Fitch Rates Hennepin County, MN's GOs 'AAA'; Outlook Stable
Fitch Ratings assigns an 'AAA' to the following Hennepin County, MN (the county) general obligation (GO) bonds:
--$43.13 million GO bonds, series 2013A;
--$7.295 million GO bonds, series 2013B.
These bonds are expected to sell via competitive sale on or about Jan. 15. Proceeds will be used to refund outstanding series 2005A GO bonds and finance various capital improvement projects.
In addition, Fitch affirms the following ratings:
--$754 million GO bonds at 'AAA';
--$146.5 million first lien sales tax revenue bonds (ballpark project), series 2007A at 'AAA';
--$103.7 million second lien sales tax revenue bonds (ballpark project), series 2008B at 'AA+';
--$41.3 million third lien variable rate sales tax revenue bonds (ballpark project), series 2008C at 'AA';
--$39.1 million Hennepin County Regional Railroad Authority (HCRRA) limited tax refunding bonds, series 2010A at 'AAA'.
The Rating Outlook is Stable.
In addition, Fitch affirms the following rating:
--Up to $200 million GO commercial paper (CP) certificates at 'F1+';
The GO bonds are secured by the county's full faith and credit and unlimited taxing power.
The sales tax bonds are special limited obligations of the county payable from certain proceeds of a county wide sales tax of 0.15% imposed by county ordinance as of Jan. 1, 2007.
The CP certificates are a GO of the county for which its full faith and credit and taxing power are pledged; however, the county may not use for the payments of the certificates any funds which are appropriated for other purposes by law or resolution or indenture. There is no standby purchase or other liquidity facility for the certificates. Instead the county is using self-liquidity to back stop the certificates.
The HCRRA bonds are a limited tax obligation of the authority, payable from ad valorem taxes on all taxable property in Hennepin County; the levy cannot exceed 0.04835% of the county's property market value. The authority covenants to levy taxes to fund debt service at 105% annually.
KEY RATING DRIVERS
HEALTHY FINANCIAL FUNDAMENTALS: Hennepin County has a sophisticated management team that uses conservative budgeting, investment and debt practices that have resulted in healthy reserve and liquidity levels.
STRONG ECONOMIC CORE: The county economy is supported by the Minneapolis-St. Paul metropolitan area and has a diverse tax base and economy, with low unemployment. However, taxable values have marginally declined over the last four years.
MANAGEABLE DEBT: The county continues to have a moderate debt profile supported by a moderate capital plan and above-average amortization.
HIGH HCRRA COVERAGE LEVELS: The 'AAA' rating for the HCRRA bonds is based on the county's economic credit strengths and the bonds' dedicated property tax millage resulting in debt service coverage at the maximum rate of over 19 times (x).
SHORT-TERM RATING: The 'F1+' rating on the CP certificates is based on the county's strong level of unrestricted internal liquidity.
SALES TAX REBOUND: The sales tax ratings reflect adequate debt service coverage at all three liens from pledged revenues and generally well-performing sales tax receipts. All liens are effectively closed, and the rating on the third lien bonds is enhanced by the county's practice of using excess funds to prepay bonds.
WHAT COULD TRIGGER A RATING ACTION
WEAKER COVERAGE: A decline in debt service coverage below current levels could have a negative impact on the sales tax secured bond ratings.
HEALTHY ECONOMIC BASE
Hennepin County, home to Minneapolis and adjacent to the state capital of St. Paul, is the largest and wealthiest county in Minnesota, featuring resident wealth levels at 122% of the state. The local area economy, anchored by the University of Minnesota and several hospitals, continues to outperform the state and nation. The unemployment rate of 5.3% as of October 2012 remains well below the national averages. The county has experienced four consecutive years of moderate declines in taxable value. Despite recent contraction, the tax base remains strong and diverse with an estimated market value per capita of $106,000 and the 10 largest taxpayers accounting for a low 2.75% of the county's 2011 tax base.
CONSISTENTLY ELEVATED RESERVE LEVELS
Conservative budgeting has led to the maintenance of ample overall financial flexibility reflected in sizeable reserves. For 2010, the county effected a one-time payment of $44.5 million from the general fund to the internal services fund to clean up an outstanding compensated absence balance, which in addition to other one-time costs, resulted in a $19 million net deficit in the general fund. The resultant 2010 unreserved fund balance was still a comfortable 17.3% of expenditures.
The 2011 budget reflected the county's conservative budgeting practices with minimal projected growth, a small increase in the tax levy, no growth in sales tax and a decline in state aid beyond the state certified amount. Despite the use of $24 million to purchase a building to consolidate some government offices, the county finished 2011 with an increase to general fund balance of $16.2 million (3% of expenditures) -- a positive swing from the $17 million budgeted use of reserves. Unrestricted fund balance at the end of 2011 was $128 million or a strong 23% of expenditures.
