Fitch Affirms Guilford County, NC's GO Bonds at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the following ratings on Guilford County, North Carolina's bonds:

--$828.3 million general obligation (GO) bonds at 'AAA';

--$16.85 million limited obligation QSCBs (LOBs) issued by Guilford County Public Facilities Corporation at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds constitute general obligations of the county, to which its full faith and credit and unlimited taxing power are pledged.

LOBs are secured by lease payments subject to annual appropriation, and a deed of trust against certain public school assets of the county.

KEY RATING DRIVERS

HEALTHY RESERVE LEVELS: Prudent fiscal practices and conservative budgeting are evidenced by the county's positive financial history and healthy reserve levels. Liquidity is strong and financial flexibility is ample.

TRANSITIONING ECONOMY: The county's economic base has remained generally level overall through the transition from a textile based manufacturing core to an increasingly diversified manufacturing base.

LIMITED LONG-TERM LIABILITIES: Debt levels remain manageable. Pensions and other post-employment liabilities do not pressure the credit.

DECREASING EXPOSURE TO VARIABLE-RATE DEBT: The county's exposure to variable-rate debt and derivatives continues to decline. Fitch believes this is a credit positive, as the county's debt structure presents risks associated with the creditworthiness and performance of the counterparties to the various swaps and liquidity agreements and the relationship of variable rate indices (basis risk).

APPROPRIATION RISK ON LOBS: The 'AA+' rating assigned to the LOBs, one notch below the county's GO rating, reflects appropriation risk mitigated by Fitch's assessment of the essentiality of the public school assets securing bondholders.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Guilford County is the most populous county in the Piedmont Triad region of North Carolina, with a 2012 population of 500,879. The county encompasses two of the state's larger trade and population centers, the cities of High Point (GOs rated 'AA+' with a Stable Outlook by Fitch) and Greensboro (GOs rated 'AAA' with a Stable Outlook by Fitch).

SOUND FISCAL POSITION

The county's reserve levels have remained strong and in-line with historical levels. Fiscal 2013 concluded with a general fund unrestricted fund balance equal to $83.5 million, or a solid 15% of general fund spending. Fitch expects balances to remain well above the county's reserve target of unassigned fund balance exceeding 8% of the subsequent year's budget. Property tax revenue accounts for 64% of total general fund revenue, reflecting a stable revenue base. The county's reserve by state statute, which is primarily to offset accounts receivable, is a source of additional financial flexibility. This reserve totaled $43.3 million at fiscal year-end 2013, or an additional 7.7% of spending.

The county's fiscal 2014 budget has decreased by $29 million, or 4.9%, year over year, primarily due to the transfer of mental health services to a multi-county operation. The budget includes an appropriation of fund balance of $27.3 million, although the county has a history of very conservative budgeting. The budget includes a property tax reduction to $0.77 per $100 valuation, a decrease of $0.01 from the 2013 level. Preliminary results for fiscal 2014 are positive. Property taxes are currently projected to be significantly over budget due in part to a conservative budget for property taxes on vehicles. Monthly sales tax revenues are also performing well when compared to fiscal 2013.

The county's maintenance of financial flexibility is considered a credit strength. Modest expenditure cuts to date have provided the county with sufficient flexibility to cut spending in the future. According to the county, there is still room for additional savings or efficiencies that would maintain the general fund balance at or near the current level over the next several years without significantly affecting service levels.

TRANSITIONING ECONOMY

Guilford County's economy has seen continued downsizing of its traditional manufacturing base. The county's unemployment rate has been pressured since the onset of the recession and, despite recent improvement, unemployment remains above state and national averages. Despite these difficulties, the county continues to expand the breadth of its economic base through the use of incentives and promotion of its quality of life, educational opportunities, and excellent transportation infrastructure.

The county's local economy continues to grow through investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and machinery products. Development of these sectors should add diversity and stability to the county's economic base. A good deal of growth is centered on the Piedmont Triad International Airport (PTIA) in Greensboro, where FedEx recently completed construction of its fifth national hub. The county notes that FedEx's presence has been recognized as an important consideration by several firms, including Honda Aircraft and Polo Ralph Lauren, which have recently decided to locate or expand within the county.

Fitch believes the county's education sector may also play a pivotal role in future growth. In particular, North Carolina Agricultural and Technical State University (NC A&T University) and The University of North Carolina at Greensboro (UNCG) were involved in the development of The Gateway University Research Park, which features a joint school of nanoscience and nanoengineering.

As of November 2013, the county's unemployment rate of 7.2% was above the state and national averages, 6.9% and 6.6% respectively. Wealth indicators for the county are on par with the state but below national averages.

AVERAGE DEBT LEVELS WITH HIGH EXPOSURE TO VARIABLE-RATE DEBT AND DERIVATIVES

Debt levels remain manageable at 2.5% of market value, but could rise with funding of capital requirements related to Guilford County Schools and Guilford Technical Community College (GTCC). Additional school bonds are planned for calendar year 2014 based on updated cash flow data from the schools.

Debt service was 12.58% of spending in fiscal 2013 based on actual results. However, the county has exceeded their internal debt service target (budgeted debt service shall remain under 15% of budgeted expenditures) on a budgeted basis starting in fiscal 2013 and is not expected to regain compliance until fiscal 2021. This incorporates the county's conservative budgeting of variable interest rates (4.25%), which led to a large positive budget variance in fiscal 2013.

The county's exposure to variable-rate debt and derivatives continues to decline, which Fitch views favorably. As of June 30, 2013, the county's fixed rate debt totaled 78.8% of total debt outstanding. According to the county it has taken advantage of the current low fixed-rate market and opportunities to achieve debt service savings, leading to a more conservative debt profile.

The county conservatively budgets its variable rate cost of interest, contributing to the favorable expenditure performance noted above. The county will continue to evaluate the use of variable-rate debt for future issuances. Fitch will monitor the county's variable-rate exposure to ensure it does not place undue pressure on the county's debt profile or on its financial flexibility.

LIMITED PENSION AND OPEB LIABILITIES

The majority of county employees participate in the well-funded North Carolina Local Governmental Employees' Retirement System (LGERS), a cost-sharing multiple-employer plan. The county also administers a single-employer pension plan to provide retirement benefits to qualified sworn law enforcement officers. The county's total fiscal 2013 pension contribution was an affordable $8.3 million or 1.25% of governmental spending.

Other post-employment benefit (OPEB) liabilities remain relatively low. Fitch does not consider the county's OPEB liability as exerting pressure on its finances given the relatively small size of the OPEB ARC. In fiscal 2013, the county contributed $8.5 million towards its OPEB costs, equal to 1.3% of total spending and 36.1% of the ARC ($23.5 million). Full funding of the fiscal 2013 ARC would consume 3.54% of spending. Notably, the county has established a trust to pre-fund its OPEB liability which Fitch views favorably. The county had been contributing $2 million a year to the OPEB trust until fiscal 2014, when it decided not to make a contribution; the county expects this will be somewhat offset by an expected decrease in OPEB ARC.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight.

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818344

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