Fitch Rates Durham, NC's GOs 'AAA'; Outlook Stable.
--$14.8 million GO bonds, series 2012A;
--$5 million taxable GO bonds, series 2012B;
--$43.2 million GO bonds, series 2012C;
--Approximately $14 million GO refunding bonds, series 2012D.
The bonds are expected to sell on June 19th via competitive sale. Bond proceeds will be used to finance capital projects and to refinance several series of outstanding GO bonds.
In addition, Fitch affirms the following ratings:
--$171.5 million of outstanding GO bonds at 'AAA';
--$9 million of outstanding certificates of participation (COPs), series 2001 at 'AA+';
--$8.5 million of outstanding COPs, series 2003 at 'AA';
--$57 million of outstanding limited obligation bonds (LOB), series 2010 at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are general obligations of the city to which its full faith and credit and unlimited taxing power are pledged.
The certificates and limited obligations are secured by installment payments made by the city to the trustee, as assignee of the New Durham Corporation. Installment payments, equal to debt service, are subject to annual appropriation. Fitch deems the assets included under the 2001 structure and the 2010 LOB structure as essential to city operations and the assets under the 2003 structure non-essential to city operations.
KEY RATING DRIVERS
STRONG ECONOMIC PROFILE: Durham's local economy is growing and diversifying as a result of the large higher education and healthcare presence and the city's proximity to Research Triangle Park (RTP). Employment growth exceeds that of the state and nation, and socio-economic indicators are favorable.
AMPLE FINANCIAL FLEXIBILITY: Prudent fiscal policies underscore strong financial management. Reserve levels are healthy, the tax rate is competitive, and expenditure reductions to date are moderate.
MANAGEABLE DEBT BURDEN: The city's debt levels are moderately low and are expected to remain so given the limited nature of future capital needs. Variable rate debt exposure is low. The city's long-term employee benefit liability is not expected to pressure future operations.
STABLE AND DIVERSE LOCAL ECONOMY
The city of Durham, with a 2011 population of approximately 228,000, has a robust economy anchored by higher education and healthcare. Home to Duke University and Merck's vaccine manufacturing facility, Durham has enjoyed average annual employment growth of 1% over the past decade, comparing favorably to the nation's rate of 0.3%. The economy's success is also related to nearby RTP, one of the most prominent research and development centers in the nation, which has helped draw biotechnology and high-tech firms into the city. IBM is the city's second largest private employer after Duke.
Economic indicators are positive. The city's unemployment rate of 6.9% as of March 2012 remains below that of the state and nation. Wealth levels are on par with national averages.
The city's tax base has been stable despite national recessionary pressures. Fiscal 2012 saw a marginal decline of 0.4% in total assessed value (TAV) after several years of growth. The city expects 4.4% growth in fiscal 2013 values based on county projections, and Fitch considers this increase likely given positive trends in the city's housing market.
HEALTHY RESERVE LEVELS
Reserve levels remain ample despite recent draws on fund balance. Fitch notes that net deficits (after transfers) in fiscals 2008 and 2009 were due to structural imbalance, while fund balance usage in fiscal 2011 was for capital. The city drew down reserves by $3.9 million (1.9% spending) in fiscal 2011, ending the year with an unrestricted fund balance (the sum of assigned, unassigned and uncommitted fund balance under GASB 54) of $23.2 million (a healthy 11.5% of spending and transfers out). The city is compliant with its fund balance policy of maintaining unassigned fund balance above 12% of budgeted expenditures, as unassigned fund balance equaled 12.6% of operational spending in fiscal 2011. Fitch considers the city's required statutory reserve a source of additional financial flexibility. In fiscal 2011, the reserve totaled $16.6 million (8.2% of spending).
Fitch notes positively the city's efforts to increase accounting transparency. In fiscal 2011, the city segregated debt service and solid waste activities from the general fund. This change in accounting treatment resulted in an approximate $20 million decrease in general fund property tax revenues and debt service expenditures, as well as an approximate $10 million decrease in general service expenditures related to solid waste. In fiscal 2013, transit activities will also be segregated from the general fund, decreasing general fund spending by an additional $8 million.
FISCAL 2012 AND 2013 ESTIMATES AND BUDGET
The removal of debt service and solid waste activities from the general fund reduced the fiscal 2012 budget by $23.2 million (11.3%) relative to that of the prior year. The 2012 budget includes a fund balance appropriation of $360,000 (0.2% of budgeted spending), as well as a modest total millage rate increase from 55.19 cents per $100 of AV to 55.75 cents; the additional property tax revenues will go towards funding general fund operations, as well as debt service and transit costs. Management projects a small operating surplus (after transfers) of $0.7 million (0.4% of projected spending) for fiscal 2012 based on three quarters of performance. The surplus derives from a positive actual-to-budget variance for operating expenditures, and given year-to-date actuals Fitch believes this projection is reasonable.
The fiscal 2013 budget represents a $6.2 million (3.4%) decrease over that of fiscal 2012 due to the removal of transit activities from the general fund ($7.6 million). The budget includes a 1.8% millage rate increase, which will generate an additional $2.4 million to be used for general fund operations, debt service and transit costs, and the city's housing fund. In addition, the city will implement a 7-cent per $100 AV tax on property within the Downtown Business Improvement District (BID) to fund projects within the BID.
MODERATELY-LOW DEBT AND OTHER LONG-TERM LIABILITIES
Overall debt levels are moderately low at $2,485 per capita and 2.5% of market value (MV). The city is well below the state's statutory debt limit of 8% of TAV, with an ample margin of $1.5 billion. Fiscal 2011 debt service equaled $24.7 million or a moderate 10.9% of general fund and debt service fund spending. Amortization of outstanding principal is rapid at roughly 75% in 10 years. Fitch notes that the city has low exposure to variable rate debt; as of June 30, 2011, the city's variable rate debt totaled $13.3 million or a low 3.7% of outstanding direct debt obligations.
Capital needs appear manageable as delineated in the city's fiscal 2012-2017 capital improvement plan (CIP). The CIP totals $400.2 million (a low 1.7% of MV), and over half of the projects are for water ($140.9 million) and wastewater ($142.7 million). Tax-supported projects relate mostly to transportation ($69.3 million) and public safety ($18.6 million). Approximately 64% of the CIP is debt financed through revenue bonds ($254 million), with a water revenue issuance expected in 2014, and 7.8% of the CIP is financed through pay-go. There are no plans presently to issue GO debt beyond this current issuance.
Long-term liabilities relating to employment benefits are not expected to pressure future operations. Total pension contributions for the four plans in which city employees participate totaled $7.7 million (a manageable 3.8% of spending) in fiscal 2011. City employees participate in three state-administered cost-sharing multiple-employer defined benefit pension plans, as well as a city-administered single-employer defined benefit plan. The city also provides post-retirement health benefits for retirees to which the city contributed $3.3 million (1.6% of spending) in fiscal 2011. The other post-employment benefits UAAL equaled a low 0.4% of MV as of Dec. 31, 2008, the most recent actuarial valuation date.
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 informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and Zillow.com.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria