boone (county of ) ky credit opinion - boone county ky.pdf · the county ran eight consecutive...

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U.S. PUBLIC FINANCE CREDIT OPINION 5 December 2018 Contacts Nisha Rajan +1.212.553.1978 Analyst [email protected] Lauren Von Bargen +1.212.553.4491 AVP-Analyst [email protected] CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Boone (County of) KY Update following upgrade to Aaa Summary Boone County's (Aaa stable) sizeable tax base benefits from the regional economic center in the Northern Kentucky/Greater Cincinnati metropolitan statistical area (MSA), and continues to exhibit healthy growth driven by new developments and property value appreciation. Expansion in the local economy is driving growth in the labor force and positively impacting core operating revenues. The county also benefits from the economic anchor of the Greater Cincinnati/Northern Kentucky International Airport, which is designated to be a cargo air hub for Amazon (Amazon.com, Inc. - A3 positive). Management has a long history of maintaining strong reserves and liquidity, supported by conservative budgetary practices and adherence to formal fiscal policies. The county's credit profile also reflects a low debt burden that will remain modest given continued tax base growth and a lack of additional debt plans. Exhibit 1 Historical Trend of Positive Operations Resulting in a Strong, Stable Financial Position Fiscal 2010-2019 0% 10% 20% 30% 40% 50% 60% 70% 80% $- $10 $20 $30 $40 $50 $60 2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2019* Reserve Ratios Revenues in Millions Net Cash as % of Revenue Total Fund Balance as % of Revenue Revenues *2017 and 2018 figures are unaudited; 2019 is budgeted Source: Boone County, KY & Moody's Investors Service On December 5th, we upgraded to Aaa from Aa1 the rating on the county’s outstanding rated general obligation debt and assigned a Aaa rating to the county’s $4.4 General Obligation Bonds, Series 2018. A stable outlook was assigned. Credit strengths » Large tax base located in a regional economic and employment center » Strong financial reserves and liquidity » Above average wealth and income levels » Low debt and pension burdens

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Page 1: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

U.S. PUBLIC FINANCE

CREDIT OPINION5 December 2018

Contacts

Nisha Rajan [email protected]

Lauren Von Bargen [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Boone (County of) KYUpdate following upgrade to Aaa

SummaryBoone County's (Aaa stable) sizeable tax base benefits from the regional economic center inthe Northern Kentucky/Greater Cincinnati metropolitan statistical area (MSA), and continuesto exhibit healthy growth driven by new developments and property value appreciation.Expansion in the local economy is driving growth in the labor force and positively impactingcore operating revenues. The county also benefits from the economic anchor of the GreaterCincinnati/Northern Kentucky International Airport, which is designated to be a cargo air hubfor Amazon (Amazon.com, Inc. - A3 positive). Management has a long history of maintainingstrong reserves and liquidity, supported by conservative budgetary practices and adherenceto formal fiscal policies. The county's credit profile also reflects a low debt burden that willremain modest given continued tax base growth and a lack of additional debt plans.

Exhibit 1

Historical Trend of Positive Operations Resulting in a Strong, Stable Financial PositionFiscal 2010-2019

0%

10%

20%

30%

40%

50%

60%

70%

80%

$-

$10

$20

$30

$40

$50

$60

2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2019*

Reserv

e R

atio

s

Re

ve

nue

s in

Mill

ions

Net Cash as % of Revenue Total Fund Balance as % of Revenue Revenues

*2017 and 2018 figures are unaudited; 2019 is budgetedSource: Boone County, KY & Moody's Investors Service

On December 5th, we upgraded to Aaa from Aa1 the rating on the county’s outstandingrated general obligation debt and assigned a Aaa rating to the county’s $4.4 GeneralObligation Bonds, Series 2018. A stable outlook was assigned.

Credit strengths

» Large tax base located in a regional economic and employment center

» Strong financial reserves and liquidity

» Above average wealth and income levels

» Low debt and pension burdens

Page 2: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Credit challenges

» Ongoing growth contributing to needs for additional infrastructure and improvements

» Exposure to potentially volatile revenue sources

Rating outlookThe stable outlook reflects the continued growth of the county's tax and employment base, which is part of a regional economic hub inthe Northern Kentucky/Greater Cincinnati metropolitan statistical area (MSA). The outlook also factors in the county's healthy financialposition and adherence to formal financial and debt policies, which will likely continue to support stable financial operations goingforward.

