NEW YORK - Moody's Investors Service said it has downgraded Dane County, Wis.'s outstanding general obligation unlimited tax backed debt to Aa1 from Aaa and revised the outlook to negative from stable, affecting $236.3 million.
Concurrently, Moody's has assigned the Aa1 with negative outlook to the county's $14.4 million general obligation promissory notes, Series 2009A, $2.1 million taxable general obligation corporate purpose bonds (Build America Bonds), Series 2009B, and $8.5 million Taxable general obligation health center bonds, series 2009c (recovery zone economic development bonds).
Together, proceeds of the three series, which are all secured by the county's unlimited tax pledge, will finance various capital projects throughout the county including the second and final phase of the new nursing home. The Aa1 rating and negative outlook reflect the county's pressured financial operations that are expected to result in negative undesignated reserves at year-end; substantial economic base anchored by the state capital, large university presence and a diverse employment base; and manageable debt profile.
Moody's anticipates that the county's tax base will continue to experience growth, though at a slower pace than in recent years, given the stability of the employment base anchored by the state capital and the flagship campus of the University of Wisconsin, as well as diverse opportunities among non-governmental employers.
Dane County is situated to experience long-term growth, with the city of Madison (general obligation rated Aaa), the state capital providing institutional stability and continuity. The county's tax base, currently at $52.2 billion, has grown at a healthy average annual rate of 6.3% over the past five years, with a significant portion resulting from new construction.
Notably, this growth has slowed from double digits recorded in 2004 through 2006, inclusive, to a much more modest 0.8% in 2009.
Favorably, major employers have avoided layoffs though the state, with over 47,000 employees, did implement 16 days of furloughs in the biennial budget.
Of the county's ten largest employers, seven are either government entities or large health care providers. In addition to governmental services and the university, the Madison area is also home to well-established companies such as WPS Insurance Group, Oscar Meyer Foods and American Family Insurance. The county's historically low unemployment rate remains below the state (8.7%) and national (9.7%) levels, at 5.9% as of July 2009.
Although the large student and agricultural population in the county somewhat negatively skews resident income and employment statistics, income levels are still nearly 20% above state figures. The county's overall economic strength is also reflected by an increasing population, with over 16% between the 1990 and 2000 census counts and a current estimated 10.6% increase since 2000.
After planned draws on General Fund reserves in fiscal 2006 and 2007 in accordance with county policy, fiscal 2008 revenues and expenditures were dramatically off budget resulting in a significant decline in General Fund reserves.
At the close of fiscal 2008, the county posted a $10.0 million deficit due to both lagging revenue collections, primarily property and sales tax, as well as expenditures in the Sheriff's Department that were several million over budget. Property and sales tax receipts account for 70% of the General Fund revenues.
Delinquent property tax receipts rose by $2.2 million and sales tax collections fell short by about $900,000, almost entirely in the last two monthly distributions. The draw on reserves resulted in a $3.3 million undesignated balance, or a minimal 1.7% of General Fund revenues.
Management is currently projecting that fiscal 2009 will end with a negative undesignated balance of $7-$8 million, reflecting another anticipated reduction of reserves of about $10 million. At a time when other municipalities were reducing fiscal 2009 budgeted receipts for economically sensitive revenues, such as sales tax, the county planned for a $1.4 million increase in sales tax revenue over actual 2008 receipts.
Year-to-date, sales tax revenues are estimated to be 11% under budget, equal to almost $5.0 million. Additionally, delinquent property tax collections continue to increase in fiscal 2009. At the end of August delinquencies were up another $3.4 million, meaning approximately $12.2 million, or possibly more, of the county's General Fund balance will need to be reserved for collections at year-end. In order to increase collections, the county has added staff to its collections team to focus on taxpayers who are three years behind in payment.
Favorably, the county has been able to negotiate with its union employees a mid-year wage concession equal to a 5% reduction over the last six months of the year. Also, though seemingly delayed, the county did implement more stringent budget controls over the Sheriff's Department which management reports has resulted in improved financial performance.
