Fitch Rates Kenosha County, WI’s GO Bonds ‘AA+’; Upgrades Outstanding Debt

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'AA+' to the following Kenosha County, WI general obligation (GO) bonds:

--$14.1 million GO bonds, series 2016A.

Fitch has also upgraded to 'AA+' from 'AA' the county's Issuer Default Rating (IDR) and the rating on $61 million of GO bonds currently outstanding.

These bonds include:

--$11.4 million GO notes, series 2014A;

--$19.5 million GO refunding bonds, series 2015A;

--$18.3 million GO Brookside Care Center bonds, series 2015B;

--$11.6 million GO promissory notes, series 2015C.

The Rating Outlook is Stable.

SECURITY

The county pledges its full faith and credit and unlimited taxing power to repay the principal and interest on its GO bonds and GO notes.

KEY RATING DRIVERS

The upgrade of Kenosha County's IDR and GO bond ratings to 'AA+' from 'AA' reflects the application of Fitch's revised rating criteria for U.S. tax-supported debt, published on April 18, 2016. Kenosha County's notable amount of untapped taxing capacity under a state-wide annual property tax cap provides significant independent legal revenue raising flexibility despite the restrictions of the cap. The county's long-term liability burden, which is composed entirely of direct and overlapping debt, is low. Fitch also expects that the county will maintain reserves throughout the economic cycle at a level that we regard as providing a high level of financial flexibility in the context of a revenue stream that has shown limited sensitivity to economic downturns and the county's strong control over revenues and spending.

Economic Resource Base

Kenosha County is located in southeastern Wisconsin and borders Illinois to the south. The local economy has traditionally been dominated by heavy industry, and was hard hit during the Great Recession, when unemployment rose to over 10% due to the closure of a Chrysler assembly plant and heavy layoffs by other manufacturing concerns. Since 2009, unemployment has declined markedly (to 5.2% in June 2016) as new employers have entered the county, resulting in greater diversification.

Revenue Framework: 'aa' factor assessment

General fund revenue growth has trended slightly below U.S. GDP growth for the past decade, although comfortably above the rate of inflation, a trend Fitch expects to continue. The county's independent legal ability to raise revenues is high given significant untapped property taxing power within the state's tight levy limits.

Expenditure Framework: 'aa' factor assessment

The county benefits from moderate fixed carrying costs and a solid ability to reduce program spending and head count. Overall personnel cost increases are expected to be in line with or marginally above revenue growth.

Long-Term Liability Burden: 'aa' factor assessment

The county benefits from a very moderate long-term liability burden. Net overlapping debt equaled a modest 10.8% of countywide personal income in fiscal 2015. The debt burden accounts for all of the county's long-term liabilities, as pensions are fully funded.

Operating Performance: 'aaa' factor assessment

Fitch views the county's operating performance as exceptionally strong. Its financial resilience derives from its solid gap-closing capacity given revenue raising flexibility, broad control of employee benefit costs, and substantial fund balances. The county has steadily built its general fund reserves and cash during the present expansion.

RATING SENSITIVITIES

REDUCTIONS IN UNTAPPED TAXING CAPACITY: The rating is sensitive to the maintenance of significant revenue raising flexibility in the form of untapped property taxing ability, as excess capacity can fluctuate based on factors that include the rate of assessed value growth and the amount of annual borrowing pursued by the county. Fitch expects this figure to remain comfortably above the level consistent with the current rating.

CREDIT PROFILE

Kenosha County is located in the southeastern corner of the State of Wisconsin and borders Lake County, Illinois to the south. The county seat is the city of Kenosha which is located 30 miles south of Milwaukee and 60 miles north of Chicago. It has a population of approximately 168,000 and has traditionally been a center for heavy industry and machine parts manufacturing. Strong access to major transportation routes including a network of highways leading north to the greater Milwaukee region and south to Chicago are an asset, as is the county's large amount of land available for future development. The county reports that it has capitalized on its location and superior transport links to lure new businesses into the county from neighboring states.

Revenue Framework

Kenosha County funds its general fund operations from a diverse variety of revenue sources, the largest of which are property taxes (55%), a local sales tax (22%), and intergovernmental revenues (15%) that derives mainly from the State of Wisconsin. Sales taxes have demonstrated the strongest growth pattern since 2011, expanding between 2.4% (2011) and 14.2% (2014) annually. Property tax revenues are expanding at a more restrained pace due to Wisconsin's statewide annual levy cap.

Kenosha County's general fund revenues grew more slowly than U.S. GDP in the decade from 2005 to 2015, as adjusted to reflect accounting changes made in fiscal 2012 that shifted certain functions out of the general fund into special revenue and internal service funds. Revenue growth was nonetheless well above the rate of inflation. Fitch expects revenues generally will continue to grow at around this pace in light of Wisconsin's restrictive property tax levy cap and the limits it places on municipalities' ability to raise their annual levies. A return to strong assessed value growth, partly driven by new construction, could bias levy increases toward the upside in the near term if the present expansion continues. It is possible that county management will choose to use less than its full levying capacity each year, instead choosing to roll forward unused capacity until it is needed to balance the budget.

The county's legal ability to raise revenues is restricted by Wisconsin's Act 66, which limits annual property tax levy increases to the prior year's levy plus any percentage change in equalized value stemming from new construction. Act 66 applies to all Wisconsin local governments with the exception of school districts. The county has increased its annual levy between 1.5% and 2.5%, on average, in recent years, or slightly below the U.S. rate of inflation.

