Jefferson County Credits Lifted to Investment Grade

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BRADENTON, Fla. – Just two years after exiting bankruptcy, Jefferson County, Ala., has won three investment grade ratings from Moody's Investors Service.

Moody's on Tuesday upgraded to Baa3 from Ba3 the county's issuer credit rating, the general obligation limited tax rating, and the limited obligation school warrant rating.

It affirmed its speculative-grade B1 ratings on the building authority's lease revenue warrants. The outlook is stable.

"The rating upgrade to Baa3 on the general obligation debt reflects the county's continued strengthening financial position through the trimming of its overall cost structure and restoration of general fund reserves, atop a broadly well-performing regionally significant economic base," said analyst Christopher Coviello.

The ratings also reflect a manageable general government debt burden, he added.

Moody's said the county sewer system is still highly leveraged, and its dependence upon annual rate increases to fund debt service payments remains a risk that could place additional financial stress on the county's revenue structure in the future. Moody's does not rate the sewer warrants.

Jefferson County filed for bankruptcy in November 2011 after failing to restructure $3.2 billion of sewer warrants and associated swaps. The county emerged Dec. 3, 2013 after issuing $1.8 billion in sewer refunding warrants to write down $1.4 billion in related sewer debt.

The bankruptcy plan is under appeal.

"Two years ago…the county exited, what was at the time of filing, the largest municipal bankruptcy in U.S. history," Jefferson County Commissioner David Carrington said in an email Dec. 3, recognizing the anniversary of the county's exit from reorganization. "Much has been accomplished in the last two years."

According to Moody's, the county's economy continues to improve with a number of hospital projects completed in recent years, along with various plant expansions, relocations, and new construction.

The residential housing market also has improved with average single family home prices rising approximately 15% from 2010 through 2014. The $45 billion tax base is anchored by Birmingham, the county seat and Alabama's most populous city with more than 210,000 residents. The county's population is more than 660,000.

The Jefferson County unemployment rate was 6.2% as of August, compared to 6.5% for the state.

"Since the county's exit from bankruptcy in December 2013, management has made great strides to improve the overall financial health of Jefferson County," Coviello said. "In addition to debt restructuring, operations were downsized substantially with a 46% reduction in full-time equivalent employees."

The general fund balance was 82% of revenues in fiscal 2014, and the county projects reserves will remain level at the end of fiscal 2015 although $37.9 million of reserves have been budgeted in fiscal 2016, according to Moody's.

"The county finished fiscal 2014 with an $8.5 million increase in reserves, bringing total general fund balance to $127.9 million or 82.3% of annual revenues, which is very substantial," Coviello said.

The fiscal 2015 general fund budget included $50.6 million in property tax revenues, $34.3 million in sales tax revenues, and $8.3 million in business license tax revenues.

The fiscal 2016 general fund budget includes $37.9 million in appropriated fund balance, $48.3 million in property tax revenues, $35 million in sales tax revenues, and $8.7 million in business license tax revenues. The appropriated fund balance will be used to finance land acquisition for an industrial park and road improvements.

Moody's said it would monitor the continued implementation of the approved sewer rate increases, and new sewer system capital and debt requirements that could place stress on overall finances.

"An adverse decision in the outstanding litigation regarding the bankruptcy court's legal ability to enforce the approved sewer rate increases will be an important rating consideration in the future and could place negative pressure on the rating," Coviello said.

Fitch Ratings affirmed its BBB rating on Jefferson County's implied unlimited GO warrants last month, and its BBB-minus rating on the GO limited tax warrants.

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