing these long-term liabilities in addition to debt is still considered moderate.

BAN RATING MAPS TO LONG-TERM: Repayment of BANs is almost exclusively dependent on future market access for the county, which Fitch assesses by analyzing its overall creditworthiness. The 'F1+' short-term rating corresponds to the 'AA' rating on the county's outstanding GO bonds.

RATING SENSITIVITIES

STABLE OUTLOOK: The 'AA' rating reflects Fitch's expectation that economic and debt fundamentals will remain largely stable and that the county will continue to manage its finances to maintain structural balance and an adequate reserve cushion. The rating is sensitive to performance outside of Fitch's stated expectations.

CREDIT PROFILE

MAJOR COMMERCIAL CENTER; MIXED SOCIOECONOMIC METRICS

Essex County is situated in northeastern New Jersey approximately 10 miles directly west of downtown Manhattan. The county is densely populated and highly developed and has an estimated 2013 population of 789,565 which has remained fairly flat over the last decade. The city of Newark, which accounts for more than one-third of the county's population, serves as the anchor of the county's urban core. The city's very weak income and unemployment metrics are balanced against the remainder of the county, which includes several wealthier suburban communities such as Milburn, Glen Ridge, and Livingston. As such overall income and unemployment metrics are mixed. Median household income registers 106% of the U.S. standard but only 79% of the state. Unemployment as of June 2014 was 7.6% in the county, 10.6% in Newark, 6.4% in New Jersey and 6.3% across the U.S.

The county features a broad and diverse economic base with representation from the telecommunication, commercial aviation, higher education, health care, pharmaceuticals, and financial services sectors. Substantial employers include St. Barnabas Hospital (23,000), Verizon (17,100), Prudential Insurance (16,850), and Continental Airlines (11,000). An excellent transportation infrastructure provides residents of the county with access to employment opportunities throughout the New York-Newark-Jersey City metropolitan statistical area (MSA). The MSA ranks as the largest employment base in the country with nearly 8.9 million non-farm jobs.

The county's tax base remains significant at $84.7 billion on an equalized basis in 2013 or close to $110,000 per capita. Home prices throughout the county are showing moderate growth on a year-over-year basis according to Zillow and Trulia. The county's tax base is approximately 75% residential property (single and multi-family) and diverse with the 10 largest taxpayers representing only 2.4% of 2013 equalized value.

IMPROVING BUT STILL MODERATE FUND BALANCE POSITION

The county's reserve position continues to show improvement but is still considered somewhat moderate by Fitch. Unaudited financial statements for 2013 depict a current fund balance of $48.3 million or 6.2% of spending. The county's reserve position has improved from $26.2 million or a low 3.4% in 2011. Management reports that the 2014 budget is performing well from both a revenue and expenditure standpoint and that approximately $10 million in 2013 appropriations will lapse this year increasing the year-end current fund balance by a like amount. The county does not have a formal fund balance policy but targets 5% of spending.

CONSERVATIVE FISCAL MANAGEMENT

The county has a history of generally stable operating results supported by careful expenditure management and consistent moderate tax rate increases which Fitch views as an important rating factor given its moderate reserves. The 2014 budget totals $744 million, an increase of $11.3 million or 1.5% over the prior year and increases the property tax levy, which generates approximately 55% of current fund revenue, by 1.6% on the year. Tax levy growth is restricted to 2% under state law with limited exclusions for debt service as well as increases in pension and health care costs. The state's tax cap laws are based on the prior year's levies thereby mitigating the effect of a decline in valuation. The county's tax levy is 100% guaranteed from the county's municipal governments eliminating collection risk.

For the third straight year the budget appropriates $4 million of fund balance or the equivalent of a low 0.5% of spending, and a strong improvement from the $21.7 million of surplus appropriated in 2010. There are no other one-time revenue sources in the 2014 budget. The county continues to derive benefit from previously underutilized facilities, most notably the Essex County Correctional Facility which is budgeted to generate $40.5 million in revenue related to the housing of U.S. Marshall inmates and immigration detainees compared to $8.6 million in 2008.

MODERATE LONG-TERM LIABILITIES; RAPID DEBT AMORTIZATION

Overall debt metrics are moderate at 2.5% of market value and $2,675 per capita. These ratios include county-guaranteed debt issued by the ECIA. Debt amortization is very aggressive with approximately 80% of outstanding obligations repaid within 10 years. The county will repay almost $730 million in principal during this period and see its annual debt service costs decline from $97.3 million this year to $52.6 million in 2024. In comparison the current capital plan, which is mostly debt funded, proposes spending $20 million annually through 2019. Despite the rapid payout of debt the county's carrying charges inclusive of pension and other post-employment benefits (OPEB) remains manageable accounting for an estimated 20% of spending.

The county administers the Essex County Employees' Retirement System (the county system) which has been closed to additional membership since the mid-eighties. The plan's liabilities were funded through the purchase of a group annuity funded with the proceeds of a GO bond issued in 1989; however, the plan's assets were depleted in 2009 so the county has been funding the plan on a pay-go basis since. The 2014 budget contains an appropriation of $3.5 million which is actuarially forecast to steadily descend by several hundred thousand over the next several years. There are presently only two active members in the plan.

All other employees and retirees not part of the county system participate in the state administered Police and Firemen's Retirement System (PFRS) or the Public Employee's Retirement System (PERS). The funded status of the PFRS and PERS was 74% and 76.9% respectively, as of June 30, 2013. The county fully funds its pension actuarial required contribution (ARC) as well as the required payments to the state plans (although the required local government contributions have averaged about 90% of the ARC the last five years).

Outstanding Fitch-rated county GO bonds:

--GO (Early Retirement Incentive) pension refunding bonds, series 2003;

--GO general improvement and county college bonds, series 2004A and 2004B;

--GO county college bonds, series 2004C;

--GO bonds, series 2005A;

--GO refunding bonds, series 2014.

Outstanding Fitch-rated Essex County Improvement Authority bonds:

--Airport refunding bonds (AMT) (Essex County guaranteed), series 2004;

--Project consolidation revenue bonds (refunding project), series 2004, 2005, 2006 and 2007;

--GO guaranteed lease revenue refunding bonds (sportsplex project), series 2005A and taxable revenue refunding bonds (sportsplex project), series 2005B.

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);

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=865374

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

Michael Rinaldi

Senior Director

+1 212-908-0833

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Kevin Dolan

Director

+1 212-908-0538

or

Committee Chairperson

Amy Laskey

Managing Director

+1 212-908-0568

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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