Representing a potential additional point of fiscal pressure, the General Fund annually subsidizes both the Human Services Fund and Badger Prairie Health Care Center. In fiscal 2009 these subsidies ware budgeted at $54.0 million and $9.1 million, respectively, and reflect continuing year-over-year growth.
Health and human services are the county's largest operating expenditure, comprising 56.1% of operating expenditures in fiscal 2008. While the county continues to seek operating efficiencies at the nursing home and other social service care facilities, it remains committed to providing a high level of care to its constituents. Moody's will continue to monitor the impact of this annual subsidy and the affect on the county's financial operations.
Going forward into fiscal 2010, officials hope to increase the property tax levy sufficient to bring the undesignated fund balance back between zero and a positive $1 million.
Budgeted sales tax revenues will be held flat based on collections received in fiscal 2009 and negotiations with the unions will target a $9 million reduction in compensation. The county does not have a detailed recovery plan and management believes it may take until fiscal 2012 until it is back in line with its reserve policy.
The policy calls for the county to maintain an undesignated balance of 3% of combined General and Human Services Fund expenditures, notably a relatively narrow amount compared to other Aa-rated entities. Per the policy, the county can apply amounts in excess of the 3% toward the following years' budget.
Moody's notes that actual undesignated reserve levels historically ranged higher than the policy, though still comparatively lower than its Aaa-rated peers at the time; however, that rating was in part based on management's ability to tightly control the budget and achieve positive budget variances that mitigated the budgeted draws on reserves. Future credit reviews will focus on the county's ability to demonstrate improvements in budgetary control, including mid-year adjustments, as well as timely restoration of operating reserves.
Moody's expects the county's debt profile to remain manageable due to an existing moderate debt profile and support from non-debt service levy sources.
The county's overall debt burden of 2.7% is above the national median for counties, though the direct debt is average at 0.5% of full valuation.
Notably, about 27% of the county's post-sale debt is paid by the Airport Fund, thereby reducing the burden on the debt service levy. The county issues on an annual basis for capital projects. In the fall of 2010 management projects borrowing about $30 million for a county-wide upgrade of the emergency radio system.
Moody's has assigned a negative outlook to the county's long-term rating based on pressured financial operations that have resulted in extremely narrowed reserves.
Moody's believes that while the county has begun to take corrective actions, albeit delayed, lagging revenue collections are expected to continue to pressure the county's financial operations over for the near to medium term. Dane County depends on property tax and sales tax revenues for 70% its General Fund operations.
Collections from both of these revenue streams have been affected by weakening economic conditions which has resulted in a dramatic decline in the county's liquidity. Additionally, General Fund reserves constitute the county's total reserves for its two largest operating funds: the General Fund and the Human Services Fund.
At the close of fiscal 2008, undesignated General Fund reserves were $3.2 million, or only 0.9% of total operating fund revenues. Budgetary pressures are expected to continue as no near-term significant improvement is expected in either revenue stream, thereby limiting the county's ability to rebuild its financial reserves. While county is taking a more conservative approach toward its fiscal 2010 budget revenue collections, Moody's believes the county will continue to face a challenging environment for revenue collections over the next few years and that a lack of corresponding expenditure adjustments could place further downward pressure on the credit.
What would change the rating up (remove negative outlook):
-Increased collections of revenue streams within the county's control to provide adequate resources for the level of services currently being maintained.
-Demonstrated ability to maintain tight oversight of operating performance as compared to budget and to make timely mid-year adjustments as necessary.
-The restoration of General Fund reserves to a level sufficient to provide adequate cushion to offset unforeseen negative budget variances across the county's operating funds.
-A detailed muti-year recovery plan supported by the county's elected officials.
What would change the rating down:
-Inability to address near-term budgetary pressures, resulting in further deterioration of already narrow reserves.
-A delay in the current estimated recovery period.
-Inability to enact long-term budgetary changes to improve overall financial position and the ability to absorb future budgetary challenges.
-Continued stagnation of local economic trends with limited growth or continued decline in property and sales tax collections.