The 2012 budget featured a small decrease in the general fund tax levy and a $14.1 million draw on fund balance. Management expects to finish the year with a $12 million surplus as a result of conservative budgeting and careful expense management, particularly for health insurance costs. Similarly, the 2013 budget includes a $15.5 million draw on fund balance, but again, management does not expect to use any fund balance. For 2013, the tax levy was increased slightly. Employees are receiving their first pay increase since 2009, with increases of 2.5% or 1.5% plus step increases.
MANAGEABLE DEBT BURDEN
The county's overall debt burden is above-average at $4,133, or 3.9%, reflecting significant borrowing by school districts and municipalities, but its direct debt levels are more moderate. The debt position is expected to remain manageable, given the above average amortization (70% in 10 years) and the scaling back of the capital improvement program, which the county undertook in response to slowing tax base growth. The current issue refunds the county's only outstanding long-term variable rate general obligation debt.
The county initiated a $150 million commercial paper program in early 2011 and has used it three times since then. The program is being increased to $200 million, though the county does not anticipate using the full authorization. Fitch's highest short-term rating on the CP program reflects the county's strong internal liquidity position providing over 4x coverage of maximum CP par, well above Fitch's 1.25x threshold (pursuant to criteria).
SALES TAX BONDS MAINTAIN ADEQUATE COVERAGE, BENEFIT FROM PREPAYMENTS
In 2006, the Minnesota legislature approved stadium legislation which provided the county with the authority to establish a 0.15% sales tax and limited the county's financial commitment to a baseball stadium project to $350 million. The legislation also created the Minnesota Ballpark Authority, which is responsible for the now completed stadium for the Minnesota Twins. The county subsequently funded its commitment with the proceeds from the first, second and third lien sales tax bonds which are primarily payable from the county-wide sales tax.
As a result of the weakened economy, sales tax receipts fell 3.7% in bond year (BY) 2009 (December-November) following a strong 8.1% increase in BY 2008. Sales tax performance has rebounded, growing 1.2% in BY 2010, 6.6% in BY 2011 and 4.9% in BY 2012. While coverage on the first lien bonds remains strong at 3.75x in 2012, healthy at the junior lien level (1.83x) and adequate on the third lien (1.75x), a weaker sales tax growth scenario could compromise current coverage levels given the ascending debt service schedule. Assuming no future growth in sales tax receipts, coverage of first-lien debt service is expected to be above 2.21x for the life of the bonds, with coverage for the second lien bonds always above 1.41x and third lien debt at 1.38x or above.
Coverage on the third lien bonds increases to 1.56x after the final maturity of the second lien bonds in 2029. The bonds could withstand the following average annual declines: 3.13% for the first lien (reaching sum-sufficient coverage in 2037), 1.99% for the second lien (2029), and 1.89% for the third lien (2029).
A debt service reserve fund for the first lien bonds is cash funded in the amount of $1 million; there are no reserves for the second and third lien bonds. The third lien bonds are variable rate. The budgeted interest rate has consistently been well above actual rates so the county has been using excess funds to pre-pay these bonds; $31.3 million has been pre-paid to date, including an $11.4 million payment in December 2012. While third lien debt service coverage has materially improved with these pre-payments, Fitch derives additional comfort from the fact that no additional bonds will be issued under any lien as the statute caps issuance for the project at $350 million, as well as from the expected continued prepayment of the third lien bonds.
MODERATE PENSION/OTHER POST-EMPLOYMENT BENEFITS
County employees participate in the state's defined benefit Public Employees Retirement Association (PERA), which administers its cost-sharing multiple-employer retirement plans for public employees as well as police and fire. The county pays in full the annual required contribution (ARC) which in 2011 was $34.5 million, or about 5% of total spending. Funding of the state pension plan is an adequate 64.5% using Fitch's 7% discount rate assumption.
The unfunded actuarially accrued liability (UAAL) for other post-employment benefits (OPEB) totals a moderate $217 million. The county funds a portion of the $26 million ARC on a pay-as-you-go-basis; in 2011, the county contributed $18.6 million, or approximately 73% of the ARC. To control its liability, the county no longer provides post-retirement healthcare benefits to new hires, starting in 2008. Total carrying costs for debt, pensions and OPEB are a moderate to high 22%.
HCRRA CONTINUES HIGH COVERAGE
HCRRA was established in 1980 for the purpose of constructing and maintaining local rail service and is a component unit of the county. HCRRA has limited property taxing authority over the broad base of the county and until recently financed both debt service and operating costs for the rail system. In 2008, the sales-tax funded CTIB became responsible for operating costs of the rail system, though HCRRA continues to provide property tax support for 10% of rail capital costs. CTIB and HCRRA have an extensive but manageable capital plan to continue building out the region's transportation infrastructure. At present, despite declines in market value, the maximum tax rate provides very strong coverage of over 19x throughout the life of the HCRRA bonds. The HCRRA unit has also built up a healthy fund balance totaling 260% of 2011 expenditures.
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, 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);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
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