New Issue: Moody's asssigns Aaa to Charlotte's (NC) $137.7M GO Bonds, Series
2013A&B; Outlook stable
Global Credit Research - 06 Aug 2013
Affirms Aaa and stable outlook on $722.6M of outstanding GO debt
CHARLOTTE (CITY OF) NC
Cities (including Towns, Villages and Townships)
NC
Moody's Rating
ISSUE
RATING
Taxable General Obligation Housing Bonds, Series 2013A
Sale Amount
$34,370,000
Expected Sale Date
08/13/13
Rating Description
General Obligation
Aaa
General Obligation Refunding Bonds, Series 2013B
Sale Amount
$103,290,000
Expected Sale Date
08/22/13
Rating Description
General Obligation
Aaa
Moody's Outlook STA
Opinion
NEW YORK, August 06, 2013 --Moody's Investors Service has assigned Aaa rating to the City of Charlotte's
(NC) $34.37 million Taxable General Obligation Housing Bonds, Series 2013A and $103.29 million General
Obligation Refunding Bonds, Series 2013B. Concurrently, Moody's has affirmed the Aaa rating on the city's $722.6
million of outstanding general obligation debt. The outlook remains stable.
SUMMARY RATINGS RATIONALE
The Series 2013A&B general obligation bonds are secured by a pledge of faith, credit and taxing power of the city.
The Aaa long-term general obligation rating reflects the city's healthy financial operations, strong management
characterized by formal financial policies, as well as a large, diverse and expanding tax base. The Aaa also
factors a relatively high, though manageable, debt burden with a modest level of variable rate and swap exposure,
which has been significantly reduced in recent years. The Series 2013A bonds will finance various city housing
projects primarily for seniors and the Series 2013B bonds will refinance Series 2003 bonds for significant net
present value savings.
STRENGTHS
-Stability provided by the city's large, growing and diverse tax base
-Conservative budgeting of revenues and expenditures resulting in solid financial position
CHALLENGES
-Somewhat high debt burden with a variable rate component that poses potential for budgetary pressures
DETAILED CREDIT DISCUSSION
ECONOMIC RECOVERY CONTINUES WITH ADDITIONAL BOOST FROM HOSTING DEMOCRATIC
NATIONAL CONVENTION
Recovery continues in the Charlotte economy at a faster pace than in recent years. The city's unemployment rate
has stabilized at 8.4% in June 2013. According to city officials, Charlotte added 9,595 new jobs with roughly $1.3
billion of investments in 2012. MetLife recently announced 1,300 new jobs at an estimated average salary of
$80,000. Chiquita recently moved its headquarters to Charlotte from Cincinnati (rated Aa2/negative). Additionally,
Time Warner Cable just added 225 new jobs and more than $100 million in investment. The city has also seen
encouraging signs in terms of additional energy sector growth including a sizable $135 million investment by
Siemens for the expansion of a plant in the county, which is expected to result in 825 new jobs over the next three
years. The $13.7 billion merger of Duke Energy (Baa2/RUR) and Progress Energy resulted in the nation's largest
public power utility with headquarters in the city. TZ Insurance Solutions LLC is opening a new office in Charlotte,
creating 125 new high paying jobs with plans to expand to 250 jobs in the near to medium term. Pactera
Technology International recently announced the establishment of its US Headquarters in the city with
approximately 200 employees.
Financial services remain an extremely important part of the Charlotte economy. Wells Fargo NA (Aa3/stable) and
Bank of America NA (A3/stable) are Charlotte's second- and fourth-largest employers, respectively, composing
8.7% of all jobs the city. In 2012, Wells Fargo, which acquired the beleaguered Wachovia in 2009, employs 22,500
individuals, while Bank of America employs 15,000. Bank of America assessed property valuation is $1.5 billion,
accounting for 1.9% of the city's total assessed value, and Wells Fargo is $1.2 billion, or 1.6%. Given the city's
sizable banking presence, it has developed into one of the largest concentrations of financial services in the US.
Indicative of the city's exposure to the volatility of the sector, the city lost nearly 6,000 jobs from October 2008 to
May 2009 or a contraction of 7.7%, compared to a 4.1% loss for the nation. Significant restructuring has already
occurred, and we believe a level of stability has returned.
