Fitch Affirms Augusta, GA's GOs and Waste Management Auth's Revs at 'AA'; Outlook Stable
Fitch Ratings has affirmed its ratings on the following bonds at 'AA':
--$42.5 million Augusta, Georgia (the consolidated government) general obligation (GO) bonds;
--$20.6 million solid waste management authority of Augusta, Georgia (the authority) revenue bonds.
The Rating Outlook is Stable.
The GO bonds are a general obligation of the consolidated government, backed by its full faith, credit, and unlimited taxing power. The GO bonds are additionally secured by sales tax proceeds received by the consolidated government.
The revenue bonds are special limited obligations of the authority, payable solely from contract payments from the consolidated government in an amount equal to debt service on the bonds. The consolidated government's obligation to make contract payments is absolute and unconditional, and shall constitute a general obligation of the consolidated government to which its full faith, credit, and taxing power are pledged.
KEY RATING DRIVERS
SOUND FINANCES: The consolidated government demonstrates healthy financial flexibility through maintenance of reserves and tax raising capacity. Fitch believes that reserves will remain solid at above 20% of general fund spending.
REGIONAL HUB ECONOMY: The economy is a regional hub for healthcare, education, and trade. Economic indicators are somewhat below average. Income levels are well below average, and there is a very high incidence of individual poverty. Unemployment rates are consistently higher than the state and nation.
MILITARY PRESENCE: Moderate concentration in the military sector exposes Augusta to risks arising from potential nation-wide annual defense cuts. These risks are mitigated in part by the importance of these unique facilities.
LOW DEBT BURDEN: Low debt levels with future capital plans primarily funded on a pay-as-you-go basis. Principal amortization is above-average.
WEAK PENSION FUNDING: On a combined basis the funded ratio is below average as per Fitch's rating criteria. However, funding of the full actuarial requirement for all the plans of $7.1 million is considered manageable.
Augusta is the formal name given to the consolidated city-county government of Augusta and Richmond County, with an estimated 2011 population of 196,494. Augusta is located 155 miles east of Atlanta and 75 miles southwest of Columbia, SC. The military is a significant economic driver with an annual regional economic impact of $2.4 billion and an estimated 20,000 employees (equal to approximately 8% of the regional workforce). The fort is the home of the Signal Corps and the U.S. Army Signal Center, the armed forces' largest information technology and telecommunications training site, and headquarters to the Southeast Region Medical Command. Future defense budget cuts due to sequestration are possible, but Fitch does not expect these potential cuts to have a significant effect on the consolidated government's military facilities due to their essentiality. In addition, the National Security Administration (NSA) has recently completed construction of a new facility within the fort and is expected to begin hiring in early 2013.
REGIONAL HUB ECONOMY
The economy serves as a regional hub and in recent years has begun to exhibit signs of diversification and stability driven by growth in employment in the healthcare, educational, and retail trade sectors. About one-half of the largest employers are participants in the healthcare and medical education sectors, led by the Medical College of Georgia (4,656 employees).
Wealth indicators are below average, at approximately 76% of the state and 72% of the national level, and the poverty rate is significantly above that of the state and nation. Unemployment is 10% as of September 2012, which is higher than both the state (8.6%) and the nation (7.6%).
Sound reserves, tax raising capacity, and the ability to implement, if needed, additional expenditure reductions underlie the government's sound financial flexibility. In fiscal 2011 the government realized a $1.7 million surplus after transfers. The unrestricted general fund balance (the sum of committed, assigned, and unassigned fund balance per GASB 54) to $34.6 million or a sound 27% of total spending. The consolidated government does not have a formal reserve policy; however, the government maintains a reserve of working capital for up to 60-90 days to provide for unforeseen revenue loss and economic decline.
Positive year-end results in fiscal 2011 are attributed to higher than budgeted property taxes and sales tax revenues, as well as below-budget expenditures. Ad valorem taxes are subject to a tax cap; however, the consolidated government can set the mill rate above the rate limitation for the purpose of expenditures associated with a catastrophic event, debt service, or if there is a statewide vote. The government has 2.5 mills (approximately $11 million) remaining under the tax cap.