Factors that could lead to an upgrade

» Not applicable

Factors that could lead to a downgrade

» Substantial erosion of financial position and liquidity

» Material decline in tax base and wealth levels

Key indicators

Exhibit 2

Boone (County of) KY 2012 2013 2014 2015 2016

Economy/Tax Base

Total Full Value ($000) $13,062,078 $13,012,166 $13,178,916 $13,708,462 $14,102,633

Population 119,406 121,214 123,030 124,617 125,656

Full Value Per Capita $109,392 $107,349 $107,120 $110,005 $112,232

Median Family Income (% of US Median) 121.2% 120.7% 120.8% 119.1% 119.2%

Finances

Operating Revenue ($000) $51,624 $52,253 $54,008 $57,263 $58,985

Fund Balance ($000) $21,217 $23,661 $25,580 $30,202 $31,298

Cash Balance ($000) $21,282 $23,605 $25,662 $31,568 $32,954

Fund Balance as a % of Revenues 41.1% 45.3% 47.4% 52.7% 53.1%

Cash Balance as a % of Revenues 41.2% 45.2% 47.5% 55.1% 55.9%

Debt/Pensions

Net Direct Debt ($000) $29,431 $26,907 $23,866 $30,265 $24,505

3-Year Average of Moody's ANPL ($000) $37,438 $42,629 $41,164 $35,403 $34,164

Net Direct Debt / Full Value (%) 0.2% 0.2% 0.2% 0.2% 0.2%

Net Direct Debt / Operating Revenues (x) 0.6x 0.5x 0.4x 0.5x 0.4x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 0.3% 0.3% 0.3% 0.3% 0.2%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 0.7x 0.8x 0.8x 0.6x 0.6x

Source: Boone County, KY & Moody's Investors Service

ProfileBoone County is located in the outer bluegrass region of the Commonwealth of Kentucky (Aa3 stable), and comprises the NorthernKentucky area along with Campbell (Aa2) and Kenton (Aa2) Counties, which are all included in the Cincinnati MSA. The county is

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa

Page 3: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

situated along the south bank of the Ohio River, immediately south of Cincinnati, OH (Aa2 stable). Boone County has an estimatedpopulation of 128,536.

Detailed credit considerationsEconomy and tax base: substantial, expanding tax base benefitting from its location in the Cincinnati MSABoone County's sizeable tax base will experience continued growth given ongoing industrial and commercial activity, moderateresidential development, and property value appreciation. The tax base grew a five-year annual average of 3% to reach $15.1 billionin fiscal 2018, representing a 23% increase since fiscal 2008. The county only experienced a small 0.4% decline in assessed value infiscal 2013 over the last ten years, highlighting the areas’ economic resiliency due to its proximity to Cincinnati and industrial diversity.The county's tax base is slightly below the national Aaa-medians for counties with similar population levels (between 100,000 and250,000) at $18.5 billion, although the base is small when compared to the median for all Aaa rated counties.

Exhibit 3

Sizeable Tax Base Exhibiting Steady Annual Growth5-year average annual growth rate of 3% (fiscal 2014-2018)

$0

$2

$4

$6

$8

$10

$12

$14

$16

2010 2011 2012 2013 2014 2015 2016 2017 2018

Assessed V

alu

atio

n in

Bill

ions

Real Estate Tangible Property Motor Vehicle Watercraft

Source: Boone County, KY & Moody's Investors Service

The county is home to the Greater Cincinnati/Northern Kentucky International Airport (CVG), which is a large hub for DHL, a subsidiaryof Deutsche Post AG (A3 stable), Germany's incumbent provider of mail services and the world's largest logistics service. Amazonrecently selected CVG to be the air cargo hub for Amazon Prime and will lease more than 900 acres of CVG land for fifty years.Construction begins in February 2019 on a $1.5 billion facility that will include 3 million square feet of buildings and will add more than2,700 jobs to CVG's existing base of 10,000 upon completion in Q1 2021. Amazon also has a warehouse facility in the county, andalong with DHL is amongst the county's top ten occupational taxpayers.

