Fitch Rates Chester County, PAs GO Bonds AAA; Outlook Stable

Fitch Ratings assigns the following ratings to the County of Chester, PA’s (the county) general obligation (GO) bonds:

–$101.5 million GO bonds, series A of 2016, ‘AAA.’

The bonds are expected to sell via negotiation the week of June 17, 2016. Proceeds of the bonds will be used to advance refund series 2009 and series C of 2009 bonds for savings taken throughout the life of the bonds with no change in final maturity on July 15, 2029.

In addition, Fitch affirms the following ratings:

–Approximately $510 million outstanding GO bonds ‘AAA’.

–Issuer Default Rating (IDR) ‘AAA’

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the county backed by its unlimited tax pledge.

KEY RATING DRIVERS

The ‘AAA’ rating reflects the county’s expectation for stable financial operations relatively stable local economy characterized by high wealth levels and low unemployment. The county’s limited prospects for natural revenue growth are offset with its significant independent revenue raising ability. Financial operations are expected to remain strong given the county’s high expenditure flexibility, low carrying costs for debt and employee benefits, including annual pension costs and modest long-term liabilities.

Economic Resource Base

The county is located in southeastern Pennsylvania, 30 miles west of Philadelphia. The well-established, diversified economy includes financial services, education, health services and agriculture sectors. Wealth levels are well above state and national levels, respectively, making Chester County the wealthiest county in the state.

Revenue Framework: ‘aa’ factor assessment

Fitch believes future new growth is likely to be in line with historical performance, trending below U.S. economic output and inflation reflecting a slow economic recovery. The county is property tax reliant and assessed values have demonstrated slow but stable growth over the 10-year period. The county’s significant independent legal ability to increases taxes elevates the overall assessment.

Expenditure Framework: ‘aa’ factor assessment

The natural rate of expenditure growth is expected to exceed expected stagnant revenue growth. The county has very strong ability to manage expenditures. Carrying costs for debt service, pension and other employee benefits are low as a percentage of governmental expenditures.

Long-Term Liability Burden: ‘aaa’ factor assessment

Long-term liabilities including debt and an unfunded pension liability account for a low 6.1% of personal income. The county’s retirement system is well funded, and other post-employment benefit (OPEB) liability is modest.

Operating Performance: ‘aaa’ factor assessment

Fitch believes that under a moderate economic downturn the county would maintain superior financial resilience given its high available general fund balance and significant budgetary flexibility. Reserves alone would be able to sustain stable financial operations with little to no deferral of required spending despite the limited prospects for natural revenue growth.

RATING SENSITIVITIES

The rating is sensitive to significant changes in budget management practices that materially affect the strong financial operations.

CREDIT PROFILE

The county has experienced steady population growth given its close proximity to major employment centers including New York, Philadelphia and New Jersey. The county’s 2015 population estimate of 512,784 represents an increase of 2.7% since the 2010 census. Fitch believes growth will remain at a moderate pace. The local economy is primarily residential (71%) and includes a healthy commercial and agricultural base. The county enjoys a diverse tax base with little concentration in any one sector or taxpayer. Taxable assessed value has remained fairly stable over the last several years and posted mild growth in fiscal 2015. The county’s unemployment rate remains well below the state and national averages.

Revenue Framework

The county is expected to have stagnant revenue growth based on the historic compound annual general fund revenue growth over the past 10 years trending below the U.S. economic output and inflation. However, the county has significant independent revenue raising flexibility, which would mitigate limited growth prospects.

General fund revenues are primarily from property taxes which account for about three-quarters of total revenue collections. Growth in assessed valuation has been flat reflecting the overall economic stability of the region. Revenue growth is expected to remain flat given modest residential development including construction of mixed use retail and residential developments and senior housing.

The county has significant ability to increase taxes under its statutory tax limits. The property tax millage rate for debt service is unlimited and the tax rate limit for general purpose property taxes is capped at 25 mills. Current general purpose tax rates are levied at a 2.794 millage rate, which provides the county with significant ability to increase the rate by 22.206 mills, 7.9x the current rate. The county has a 4 mill legal limit to tax personal property, but it has not levied this tax since 1996. The county also has the unlimited capacity to levy for debt service, libraries, parks and playgrounds.

Expenditure Framework

The county has strong ability to manage expenditures, and growth in the pace of spending is expected to slightly exceed projected revenue growth.

The county has a strong record of managing the pace of expenditure growth given its conservative budgeting practices and ongoing efforts to establish greater operational efficiencies. Throughout the past several years the county has managed labor costs through attrition and controlling overtime.

Carrying costs for debt service, pension and other post-employment benefit (OPEB) equaled a modest 11.5% of 2014 total governmental spending. The majority of the county’s general fund expenditures are for corrections and court services, which accounts for 31% and 29.7%, respectively. Management has been successful at controlling these expenditures through court consolidations and prison energy savings initiatives. The county maintains flexibility for additional consolidations and shared service agreements with other municipal entities. Under the county’s labor agreement, management has the ability to manage the size of its labor force and has required employees to share in health care costs.

Long-Term Liability Burden

The modest overall long-term liability burden accounts for 6.8% of personal income, and the county has manageable future borrowing plans that are in-line with principal amortization. The majority of the debt burden, 4% of market valuation, is overlapping debt with towns and school districts. Amortization is fairly rapid with 62% of outstanding principal paid within 10 years.

Fitch expects the moderate pension and OPEB liability burden is moderate and is expected to decrease over time. The county operated pension plan is well-funded at 91.9% as of Jan. 1, 2014, based on the plan’s 7.5% rate of return. Using a more conservative 7% rate of return, Fitch estimates the funded ratio to be still satisfactory at an estimated 87.1%. The county traditionally makes 100% of its annual required contributions (ARC) and in fiscal 2014 its ARC was $7.8 million, a low 2% of total budgeted government spending. The county is updating its actuarial assumptions in determining the overall unfunded liability and a slight decrease to the funding ratio is expected. OPEB costs are limited and the elimination of retiree health benefits beginning in July 2006 will reduce the liability over time. The county makes pay as you go payments and had unfunded actuarial accrued liabilities of a negligible $2.2 million as of Dec. 31, 2014.

Operating Performance

Fitch believes that the overall operating performance would remain strong in the event of a moderate economic downturn given the county’s high reserve safety margin, ample revenue-raising capacity and notable expenditure flexibility. A stress scenario would likely result in the use of reserves, the county maintains significant budgetary flexibility to rapidly restore general fund balance without deferring required spending. County officials have consistently demonstrated proactive and effective financial stewardship by budgeting conservatively, maintaining strong expenditure controls and increasing taxes when necessary.

Financial results are consistently better than budgeted estimates reflecting management’s conservative budgeting practices. The general fund balance is expected to increase to $41 million, approximately 27% of general fund expenditures in fiscal 2015 from $37.8 million in fiscal 2014. Positive property tax collections as well as expenditure savings produced positive results.

Consistent with the county’s conservative budgeting practices, the county appropriates general fund balance in the adopted budget on an annual basis; however this is typically offset with positive operating performance that exceeds this appropriation. The 2016 budget includes an appropriation of $8 million, $800,000 less than the fiscal 2015 appropriation. Based on strong property tax levy collections, an increase in state and federal grant, and expenditure savings, management does not anticipate utilizing the fund balance appropriation and instead anticipates modest general fund surplus.

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.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy