Fitch Ratings has assigned a ‘AA+’ rating to the following general obligation (GO) bonds to be issued by Union County, New Jersey:
–$62,810,000 general improvement bonds of 2016;
–$2,075,000 county vocational-technical school bonds of 2016 (New Jersey bond reserve act);
–$3,000,000 county college bonds of 2016, series A (chapter 12 state aid);
–$9,615,000 county college bonds of 2016, series B.
Fitch has also assigned a rating of ‘F1+’ to $90,000,000 of bond anticipation notes (BANs), due June 23, 2017.
The GO bonds are being issued to current refund $74,410,000 of BANs maturing June 24, 2016 and fund $3,090,000 of new money county college projects. The GO bonds will be sold competitively on June 14. The BANs being offered will fund $35.3 million in new money projects and roll over an additional $54.7 million in outstanding BANs. The BANs will be sold competitively on June 15.
In addition, Fitch has affirmed at ‘AA+’ the county’s Issuer Default Rating (IDR) and the ratings on $366 million of outstanding county GO bonds and $18.7 million of outstanding Union County Improvement Authority county guaranteed revenue bonds, 2010B (Oakwood Plaza-Elizabeth Project).
The Rating Outlook on all of the long-term ratings is Stable.
The GO bonds and BANs are direct and general obligations of the county for which its full faith and credit and unlimited taxing authority are pledged. The authority bonds are secured by developer loan repayments and a deficiency agreement, whereby the county unconditionally and irrevocably guarantees payment of the bonds. Pursuant to the agreement, the county pledges its full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
The ‘AA+’ IDR and GO rating reflects Fitch’s view of the county’s demonstrated capacity to manage through economic downturns, reflected in a history of generally stable operating results and financial reserves varying from 10%-15% of spending. Long-term liability levels are low and further support the county’s high credit quality. Revenue and expenditure flexibility are viewed as more limited. The county’s position within the New York-Northern New Jersey-Long Island metropolitan statistical area (MSA) should support a stable to moderately expanding population and economy over time.
The ‘F1+’ rating assigned to the BANs corresponds to the long-term rating on the county’s GO bonds, and considers the county’s past experience in and demonstrated access to the capital markets.
Economic Resource Base
Union County is situated about 20 miles west of New York City, the center for the largest economic and employment market in the U.S. The county has a stable and largely affluent population of roughly 555,000 residents and a notable business core led by the pharmaceutical, technology, and health care industry. Transportation plays a key role in the county’s economy given access to commuter and freight rail, numerous major road systems, Newark Liberty International Airport, and the Port of Newark/Elizabeth.
Revenue Framework: ‘aa’ factor assessment
Substantial independent revenue raising flexibility exists relative to revenue declines depicted by the Fitch analytical sensitivity tool (FAST) despite statutory limits on annual changes in the property tax levy, the central funding source for current fund operations. Long-term revenue growth is expected to trend above the level of inflation given growth prospects for the economy and tax base.
Expenditure Framework: ‘aa’ factor assessment
Statutory restrictions on revenue growth are similarly applied to appropriations supporting an expectation for spending growth to generally track revenue changes over time. Overall expenditure flexibility is viewed as solid reflecting the county’s relatively strong control over employee wage and benefit expenses and manageable fixed charges associated with debt service and retiree benefit liabilities.
Long-Term Liability Burden: ‘aaa’ factor assessment
Long-term liabilities associated with debt and retiree pension benefits are low at about 6% of personal income. Capital needs and issuance plans are expected to be manageable. The Fitch-adjusted funded position of the state pension plans the county participates in have been relatively stable ranging from 65%-70% as have the actuarially-based annual contributions to the plans.
Operating Performance: ‘aaa’ factor assessment
The county retains significant financial resources (available reserves equal to 19% of spending in 2014) plus a high level of budgetary flexibility to manage through periods of economic and revenue decline or other operating challenges. Revenues were very stable over the most recent economic downturn reflecting policy actions to increase the tax levy within permissible limits prescribed by law.
Fundamental Shifts: Although not anticipated, the rating could be sensitive to shifts in the county’s budget management practices and financial resilience or a prolonged weakening of economic growth prospects.
Union County’s economic base is principally supported by its favorable location within the New York-Northern New Jersey-Long Island MSA and access to a vast network of transportation assets. The presence of Newark International Airport and the Port of New York and New Jersey drive a large presence in warehousing, distribution, and light industrial enterprises. Pharmaceutical firm Merck remains the largest employer in the county with an estimated 5,000 employees, but that is less than half of the number of employees reported at the time of its 2009 merger with Schering-Plough. Another pharmaceutical company, Celgene, recently acquired Merck’s Summit property with the intention of expanding its research and office facilities. Overlook Hospital, Trinitas Hospital, and Children’s Specialized Hospital collectively employ 7,900 and anchor a healthcare presence that lends stability to area employment.
The county’s unemployment rate continued to track the New Jersey average the last several years despite the downsizing at Merck, and its total number of non-farm jobs has expanded at a CAGR of 1.4% since 2009. However, IHS forecasts job growth of only 0.4% from 2016-2020 for the Newark metropolitan division of the MSA in which the country resides. The county’s population has steadily expanded over the prior two decades reaching an estimated 555,786 in 2015. Resident personal incomes measure 96% and 120% of the NJ and U.S. norms, respectively. These averages reflect the presence of several communities with very high wealth and educational attainment levels as well as some with elevated poverty and low educational attainment.