Notwithstanding the relative concentration in the financial services industry, Charlotte's economy is diverse in the
significant trade, services and manufacturing interests including a notable number of international firms. The cityowned Charlotte-Douglas International Airport employs several thousand people in the city, and is US Airways
(B3/stable) main hub which recently announced a merger with American Airlines (Baa3/stable). The new NASCAR
Hall of Fame, located in the downtown area, opened in 2010 and is bringing a significant tourism component to the
city. Further, a level of economic stability is brought about by the presence of major non-profit and educational
institutions, including Presbyterian Healthcare/Novant Health, Carolinas HealthCare System (rated Aa3) and the
University of North Carolina-Charlotte (rated Aa3/stable) with nearly 22,000 students.
The Democratic National Committee held its national convention in the City in September 2012 with approximately
35,000 attendees, including 15,000 members of the media and 6,500 delegates. According to the report by
consultant group, Tourism Economics, the convention lead to $91 million in direct spending in the local economy
and nearly $163.6 million in total economic impact. Area hotels booked 61,246 hotel room nights for the DNC
which generated $20.9 million in revenue. Visitors spent an estimated $5.7 million on food and beverage, $3.0
million on recreation, and $5.4 million on local transportation.
The city's assessed value growth has averaged 5.8% over the last five years. Mecklenburg County (rated
Aaa/stable), which is responsible for assessments, had intended to complete revaluation in 2009, but opted to
delay revaluation until 2011 in light of the recession. The recent revaluation lead to 16.5% spike last year to a total
of $90.4 billion.
Wealth levels in the city remain stronger than the state and nation, with the 2010 American Community Survey per
capita income representing 125.1% of the State of North Carolina (G.O. rated Aaa/stable) and 113.0% of the
nation. Full value per capita of $116,970 is also strong.
SOUND FINANCIAL OPERATIONS SUPPORTED BY PROACTIVE MANAGEMENT PRACTICES
Charlotte's financial operations are expected to continue to be well-managed, characterized by considerable
operating flexibility, a trend of ample reserves and a strong cash position. The city has a formal policy to maintain
operating fund balances at 16% of the current year expenditures. Strong results for fiscal 2012 reflect improved
sales tax receipts up 9% from the previous year and tight expenditure controls. The city achieved a $9.6 million
surplus for a total General Fund balance of $159.2 million. The unassigned balance was $88.4 million at fiscal
year-end, representing 16.3% of General Fund revenues. The city maintains strong liquidity with General Fund
cash at the end of fiscal 2012 equaling $163.1 million or 30.1% of revenues. Positively, the city maintains additional
financial flexibility available for debt service in its Debt Service Fund which maintained a balance of $229.9 million
at the end of fiscal 2012. The fiscal 2013 budget was conservatively balanced. City officials conservatively
estimate a modest operating surplus of $10-15 million for the recently closed fiscal 2013. Property taxes are the
city's primary source of operating revenues (57% of fiscal 2012 General Fund revenues). The lack of property tax
levy limits affords the city substantial budgetary flexibility.
The city adopted the fiscal 2014 budget in June which includes a 3.17 cent property tax increase to fund the
comprehensive $817 million 2014-20 capital improvement plan. Revenues are projected to increase by 2.3%, fees
in permits up 6% and sales tax is projected to grow by 3.5%.
The North Carolina General Assembly recently signed into law legislation that would allow for the creation of a
Douglas International Airport Commission to take over operations of the city-owned and operated airport. It is
unclear at this point how this situation will unfold but city officials are extremely confident that there is no negative
potential impact on the city's overall finances.