Kenosha County has significant untapped property taxing capacity under the Act 66 framework, stemming from the fact that it has historically paid debt service using a portion of its operating levy, rather than establishing a separate levy specifically for debt service. Since Act 66 came into effect in 2011, the county has been able to utilize the majority of its annual debt service expense as an exception to Act 66's levy cap. For fiscal 2016, the exception results in $14.6 million of unused taxing capacity.

The county is allowed under Act 66 to increase its operating levy by the same amount as its unused debt service levy, subject to adjustments for new construction and any portion of debt service costs that the county chooses to utilize out of the total amount of the exception. The county's $14.6 million of unused taxing capacity for fiscal 2016 equaled approximately 24% of its general purpose levy. These numbers indicate a large measure of untapped taxing capacity that could be used in the future to close budget gaps by offsetting revenue declines caused by economic recessions with new tax revenues.

Kenosha County also relies on a county-wide half-cent sales tax for approximately 10% of revenues. The county was allowed to impose the sales tax by a vote of its governing body. It can raise the sales tax rate only with the approval of voters, however, giving it no independent legal ability to lift sales taxes without putting a measure on the ballot.

Expenditure Framework

The county is responsible for public safety (i.e. the county sheriff), along with courts, prisons, recreation, social services, and county roads. The county operates the Brookside Nursing Home, as well as a golf course. Public safety costs, which include courts, prisons and administration, accounted for 60% of general fund spending in fiscal 2015. General government functions accounted for 35% of general fund spending in the same fiscal year. Health and social service functions are handled out of a separate human services fund that receives the majority of its revenues (78%) from the State of Wisconsin.

Fitch expects Kenosha County's natural pace of spending growth to be in line with, to marginally above, the rate of revenue growth in the absence of policy actions to align spending with revenues. The county workforce includes only one group of unionized employees, salary increases for whom are expected to be in line with those of neighboring counties, or modestly above the rate of inflation. Capital spending needs are moderate and pension funding is strong.

The county's ability to cut spending through the economic cycle is solid, given management's ability to control the size of the county workforce and small number of bargaining units. Fixed carrying costs account for a modest share of expenditures, at 13.3% of total governmental spending in fiscal 2015. Pension contributions accounted for 2.6% of spending in the same fiscal year, whereas debt service consumed 8.5% and other post-employment benefit (OPEB) contributions 2.2%. Pension contributions are unlikely to rise given that the county presently has a pension asset, rather than a liability.

Tools for cost management include not filling less-essential positions, cutting back on non-core services, workforce reductions, and negotiating salary concessions. Positively, Wisconsin labor statutes give local government considerable leeway in designing employee benefit plans, including those for healthcare, and setting hours and workplace rules. This should help the county control costs going forward.

Long-Term Liability Burden

The county's long-term liability burden is moderate when compared to its economic resource base. As calculated by Fitch, Kenosha County's long-term debt and pension liability equals a manageable 10.8% of county personal income. Pensions account for 0% of the total liability burden, as the county recorded a $9.9 million net pension asset as of Dec. 31, 2014. The majority of long-term liabilities consist of overlapping debts of component municipalities, which totaled $599 million in 2015. The county will also have $118 million of direct debt outstanding following the current issue. Amortization is rapid with 80% of principal retired within 10 years.

County employees participate in the Wisconsin Retirement System, a cost-sharing multiple employer defined benefit pension plan. As of December 2014, the plan was fully-funded on an actuarial basis using the plan's 7.2% annual rate of return assumption and when adjusted by Fitch to reflect a more conservative discount rate of 7%. The county continues to fully fund its actuarially-determined annual pension contribution. The county's OPEB liability is minimal at less than 0.5% of market value.

Operating Performance

The county's financial resilience is exceptionally strong based on its high independent legal ability to raise revenues and solid control over costs. Based on an adjusted general fund revenue history that smoothes out variances driven by recent accounting changes, we calculate a Fitch Analytical Sensitivity Tool (FAST) output of a potential revenue change of -1% in a -1% U.S. GDP moderate economic downturn scenario.

Fitch expects that management would be able to close the resulting budget gap using a combination of revenue and expenditure actions without resorting to draws on general fund reserves. If management was forced to rely on reserves to close a mid-year budget gap, however, we believe available reserves would remain comfortably above the 'aaa' reserve safety margin level. Available reserves closed out fiscal 2015 at 31% of expenditures; Fitch considers it unlikely that the county would have to draw much below this level to address a moderate economic downturn.

Kenosha County's audited financials from the past several years show a consistent trend of adding to reserves during periods of economic recovery. Between fiscal 2010 and fiscal 2015, available reserves grew from 14% of expenditures to the most recent 31% of expenditures. The implementation of GASB 54 in 2011 did not affect this outcome. Management has followed a pattern of modest tax increases to align revenues with expenditures and follows conservative budgeting practices. It has a reserve policy of keeping general fund reserves at a minimum of 17% of expenditures and has comfortably exceeded this benchmark since fiscal 2012.

Fiscal 2015 operations concluded with a $2.7 million operating surplus equal to 4.4% of expenditures. Results were driven by positive revenue performance, with sales taxes, in particular, outperforming budget. A strong expansion in transactions related to manufacturing concerns within the county led the growth, as did strong automobile and auto parts sales. The fiscal 2016 general fund budget grew by $3.5 million over the prior year with most of the increase related to higher health insurance costs driven by a small number of high-cost claims. The remainder of the increase was driven by growing social service costs related to adult and juvenile mental health needs, and by contractual salary increases. The budget was balanced with the anticipated use of $300,000 in reserves, but management expects fiscal 2016 (Dec. 31 year end) to close with balanced operations and no draw on fund balances, consistent with the county's conservative budgeting.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the 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)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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