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Fitch Affirms Franklin County, NC's $65MM GOs at 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following bonds of Franklin County, NC:

-- $64.9 million general obligation (GO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the county's pledge of its full faith and credit and its unlimited taxing power.

KEY RATING DRIVERS

BIOTECHNOLOGY BENEFITS NARROW ECONOMY: The county's limited employment base has expanded somewhat to absorb ancillary needs of the biotechnology industry in the area's Research Triangle Park.

WEAK SOCIOECONOMIC INDICATORS: Unemployment exceeds national and regional rates and wealth levels are below national indices.

AMPLE FINANCIAL FLEXIBILITY: The county has consistently maintained sound reserve and liquidity levels. Ample capacity to reduce expenditures remains, if required.

FAVORABLE DEBT PROFILE: The debt burden is low and future financing requirements are minimal. Post-employment obligations do not pressure the credit.

CREDIT PROFILE

BIOTECHNOLOGY AIDS EXPANSION OF LIMITED EMPLOYMENT BASE

The county is located in North Carolina's upper Piedmont Plateau, approximately 30 miles from Raleigh (GOs rated 'AAA', Stable Outlook by Fitch Ratings) and Research Triangle Park. Its economy, traditionally based in agriculture and textiles, has broadened somewhat as biotechnology manufacturers gravitate to Research Triangle Park. Biotechnology employment still remains modest, with most firms employing fewer than 200, excepting Novozymes North America, Inc., the county's largest employer (460 employees). The county can accommodate long-term economic growth due to the Kerrtar Regional Economic Corp., a four-county consortium that expects to attract additional biotechnology jobs, although there are currently no tenants. Fitch believes that the inherent strength of Research Triangle Park will ultimately benefit the county.

BELOW-AVERAGE WEALTH AND EMPLOYMENT LEVELS

Socio-economic indicators trail those of the nation. The county's 9.0% unemployment rate of July 2012 is somewhat above the nation's 8.6%, although county employment growth over the past year has been nearly double that of the country. Wealth levels are around 75%-85% of national levels. The North Carolina Department of Commerce has not ranked the county among the most prosperous 20% in the state since 2008. Housing prices and new construction remain sluggish.

SOUND RESERVE LEVELS

Reserve levels are healthy and consistent, exceeding 21% of spending since at least fiscal 2007. Liquidity levels have likewise been solid throughout the period. Fitch believes that if necessary the county could implement a variety of expenditure reductions without hampering core service delivery. Furthermore, management has demonstrated its willingness to increase revenues.

The county concluded fiscal 2011 with a minimal drawdown of $86 thousand, equal to 0.1% of spending. Reserves (comprising committed, assigned, and unassigned fund balance per GASB54) were healthy at 26.2% of spending. Adding funds restricted by state statute, which are primarily to offset accounts receivable, the available balance equals a noteworthy 31.2% of spending. Cash levels continued to exceed total liabilities by four times.

Preliminary fiscal 2012 results point to the use of just $225 thousand of fund balance, well below the $2.7 million appropriation. Property taxes comprise slightly over one-half of revenues, and the county reports an uptick in collections. Sales tax receipts are anticipated to rise about 7% from the prior year; although they equal only about 10% of revenues, their increase indicates recovering economic activity. The county has been able to start rehiring some of the 29 employees it had previously laid off, representing 6% of the fiscal 2010 workforce.

The fiscal 2013 budget includes a $3 million fund balance appropriation. The county anticipates generating an additional $800 thousand-$1 million given preliminary estimates that a soon to be completed revaluation will increase the tax base by 3%. Fitch notes positively that the county did not incorporate the growth into its adopted budget. County management estimates that sales taxes will increase 5% over fiscal 2012 receipts, a level that Fitch believes is realistic. The budget does not contain an employee furlough, unlike that of the past year, and includes a 3% employee cost of living increase. Management anticipates that fund balance use will not exceed $500 thousand, which Fitch believes is attainable given revenue patterns and a history of conservative fund balance appropriation.

The recent negative operating margins hint at a mild structural imbalance, somewhat attributable to subsidies of the water and sewer fund. The county contends that the water and sewer fund is stabilizing. Fitch agrees with the assessment, given that the fiscal 2011 subsidy of $235 thousand was approximately $550 thousand below the subsidy of the prior year. Additionally, the water and sewer fund has begun to repay a $6 million loan from the general fund, at $440 thousand in fiscal 2012 and $400 thousand budgeted in fiscal 2013. Fitch believes that the county is well-positioned to return to structural balance given the enterprise fund's stronger financial position coupled with fiscal 2014 and 2016 debt maturing. In addition, the state's Local Government Commission monitors municipal finances throughout the state, providing what Fitch views as financially prudent oversight.

REASONABLY STRONG DEBT POSITION

Overall debt levels are low at $1,423 per capita and 2.1% of market value. Rapid amortization, at 64.4% of principal retired within 10 years, contributes to the somewhat high debt service, equal to 13.7% of expenditures. There is no exposure to variable rate debt.

Intermediate-term debt offerings appear limited to initial financing for a jail financing at around $2 million. School capital needs have moderated, as the county has already addressed the capacity pressures attributable to above-average population growth prior to the recession. No new school construction is anticipated in the next five years. Fitch views favorably the county's pay-as-you-go capital financing, at $1.5 million in fiscal 2012 and $1.4 million budgeted in fiscal 2013.

MODEST POST-EMPLOYMENT REQUIREMENTS

The majority of county employees participate in the statewide Local Governmental Employees' Retirement System (LGERS), a cost-sharing multiple-employer plan. Although funding of LGERS has declined, it remains nearly fully funded at 95.4% as of Dec. 31, 2010. The county's fiscal 2011 contribution equaled a low 1.7% of spending.

The county administers a single-employer pension plan to provide supplemental benefits to qualified law enforcement officers up to age 65. The fiscal 2011 annual pension cost was $72 thousand. The county funds the plan on a pay-as-you go basis and has not contributed for the past two fiscal years, since there are no individuals receiving benefits. Fitch notes that the unfunded actuarial liability still represents less than 0.1% of market value.

The county's fiscal 2011 annual required contribution (ARC) for OPEB equaled $1.5 million or 2.2% of spending. The county contribution does not fully meet the ARC. The unfunded OPEB liability equals a modest 0.5% of market value. Fitch believes that the post-employment obligations do not pressure the credit.

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 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 Global Insight, Zillow.com, and the National Association of Realtors.

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

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Fitch, Inc.
Primary Analyst
Barbara Ruth Rosenberg, +1-212-908-0731
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gary Huang, +1-212-908-0315
Analyst
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings