[May 28, 2015]

Fitch Rates Wilmington, NC's Limited Obligation Bonds 'AA'; Outlook Positive

Fitch Ratings has assigned an 'AA' rating to the following Wilmington, NC limited obligation bonds (LOBs):

--$15,025,000 LOBs, series 2015A;

--$4,615,000 taxable LOBs, series 2015B.

The bonds will be sold on a negotiated basis on June 10. Proceeds will fund two new fire stations, various street improvements, and improvements to the city's river walk and riverfront, and to refund an installment payment obligation of approximately $2.1 million.

In addition, Fitch affirms the following ratings:

--$27 million in general obligation bonds (GOs) at 'AA+';

--$138 million in certificates of participation (COPs) and LOBs at 'AA'.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The city's LOBs and COPs are payable from installment payments made by the city, equal to debt service, subject to annual appropriation. To secure its obligation to make installment payments, the city delivered deeds of trust on essential and non-essential governmental facilities, including the city's police headquarters, fire station facilities, and the convention center (series 2005A, 2008A&B, 2010A&B) and operations center, fire station facilities and the command center (series 2012 and 2015A&B).

The GO bonds are secured by the city's full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Four consecutive years of operating surpluses have built strong reserves, which together with detailed financial forecasting and budget monitoring continue to support stable operations.

COPS/LOBS NOTCHING: The 'AA' rating on the COPs and LOBs is one notch lower than the city's GO rating reflecting the lesser long-term commitment to repayment, principally evidenced by the city's obligation to annually appropriate installment payments. The rating also considers that a satisfactory amount of essential governmental assets are subject to a deed of trust and surrender should the city fail to make an installment payment.

REGIONAL ECONOMIC HUB: The city serves as the economic center for southeastern North Carolina. Business enterprises are diverse, while a large government and health care presence enhances stability. Income metrics are below average.

AVERAGE LONG-TERM LIABILITIES: Debt ratios are average despite the city's rapid growth. Pension and OPEB costs are low. Future capital needs are manageable.

ECONOMIC VIBRANCY SUPPORTS OUTLOOK REVISION: Economic expansion is evidenced by exceptionally strong job growth, population expansion and building permit activity. Together with the city's long history of strong financial performance, the Positive Outlook recognizes the city's economic vibrancy.

RATING SENSITIVITIES

SUSTAINED ECONOMIC EXPANSION: Positive rating action could result from continued strong financial performance and sustained economic expansion.

CREDIT PROFILE

Located on the eastern coast of North Carolina, the city serves as the county seat for New Hanover County. The city is on the Cape Fear River approximately 30 miles from the Atlantic Ocean and is home to the state's largest port. The city's population growth outpaced the state and nation. The 2013 population of 112,067 is a 47.8% increase from 2000.

DIVERSE ECONOMY SERVES AS REGIONAL HUB

The city's diverse economy serves as a regional hub for the southeastern portion of the state with a mixture of high-tech manufacturing, government, telecommunications, transportation, filmmaking/entertainment, health care, higher education and tourism. The largest taxpayer is Corning's (News - Alert) fiber optic plant (1.7% of tax base) and the second largest taxpayer is the global headquarters of a pharmaceutical contract research organization for discovery and development. Overall, the tax base shows little concentration, with the top 10 taxpayers accounting for a modest 4.6% of assessed value (AV). The tax base per capita is strong at approximately $116,000.

The University of NC at Wilmington, one of the 17 state university campuses, has enrollment of approximately 14,000. The New Hanover Regional Medical Center, a teaching hospital affiliated with UNC Chapel Hill and a regional tertiary care center, provides a strong medical presence in the city. Several substantial new developments have recently been completed or are underway, including a downtown professional office project, residential subdivisions, mixed use projects, and new hotels. Among the larger projects is an expansion by Vertex (News - Alert) Rail, which is undertaking a $60 million investment to manufacture rail tanks, with employment of 1,300.

Both employment and labor force growth is very strong, with professional and business services, financial activities and information sectors posting substantial percentage gains. The February 2015 unemployment rate is a low 5.1% below the state and national rates of 5.6% and 5.8%, respectively. Poverty and median household income metrics lag the state and nation, partially reflecting the sizable higher education presence. Per capita income approximates the nation; however, real wage growth and real personal income growth over the past year substantially outpace the nation.