The local economy is largely based in services, trade, transportation, and manufacturing, and concentration is minimal with the topten taxpayers comprising just 2.5% of 2018 assessed valuation. The county's largest employers are stable and include Citigroup CreditServices (Citigroup Inc. - Baa1 rating under review for possible upgrade) with 2,485 employees, as well as several automotive partsmanufacturers, including Robert Bosch and Mubea and Meritor Heavy Vehicle Systems (subsidiary of Meritor, Inc. - Ba3 stable), whichcollectively employ over 2,200 individuals. In the past calendar year, management reports new housing permits have surpassed pre-recession levels, with demand for homes increasing as industrial development continues.

Unemployment in the county consistently trends below the state and nation, highlighting resiliency during economic downturns andindependence from dependency on one industry. As of September 2018, unemployment was 3.2%, relative to 4.3% and 3.6% in thestate and nation, respectively. Wealth and income is also strong, with median family income of 119.2% of the national level, and fullvalue (2018) per capita of $115,609, which is above with the Aaa median of $110,655.

3 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa

Page 4: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Financial operations and reserves: strong financial position and reserves despite sizeable capital allocationsThe county's financial position will remain healthy due to growing revenue streams, managements' commitment to long-term financialplanning, and adherence to prudent fiscal policies. The county maintains a formal policy to retain a minimum fund balance of 25%annual general fund revenues, a level it has exceeded over the past ten fiscal years (through 2018).

The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund capital projects.Fiscal 2016 finished with a $1.4 million general fund surplus, which brought total fund balance to $35.5 million (72.4% of revenues)and unassigned fund balance to $27.5 million (56% of revenues). General fund revenues were primarily comprised of taxes (84%),including occupational license (59%), property taxes (25%). and net profit taxes (3%).

The general fund has reported a receivable from the golf fund on its balance sheet over the past several fiscal years. At fiscal year-end2016, the amount due to the general fund was $4.8 million. Net of the receivable, general fund balance falls to $30.7 million or a stillhealthy 62.6% of revenues. The golf fund is anticipated to become fully self-supporting in fiscal 2019, after which management willdetermine a repayment date to the general fund. Subsequent subsidies to the golf fund include $325,000 in fiscal 2017 and $275,000in fiscal 2018 for capital equipment and improvements.

Operating funds (general, road, jail and debt service funds) also reported a $2 million surplus, and finished with available (unassignedand assigned) fund balance of $31.3 million (53.1% of operating revenues), which significantly surpasses the Aaa median of 33.5%of revenues. Taxes accounted for 70% of operating revenues, followed by intergovernmental revenue at 19%. The county's jail fundrecorded intergovernmental revenues, consisting primarily of receipts for housing federal and state inmates, which is a large portionof its jail population. As such, the jail fund is exposed to potential revenue volatility should the reimbursement rate paid by the federalgovernment or the Commonwealth of Kentucky change. The jail fund has received modest transfers from the general fund, including$450,000 in 2016, $350,000 in 2017, and $689,000 in fiscal 2018.

The county's audited financials are delayed due to final approval from the state auditor, however, unaudited results for fiscal 2017 and2018 are aligned with prior years. The county allocated $21 million for capital projects, which includes pre-funding for the county'sportion of approved grants state and federal grants for road projects beginning in fiscal 2021-2022, the general fund expects just a $3.1million deficit, bringing total fund balance to $32.4 million (63% of revenues). Operating funds anticipate a $1.8 million surplus andtotal fund balance of $41.1 million (67% of revenues).

In 2018 the county also allocated $21 million for capital projects (primarily road projects), with $6 million for a next generation 911radio system (in lieu of a debt issuance). The general fund anticipates just a $1.9 million deficit, bringing total fund balance of $30.6million (57.5% of revenues). Operating funds anticipate an $82,000 deficit and total fund balance of $41.1 million (65% of revenues).

