Fitch Ratings has assigned a rating of 'AA-' to the following limited obligation bonds (LOBs) issued by Dare County, North Carolina (the county):
--$8.8 million LOBs, series 2012C;
--$34.3 million refunding LOBs, series 2012D;
--$285,000 taxable refunding LOBs, series 2012E.
The LOBs are scheduled for sale by negotiation on September 20th.
Proceeds of the series 2012C bonds will be used to fund the purchase of an EMS helicopter and cardiac monitoring equipment. Proceeds of the series 2012D bonds will refund outstanding series 2004 and series 2008 certificates of participation (COPs) for debt service savings and series 2012E proceeds will pay the costs related to the termination of an interest rate swap agreement.
In addition, Fitch affirms the following ratings:
--$0.4 million general obligation (GO) bonds at 'AA';
--$131.1 million COPs (various series) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are general obligations of the county secured by a pledge of its full faith and credit and unlimited taxing power.
The LOBs and COPs are payable from funds subject to appropriation by the county board of commissioners, and by a respective deed of trust granting a lien on certain project sites and improvements. If a default occurs the trustee can direct the foreclosure on the mortgaged property and apply the proceeds to the payment of amounts due to bondholders.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Dare County's history of prudent financial management and reserve levels serve to mitigate its operational exposure to volatility of tourism related revenues and risk to storm damage.
PROPERTY TAX FLEXIBLITY: Property taxes account for about half of general fund revenues. The county's tax rate is among the lowest in the state, enhancing overall financial flexibility and providing an outlet to offset potential downturns in less stable sources.
MANAGEABLE DEBT POSITION: Debt levels remain affordable, existing debt is rapidly repaid, and future capital needs and borrowing plans are modest. Termination of outstanding swaps and swaptions from refunding savings eliminates the county's vulnerability to basis, counterparty and termination risks.
TOURISM AND MAJOR STORM RISK: Economic activity is highly concentrated in tourism and related activities. The majority of developable land within the county is located on a barrier island exposing an additional vulnerability to storm damage; the attractiveness of the region has served to encourage rebuilding efforts following past storms.
APPROPRIATION RISK: The one-notch distinction in the rating between the GO bonds and the LOBs and COPs incorporates risk to annual appropriation by the county board of commissioners to pay debt service and limitations on bondholder's recourse to an event of non-appropriation or default; such risk is somewhat diminished by the deed of trust granted on essential public school and community college facilities.
AFFLUENT, TOURISM-DEPENDENT TAX BASE
Dare County is located along the northeastern North Carolina coast and contains most of the popular barrier island known as the Outer Banks. According to the North Carolina Department of Commerce more than 11,260 jobs in the county are directly attributable to travel and tourism (or nearly 60% of the county's average annual employment).
Economic indicators for the first half of 2012 are positive. Six month through June occupancy tax and food and beverage tax receipts were up significantly from the first half of 2011 while local sales tax collections for fiscal 2012 (ending June 30th) increased 3% over the prior fiscal year. Year to date building permit values and land transfer collections also displayed notable gains.
Despite the pick-up in economic activity, employment levels have lagged in 2012. June and July employment totals for 2012 were down 3.1% and 4.0%, respectively from the same months in 2011. The July unemployment of 8.2% was well below the state average of 9.6% and proximate to the national average. However, typical of tourist-based economies, employment is seasonal and varies greatly over the year. The county's February 2012 unemployment rate topped 19%. Officials attribute the lackluster job trends to the lingering effects of Hurricane Irene, which hit the county in August 2011 producing extensive flooding and halting business activity on Hatteras Island for six weeks.
The tax base includes approximately 12,000 vacation homes and condominiums and 3,000 hotel or motel rooms, which accommodate an average seasonal population of 150,000 compared to the year-end Census figure of less than 34,000. Income indicators are above those of the state and nation.
Seasonal visitors contribute a good deal of wealth to the economy, perhaps best evidenced in the county's retail sales per capita which is more than three times the state average. Property values within the county's resort communities are high; for example, the median home value of a property in the incorporated village of Hatteras is an elevated $310,000 according to Zillow.com (but down over 11% year-over-year).
RESERVES A FAVORABLE RATING CONSIDERATION
Historically strong reserve levels, which Fitch considers prudent to compensate for the financial unpredictability in an area dependent on tourism and susceptible to major storms, have moderated some in recent years but remain sound.
In fiscal 2011 the general fund produced a net surplus of $1.2 million or 1.3% of spending. The fiscal 2011 unrestricted fund balance (the sum of the unassigned, assigned, and committed fund balance under GASB 54) totalled $17.2 million or 18.9% of spending. The county incurred three consecutive net deficits between fiscals 2008 through 2010 totalling nearly $9.2 million. Unrestricted reserves fell from 30.5% of spending in fiscal 2007 to a still healthy 19.6% of spending at the close of fiscal 2010. Fitch also considers as an available resource the portion of the balance sheet reserved for stabilization per state law, totalling $8.2 million or an additional 9% of spending in fiscal 2011.
County officials project the fiscal 2012 general fund to report a small modest year-end surplus of about $600,000, representing about 0.6% of spending. The county had budgeted a $2 million drawdown, however, county budgets are typically conservative and expenditures are currently estimated to be about $3.3 million below budget. Revenues are forecast to be slightly under budget but still exceed county expectations given the effects of Hurricane Irene. Officials project the county's unrestricted general fund balance to increase to $18.5 million or 20% of spending with an unassigned general fund balance of $15.7 million representing 17.3% of spending.
The county's fund balance policy targets an unassigned fund balance equal to 19% to 21% of operating expenditures (Fitch commonly measures reserves against operating expenditures and transfers out). By policy the county also sets aside $300,000 for contingency and $750,000 for disaster recovery.
FISCAL 2013 BUDGET SUMMARY
The adopted fiscal 2013 general fund budget totals $100.9 million, a modest increase of 1.2% from the year prior. The budget appropriates approximately $2.7 million in existing fund balance, about the same as the prior year revised budget, and largely related to carryover encumbrances. An uptick in property tax revenues and a sizable increase in EMS fees and reimbursements offset reductions in health and social service revenues. Revenue from the EMS helicopter, financed with this bond issue, is projected to generate about $900,000 in fee income. On the spending side, the county is budgeting over $700,000 in EMS costs due to the need for additional personnel plus increased funding for schools and social services.
The county's conservative forecasting and timely budget revisions on the expenditure side has typically offset recent revenue shortfalls due to the economy (Fitch notes that actual spending has averaged approximately 95% of the budget during the prior five fiscal periods).
Management stated similar flexibility exists as in years past, supporting the county's expectation that the general fund will meet its meet its unassigned general fund balance target by year-end. The county has a solid track record with respect to budgeting, as bottom-line results have consistently surpassed projections.
PROPERTY TAXES PROVE STABLE
Property taxes fund just under 50% of the fiscal 2013 general fund budget. The property tax rate will remain $0.28 per $100 of assessed value (AV) for the third straight year. The property tax rate is the second lowest county tax rate in the state, and well below the statutory cap of $1.50 per $100 AV. The tax base has expanded at a very modest pace of 0.8% per year between fiscal years 2007 - 2013.
Officials expect a significant AV loss in conjunction with the next scheduled revaluation (Jan. 1, 2013 for fiscal year 2014) given a high sales-to-assessment ratio reported by the NC Department of Revenue. The county intends to mitigate the impact on revenue through an adjustment to the tax rate. Current tax collections remain exceptional at 99% in fiscal 2012. There are no major taxpayers, but the tax base is exposed to concentration within the real estate sector.
MANAGABLE DEBT BURDEN
Overall debt is low relative to market value (1.1%) and moderately high on a per capita basis ($4,768), a trend not inconsistent in communities with high proportions of second homes. The fiscal 2013 debt service budget of $17.3 million approximates an above-average 17% of spending. With anticipated savings from the refunding, fiscal 2013 debt drops temporarily to $14.8 million or a still elevated 14.7% of budgeted general fund expenditures. Overall, the debt service burden is manageable given the rapid pay-out of existing debt (over 70% in 10 years), limited future capital needs (less than $20 million) and borrowing plans (less than $10 million) and reasonably affordable other long-term liabilities for pension and other post-employment benefits (OPEB).
ELIMINATION OF DERIVATIVE EXPOSURE
The county intends to utilize a portion of bond proceeds and planned upfront savings from the refunding to terminate remaining derivative contracts relating to $16.9 million of outstanding fixed-rate series 2004 COPs (approximately 12% of outstanding debt). The derivative contracts, which include a swap and swaption, expose the county to a number of potential risks, including basis risk, counterparty risk and termination risk. Fitch positively views the county's actions to utilize the current financing to terminate its remaining derivative contracts thereby eliminating all vulnerability to swap-associated risks.
Fitch has withdrawn its rating for the following bonds due to pre-refunding activity.
--series 2002 certificates of participation.
The updated rating history for the above bonds is now reflected on Fitch's website at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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, Zillow.com, 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
U.S. Local Government Tax-Supported Rating Criteria
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