Union County’s current fund budget is approximately 70% funded by local property taxes. Revenue-raising flexibility is limited by state-imposed tax caps. County taxes are collected by the municipalities within the county and paid to the county treasurer on a quarterly basis. The county receives its share from the first taxes collected by each municipality assuring 100% collection. The bulk of other revenues are derived from a combination of fees, permits, and grants, among other miscellaneous sources. Under state law no miscellaneous revenues from any source shall be included in the budget in an amount in excess of the amount actually realized during the next preceding fiscal year.
Current fund revenues are expected to generally track the level of national inflation over time, largely due to the nature of restrictions on property tax growth imposed by state law and expectations for a stable to moderately expanding population and economy over time.
New Jersey counties operate under two separate cap laws. The 1976 law limits increases in the tax levy by the lesser of 2.5% or the Cost-of- Living Adjustment (COLA); however, increases up to 3.5% in the tax levy are allowed by adoption of a resolution of the county freeholders whenever the COLA is less than 2.5%. A second test effective since budget year 2011 limits growth in the tax levy to 2%, which is the level of growth that Fitch applies for purposes of assessing legal revenue raising capacity.
Importantly, each test includes exclusions from the caps for the value of new construction and additions to the tax base, increases in debt service, certain increased pension contributions and healthcare costs, and expenditures mandated as a result of certain emergencies. Local governments may bank that portion of the maximum tax levy that is not utilized for a period of three years. At the conclusion of its 2016 budget process the county’s cap bank totaled $16.2 million (equal to 3.2% of budgeted current fund revenue).
Health and welfare and public safety are the largest expenditure areas accounting for roughly 23% and 19% of the adopted 2016 budget, respectively. The county budget funds a mix of administrative functions (public safety, parks and recreation, finance, public works, etc.) and constitutional offices (county clerk, county prosecutor, county sheriff, and county surrogate) for which the county manager retains control over centralized functions such as hiring, wages, and purchasing regulations, for example.
The tax cap laws are similarly applied to increases in annual appropriations, which should generally align the pace of revenue and spending growth over time.
Fixed costs associated with debt service and contributions for retiree pension and health benefits are estimated at roughly 22% of spending in 2016. Debt service drives about half of the metric and reflects a fairly aggressive principal amortization schedule of nearly 75% repayment within 10 years. Annual debt service requirements decline by 36% or $21.5 million between 2016 and 2024 providing potential for budgetary flexibility and/or capacity for additional debt incurrence.
OPEB accounts for 5% of the total as most future retirees will receive 100% county paid health benefits. However, the county reported a separate reserve outside of the current fund for future OPEB benefits with a balance of $19.9 million in 2015 (close to 90% of the 2015 normal cost).
Salary and wage expenses represent about 35% of the budget. County employees are represented by a total of 22 labor organizations. The county is currently in negotiation with several of its larger groups including the civil service association and county police. Impasse resolution occurs through a binding arbitration process in which the arbitrator must assess the financial impact of the award on the local governing unit and its residents, the continuity and stability of employment, and a comparison of contract terms with other employees generally. Furthermore, under existing New Jersey law there is also a 2% hard cap on arbitration awards for all public safety employees.
Long-Term Liability Burden
The county’s long-term liability burden is calculated by Fitch at $1.8 billion, a low 6% of personal income. Direct and overlapping debt accounts for 80% of the burden with the balance representing an estimate of the county’s proportional share of the unfunded liability related to two state administered pension plans, the local components of the Public Employees’ Retirement System (PERS) and the Police, Firemen’s Retirement System (PFRS). PERS and PFRS have an estimated aggregate funded ratio of 68% as of July 1, 2015, adjusted by Fitch to assume a 7% investment rate of return in place of the plans’ 7.9% rate.
Fitch does not expect the issuance of additional debt associated with the financing of the capital plan to have a material impact on the county’s long-term liability burden. The county’s six-year capital improvement plan totals a manageable $195.4 million, the bulk of which is related to the maintenance and renovation of county facilities, public works, and parks and recreation.
The three-year scenario revenue estimate generated by Fitch’s Analytical Sensitivity Tool (FAST) depicts a very low level of revenue volatility in the absence of offsetting policy action. Fitch expects that the county would maintain a reserve cushion in the range of 15%-17% in an unaddressed moderate economic downturn scenario which is comfortably commensurate with a ‘aaa’ financial resilience assessment.
Available resources include current fund balance and other unrestricted reserves in the general capital fund and various trust funds that have ranged from 10%-14% of spending in aggregate from 2008-2013. Trust funds are established for specific general government functions including pension benefits, health and disability insurance, parks and recreation, and the operation of the sheriff, county clerk, and prosecutor’s offices, among others.
Available resources increased considerably in 2014 to $103.6 million or 19% of spending aided by the $26 million sale of Runnells Hospital to a private entity and improved miscellaneous and property tax revenue performance. The county recorded $20 million from the proceeds of the hospital sale as a separate ‘sale of asset’ reserve on its balance sheet apart from its current fund reserve to allow for greater transparency regarding the use of proceeds from the transaction going forward.
Unaudited results for 2015 depict a $24 million increase in the current fund balance for the year. This reflects a combination of improved miscellaneous revenues over budget; lapsed debt service expenditures; and operating savings related to Runnells Hospital, which the current fund had been subsidizing at an annual cost of more than $13 million the last several years.
The 2016 budget appropriates $22.3 million of fund balance, which is equivalent to roughly 4% of the total current fund budget. The amount of fund balance utilized to balance the budget is up from $20 million in each of the last two years. County officials do not anticipate spending any portion of the fund balance appropriation based on their analysis of year-to-date budget results but expect to end 2016 with a small operating surplus and addition to current fund reserves.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form