Another source of revenue is the government's 1% local option sales and use tax, which the former county government instituted and made available in perpetuity. The consolidated government currently receives approximately 97% of total tax proceeds which have been relatively stable in the last five fiscal periods with collections exceeding budget. Property taxes and sales taxes made up 31% and 22% of fiscal 2011 general fund revenue, respectively at the end of fiscal 2011.
The adopted fiscal 2012 budget appropriates $2.1 million of fund balance (1.5% of budgeted spending) to support operations. Operations are expected to yield break-even results; however, management does expect to use $1.2 million of fund balance for a lawsuit from 2005. The unrestricted general fund balance is expected to remain strong at year end.
EXPECTATIONS FOR FISCAL 2013
The fiscal 2013 preliminary budget projects a $4 million shortfall, equal to approximately 3% of budgeted spending. Management has therefore included a $4 million fund balance appropriation to address the funding gap. The budget gap stems from employee pay increases, unfunded and mandated judicial positions, and the loss of one-time revenue sources such as land sales. The 2% employee pay increase (approximately $750 salary increase per employee) is the first raise in three years. The proposed salary increase will impact the general fund by approximately $750,000 when including benefits associated. Officials are expecting a 1 mill increase in the ad valorem rate (generating $4 million) to offset these recurring expenditures. Although the imbalance is a moderate concern, Fitch believes that management has the ability to correct the gap moving forward. Historical trends have shown that the government typically does not use the full amount. Management expects to maintain compliance with its financial policies by preserving unassigned fund balance levels in the range of 20% of general fund spending.
LOW DEBT BURDEN
Overall debt at $723 per capita and 1.1% of market value remains low, while debt amortizes at an above-average pace. Fiscal 2012 budgeted debt service is a very manageable 3% of spending. Fitch considers the consolidated government's consistent utilization of designated revenue sources to pay for debt service, as well as extensive pay-as-you-go capital financing favorably.
The tax-supported capital improvement plan (CIP) is limited to $184.7 million, which is funded almost exclusively by a special purpose local option sales tax (SPLOST) approved by voters in June 2009. The SPLOST provide funds for debt service on all previously issued GO bonds and for pay-as-you-go capital financing. Historical and current SPLOST collections indicate that revenues will suffice for debt service and there will be no call on the ad valorem pledge.
SOLID WASTE MANAGEMENT AUTHORITY DEBT
The authority was created to manage solid waste collection and disposal activities and to pay associated costs from revenue bond proceeds. The consolidated government anticipates that revenues of the solid waste system will suffice to pay debt service. Historical results indicate that system revenues would be sufficient to pay debt service on outstanding system debt and on the maximum annual debt service; therefore, Fitch has provided self-supporting credit to the authority's debt. Should system revenues prove insufficient the government will utilize ad valorem collections to pay debt service on these bonds and certain parity debt.
PENSION FUNDING A WEAKNESS
The consolidated government maintains a multiple-employer defined benefit pension plan, the Georgia Municipal Employees Benefit System (GMEBS). In addition, the government also maintains six single-employer defined-benefit pension plans (the general retirement plan, the 1945 plan, the general pension plan, the policemen's pension plan, the firemen's pension plan, and the city employees' pension plan). All of the pension plans except for the GMEBS plan are closed to new employees. The pension plans have an aggregate somewhat weak funded ratio of 69% as of July 1, 2011, using Fitch's 7% investment rate of return. The unfunded liability on a combined basis of $44.8 million equals a manageable 0.3% of 2012 market value.
The consolidated government funds other post-employment benefits (OPEB) on a pay-as-you-go basis, which in fiscal 2011 was $2.5 million, or around a low 2% of general fund spending. The amount contributed for the year was slightly less than a third of the ARC.
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 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, and the 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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