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Rhino Blog
January 23, 2009 | 11:51 PM
While a new report from Fitch Ratings leaves Mecklenburg's coveted AAA rating for general obligation bonds intact, and dips it to AA+ for certificates of participation, the agency's report could spell big trouble for Charlotte-Mecklenburg Schools' 10-Year Capital Plan.
Recall that last year commissioners were forced to adopt a new debt policy, which essentially raised the limit on how much the county could borrow. Think of it as trading in the gold card for a platinum card, so you can keep spending like there's no tomorrow. But even with the new, higher debt ceilings, Commissioner Bill James says Fitch's latest assessment of Mecklenburg County's mound of debt sticks a dagger in CMS' wish list for school construction and its grab to land $500 million in bonds every two years. James' take is posted below:
Fitch (a National Rating Agency) left the County's bond ratings the same (AAA for General Obligation Bonds and one notch lower at AA+ for COPS).
That would seem to be good news and a casual read of the first couple of paragraphs of the Press Release would lead folks to think that Fitch thinks Mecklenburg County is in pretty good shape and has bond levels that are generally OK.
A detail read of the release however contains a series of explicit statements that should sober up even the most drunk of those that are downing shots of Mecklenburg County bond dollars.
So what did the rating agency say about Mecklenburg County that is so bad?
Well, here are a few quotes:
Mecklenburg County's debt levels are " are inconsistent with such a highly rated credit" (My note: We should be downgraded this year but they are going to warn us first)
We have a 'liberal' debt policy (My note: They got that right. It is so 'liberal' in fact that there hardly isn't one).
"The Stable Rating Outlook incorporates Fitch's assumptions that the debt burden will remain well within ceilings outlined in the county's new policies" (My note: this is impossible if we issue all planned debt we have promised CMS and others),
"The Stable Rating Outlook incorporates Fitch's assumptions that variable rate exposure, including hedged debt, will be contained at current levels" (My note: We are already at about 33% 'variable' which is more than what NC good practices would dictate as a 10% maximum).
"Fitch believes the guidelines embody liberal debt burden and debt service spending targets relative to other highly-rated entities; the county contends that the high ceilings provide flexibility and that actual ratios will be below the guidelines." (My note: According to projections, if we issue what CMS and other groups want in terms of debt, we will EXCEED the revised guidelines in a few years).
"The fiscal years 2009-2018 capital improvement plan identifies general county projects that total approximately $2.6 billion, although there is no indication that the county will fund the entire requested amount." (My note: Most of that is CMS debt. Who said we weren't going to be issuing this debt over the next 10 years? Did we tell them we were not?)
"Assumed school debt authorization of $350 million every other year is under reconsideration".
That last statement about reducing the amount of 'school debt authorization below $350 million every OTHER year would effectively kill CMS' issued 10 year capital plan 'black flag dead' (to borrow a phrase from former County Commission Chair Tom Bush).
What is surprising about this statement is that the Board of County Commissioners has refused to engage in any 'reconsideration' or limit. I have been trying to get the Democrats on the Board to consider this for 10 years as debt spiraled out of control.
If this 'reconsideration' is in process then how far along is it? How much are we reducing CMS' debt access to? Is CMS aware of this 'reconsideration' and are they participating in it? Is this the real reason behind the 'lower' sale amount - to restrict CMS bond money without having to confront them?
Hmmm.......
Two years ago CMS received $147 million (approx) in bonds (that would be roughly $300 million every two years).
A year ago we issued roughly $197 million in bonds for CMS (that would translate to about $400 million every two years).
This year CMS wanted around $270 million (that would translate to $540 million every two years).
So............if CMS wants a bond issue of $500 million every two years (as Peter Gorman has stated) for 'the children' how does Mecklenburg County accomplish that if we have agreed to 'reconsider' and limit our CMS sales to less than $350 million every two years?
Fitch has stated the obvious. Mecklenburg County's debt levels are 'inconsistent with such highly rated credit'.
They are telling us to fix our problems. It is a shot across the bow of the County Commission.
The question is - Will the Democrats listen and fix the problem and impose a hard debt limit?
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Fitch Assigns 'AA+' to Mecklenburg County, NC $91MM COPs; Stable Outlook
18:10 EST Tuesday, January 13, 2009
NEW YORK (Business Wire) -- Fitch Ratings assigns a rating of 'AA+' to Mecklenburg County, North Carolina's $90,765,000 certificates of participation (the COPs), series 2009A Mecklenburg County. The COPs are scheduled to sell via negotiation on Jan. 28, 2009.