HEALTHY FINANCIAL OPERATIONS

Reserves and liquidity levels remain ample, reflecting the city's sound financial profile. In each of the past four fiscal years the city has boosted general fund reserves. At the close of fiscal 2014, the unrestricted general fund balance totaled $33 million, equal to a strong 37% of spending. The city's fund balance policy requires a minimum unassigned fund balance equal to a prudent 15% to 20% of the current operating budget. In evaluating the city's overall financial flexibility, Fitch also gives credit to the statutory stabilization reserve which is generally composed of accounts receivable not offset by deferred revenue. In fiscal 2014 this reserve totaled $11.4 million or an additional 13% of spending.

Property taxes are the largest single revenue stream for the general fund, accounting for approximately 58% of total sources. Revaluation of real property is required at least once every eight years by state statute and the city's tax base declined 10.5% in the fiscal 2013 revaluation. The city raised the tax rate to achieve growth in the total levy. The rate was held steady in 2014 and a modest 2.2% tax rate increase was implemented in fiscal 2015. Sales taxes are the next largest general fund revenue source, accounting for 21% of revenues. The city prudently budgets sales tax revenues conservatively.

STRONG RESULTS PROJECTED FOR FISCAL 2015

With favorable regional economic recovery, property tax and sales tax collections are coming in over budget, which together with budgetary expenditure savings is leading to a projected fifth consecutive net operating surplus. The fiscal 2015 amended budget was balanced with $1.9 million appropriation of reserves, but projections are for a $3.3 million addition to fund balance. The projected net operating surplus is conservatively estimated; if the year-to-date 14.5% sales tax revenue growth continues throughout the balance of the fiscal year, an additional $1.4 million of revenue will be collected.

The city's detailed financial policies limit use of one-time revenues, such as reserves. Typically, reserve use has been for capital purchases and other one-time expenditures. The fiscal 2015 tax rate of $0.46 per $100 AV is very low relative to the statutory cap of $1.50 per $100 AV, and well within the state norms. The tax rate includes $.05 per $100 dedicated to debt service.

The proposed fiscal 2016 general fund budget of $94.7 million is a 3.9% increase over the current adopted amount, and proposes a $.025 per $100 AV increase in the property tax rate. A portion of the rate increase is to support transportation construction costs as well as offset the statewide elimination of the privilege (business) license fees which resulted in the fiscal 2016 loss of $2.3 million in annual revenue. The proposed budget appropriates a moderate $1.15 million in reserves for one-time expenditures. Sales tax revenues are prudently budgeted for a 3% increase; sales tax revenues in the first seven months of fiscal 2015 are up 14.5% from fiscal 2014. The city's conservative financial projections indicate manageable increases in the millage rate will be needed.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt ratios are average at 2.7% of taxable AV and $3,135 per capita. Amortization is also average. In fiscal 2014, debt service was 18.2% of governmental fund expenditures. Adjusting for reimbursements for GO and LOB water obligations, debt service is 14.6% of governmental fund expenditures. The city transferred water operations to the Cape Fear Public Utility Authority, and the authority reimburses the city for debt service on water related GOs and LOBs.

Future borrowing needs are manageable. In fiscal 2013 the city implemented a strategy dedicating $0.05 of the property tax rate for capital needs, with 80% for debt service and 20% for pay-as-you-go projects. In November 2014, voters approved $44 million in GO bonds for street, sidewalk and transportation improvements, with issuance occurring over nine years. The city also expects to continue issuance of installment financing bonds for new projects. Direct debt metrics should remain moderate given amortization.

The city participates in the statewide Local Governmental Employees' Retirement System (LGERS). The pension plan as a whole is a very well-funded at an estimated 97.1% as adjusted by Fitch to a 7% investment return. For fiscal 2014, the city's required pension contributions were a low 3.2% of governmental spending. Total carrying costs including pension, debt service and OPEB are manageable at 22.5% of general government spending, or 17.9% adjusting for reimbursed debt. The OPEB unfunded liability was low at $45.6 million (0.4% of the market value of real property) at Dec. 31, 2013.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985507

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31"

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