As the bulk of the capital needs were funded in fiscal 2017 and 2018, fiscal 2019 anticipates allocating $15 million to capital projects.The budget projects revenues of $52.3 million, and a small operating surplus of $35,000, bringing total fund balance to $30.6 million(59% of revenues).

Although the county is reliant on economically sensitive revenues including occupational and business net profit taxes, these revenuestreams have had limited volatility since 2009. Over the past five years, total taxes grew a compound annual average of 4% (fiscal2014 through 2018); occupational taxes grew 5%, the net profit tax grew 4%, and property taxes grew 2%.

The county also maintains substantial financial flexibility to raise revenues. Management has opted not to increase the annual propertytax levy by the statutory maximum 4% in recent years, and the real property tax rate of $1.04 and personal property tax rate of $1.25per $1,000 of assessed valuation remains low. Furthermore, the county may levy an insurance premiums tax with fiscal court approval,yet management indicates no near term plans for such a levy. Given the county's demonstrated prudent fiscal management practices,financial operations will remain healthy over the near term.

LIQUIDITYThe county's net cash position remains healthy and exceeds the median (42.2% of revenues) for similarly rated counties nationally.Fiscal 2016 finished with a general fund cash balance of $29.5 million (60.2% of revenues). The county's operating fund cash balancetotaled $33 million, reflecting a strong 66.7% of operating fund revenues. Overall, the county's five year net cash position averaged49% of revenues.

4 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa

Page 5: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Debt and pensions: low debt burden with rapid payout; manageable pension liabilitiesThe county's debt profile will remain modest over the near term given minimal future borrowing plans, use of pay-go funds to financecapital projects, and aggressive retirement of outstanding debt. After the issuance of the 2018 bonds, the county's direct debt burdenwill be $17.8 million, or a modest at 0.12% of full valuation. The county's debt level is substantially below the Aaa median of 1% of fullvalue.

DEBT STRUCTUREAll of the county's rated debt (75% of debt outstanding post 2018 issuance) is backed by its unlimited general obligation pledge and isfixed rate. The county also has $4.4 million in jail revenue bonds outstanding, which is backed by revenues received from the KentuckyAdministrative Office of the Courts. Principal payout is rapid, with 82% of debt retired within 10 years.

DEBT-RELATED DERIVATIVESThe county is not party to any interest rate swaps or other derivative agreements.

PENSIONS AND OPEBThe county participates in the County Employees Retirement System (CERS), a cost sharing, multiple employer defined benefit pensionplan with benefit contributions and provisions established by statute and administered by the Board of Trustees of the KentuckyRetirement Systems.

The county's adjusted net pension liability (ANPL) for fiscal 2016, under Moody's methodology for adjusting reported pension data is$42.5 million, a low 0.72 times operating revenues.

Total fixed costs (debt service and pension contributions) totaled a low 12.5% in fiscal 2016, which is slightly elevated due to arefunding in September 2015.

Management and governanceManagement demonstrates conservative budgeting practices and adheres to a formal fund balance policy.

Kentucky Counties have an Institutional Framework score of Aa, which is high. Institutional Framework scores measure a sector'slegal ability to increase revenues and decrease expenditures. Property and occupational license taxes, the primary revenue sources,are highly predictable. Counties' ability to raise property tax revenues is moderate as they are limited by state law to 4% increasesannually. The Kentucky Constitution establishes maximum property tax rate at 5 mills, but there is substantial headroom under thislimit (typically over 50%). Unpredictable revenue fluctuations tend to be minor, or under 5% annually. Across the sector, fixed andmandated costs are generally less than 25% of expenditures. Kentucky is a Right to Work state, providing significant expenditurecutting ability. Unpredictable expenditure fluctuations tend to be moderate, between 5-10% annually.

5 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa

Page 6: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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REPORT NUMBER 1153180

6 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa

Page 7: Boone (County of ) KY Credit Opinion - Boone County KY.pdf · The county ran eight consecutive years of general fund surpluses through fiscal 2016, despite utilizing revenues to fund

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

7 5 December 2018 Boone (County of) KY: Update following upgrade to Aaa