In addition, Fitch affirms outstanding county obligations as follows:
--$1.76 billion general obligation (GO) bonds at 'AAA';
--$518 million COPs at 'AA+'.
The Rating Outlook for all obligations is Stable.
The 'AA+' rating on the COPs reflects the solid legal provisions, the essentiality of the mortgaged property, and the fact that COPs payments are subject to annual appropriation. The long-term 'AAA' GO rating reflects the strength of the county's broad and expanding economy, as well as its strong financial performance and management.
The rating also incorporates debt ratios considered high for the rating category, attributable to sustained aggressive borrowing program to fund significant capital needs coupled with the overlapping debt of the city of Charlotte.
The county recently revised its debt policies to reflect actual debt levels that were no longer in compliance with the prior policy. Fitch believes the new policies will provide guidance on an acceptable debt burden going forward. The county's minimal pension and OPEB liabilities, conservative budgeting for debt service and ample reserve levels partially offset concerns regarding the county's debt profile.
The Stable Rating Outlook incorporates Fitch's assumptions that the debt burden will remain well within ceilings outlined in the county's new policies, and that variable rate exposure, including hedged debt, will be contained at current levels. Changes in these assumptions could result in negative credit action.
The current COPs offering will be used primarily to fund schools and to a limited extent other county capital improvements. Under an installment financing agreement, the county will make payments, subject to annual appropriation, equal to debt service to the Mecklenburg County Public Facilities Corporation (the corporation), a nonprofit entity. Mortgaged property conveyed under the deed of trust for the benefit of the corporation includes two new middle schools, whose essentiality provides sufficient incentive to appropriate.
With the financial, business and professional services, and communications sectors playing a large role, Mecklenburg has a diverse economy. Anchored by the city of Charlotte, Mecklenburg is the second largest financial center in the U.S., with more than 85,000 finance-related jobs produced by institutions with assets exceeding $3.3 trillion. The county projects that this sector will remain strong even after the completion of the recent acquisition of one of its largest employers, Wachovia Bank, by Wells Fargo & Company. Fitch will continue to monitor ramifications to the county of the proposed acquisition as well as the impact of changes throughout the financial services industry.
The diverse economy includes more than 320 Fortune 500 companies and a growing presence in the tourism, high-technology manufacturing, energy production and logistics/distribution sectors. Wealth levels are above state and national averages. Unemployment, which has traditionally been at or below the state and national averages, has risen in tandem with the state's although more sharply than the nation's over the past year, with the county's 7.7% November 2008 unemployment marginally below the state's 7.8% but well above the nation's 6.5%.
Strong long-range financial planning and comprehensive policies have enabled Mecklenburg to manage its growth-related financial needs within the constraints of its budget. Audited fiscal 2008 results reflect continued operating gains and maintained the county's unreserved general fund balance at a high 20.2% of spending. The unreserved balance has increased by 147% since fiscal 2002. The county projects a draw-down of general fund balance in fiscal 2009 after transfers out for pay-as-you-go capital financing and capital reserve funding. Reserves remain strong in spite of high levels of debt service spending, which reached 17.7% of expenditures, transfers out, and other uses in fiscal 2008.
The county revised its debt policies in the summer of 2008, in recognition that it would not be able to adhere to previous targets given sizable upcoming capital needs. Fitch believes the guidelines embody liberal debt burden and debt service spending targets relative to other highly-rated entities; the county contends that the high ceilings provide flexibility and that actual ratios will be below the guidelines. Additionally, the guidelines institutionalize Mecklenburg County's maximum permitted unhedged variable rate debt exposure at 35% of the total and do not limit synthetically fixed rate debt, which Fitch views with concern as potentially weakening the county's debt profile.
Current direct debt ratios are in compliance with the revised targets. Overall debt levels, at $4,321 per capita and 3.9% of market value, are still moderate but are inconsistent with such a highly rated credit; these levels would rise to $4,613 per capita and 4.1% of market value should the county complete a forthcoming $253 million GO issuance. Debt amortization is above average even with the full GO issuance, about 65% in 10 years, in compliance with county policy. The fiscal years 2009-2018 capital improvement plan identifies general county projects that total approximately $2.6 billion, although there is no indication that the county will fund the entire requested amount.
Assumed school debt authorization of $350 million every other year is under reconsideration. A recently adopted pay-as-you-go financing policy should increase the current $26 million pay-go funding to $52 million per year beginning in fiscal year 2010. Fitch will monitor compliance with new policies, and would consider negative credit action were the county to exceed current projections.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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