DEBT LEVELS REMAIN ABOVE AVERAGE; MODERATE VARIABLE RATE EXPOSURE
The city's slightly elevated debt burden (direct 1.5% of full value) should remain manageable for the medium-term
given the city's careful debt planning. Following the current issue, Charlotte will have $757.3 million of general
obligation debt and an additional $922 million of appropriation backed debt. Of the city's outstanding general
obligation debt, approximately 36% is financed by self-supporting utility enterprises, including water, sewer and
storm water. As a result, we remove these obligations from calculations of the city's debt burden. For
appropriation-backed debt, a substantial portion is paid from dedicated revenues outside of General Fund
operations, mostly comprised of various taxes levied to support the transit system, the convention center and a
sports arena. These separate credit entities outside of the General Fund, established to capture revenues to
support debt service for the city's convention center, arena, arts facilities, the NASCAR Hall of Fame and the
transit system, maintained fund balances equal to $229.9 million, or 24% of total special credit entity debt
outstanding, at the end of fiscal 2012, providing an additional source of financial cushion. Further, the city's overall
debt burden of 2.6% of full valuation, including approximately $2.4 billion of overlapping debt of Mecklenburg
County, is higher than the Moody's median for all cities. The ability of the city to balance operating expenditure
pressures and lease payments as part of its annual budget process while maintaining a strong financial position
will be key facets of future credit analysis.
Approximately 12% of general obligation and certificate of participation debt is in a variable rate mode. All but
$221.8 million of the city's certificates of participation variable rate debt is unhedged. The city's one general
obligation interest rate swap, which is associated with variable rate debt issued to finance the NASCAR Hall of
Fame, was moved from debt associated with city's water and sewer enterprise in July 2009. All of the city's
variable rate debt, including the CP, has liquidity support from third party providers. The city entered into a
swaption with Wachovia, now Wells Fargo N.A., in 2005 and received an upfront payment of $5.8 million, which
were tied to the Series 2003G COPs. As per the agreement, in March 2013 the bank chose to exercise its option
after which the city pays the bank a fixed-rate of 5.097% and receives a floating-rate based on SIFMA. The Series
2013G COPs effectively create a synthetic fixed-rate refunding. The notional amount of the swap, currently $128.2
million, will decrease as the sinking fund prepayments are made on the 2013G COPs.
As noted above, the city recently adopted a $817 million 2014-20 CIP to be partially funded with the 3.17 cent
property tax increase. The city also has an extensive pay-go program.
The city participates in the North Carolina Local Government Employees Retirement System, multi-employer,
defined benefit retirement plans sponsored by the State of North Carolina (GO rated Aaa/stable). The city also has
its own Firefighter Retirement and Law Enforcement Separation Allowance systems. The city's combined annual
required contribution (ARC) for the plans was $32.4 million or 6% of General Fund expenditures. The city's
combined adjusted net pension liability, under Moody's methodology for adjusting reported pension data, is $463
million or approximately 0.89 times General Fund revenues. Moody's uses the adjusted net pension liability to
improve comparability of reported pension liabilities. The adjustments are not intended to replace the city's
reported liability information, but to improve comparability with other rated entities. We determined the city's share
of liability for the state-run plans in proportion to its contributions to the plans.
WHAT COULD CHANGE THE RATING DOWN (or revise the outlook to negative):
-Negative budget variances in revenues coupled with an inability or unwillingness to implement corresponding
expenditure reductions or alternate revenue generators
-Declines in liquidity and/or fund balances to levels that exceed current expectations
-Economic stagnation that impedes tax base growth and detracts from the success of economic revitalization
efforts
-Failure to appropriate debt service funding
KEY STATISTICS
2012 population: 731,424 (increase of 35.2% from 2000 to 2010)
2012 Full valuation: 90.4 billion
Debt burden: 2.6% overall/ 1.5% direct
Amortization of principal (including installment purchase bonds): 62.5%
Fiscal 2012 General Fund balance: $149.5 million (28.6% of General Fund revenues)
Median Family Income as a % of state (2010): 111.2%
Per Capita Income as % of state, % of nation (2010): 125.1%
General obligation debt outstanding post-sale: $757.3 million
The principal methodology used in these ratings was General Obligation Bonds Issued by US Local Governments
published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory
disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class
of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance
with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating
action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in
relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where
the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner
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Analysts
Edward Damutz
Lead Analyst
Public Finance Group
Moody's Investors Service
Robert Weber
Backup Analyst
Public Finance Group
Moody's Investors Service
Kristin Button
Additional Contact
Public Finance Group
Moody's Investors Service
Contacts
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