Fitch Ratings assigns an 'AA+' rating to the following general
obligation (GO) bonds to be issued by the County of Mercer, NJ (the
county):
--$39,000,000 GO bonds, series 2015.
The bonds will sell via competitive sale on Feb. 4, 2015.
Proceeds will be used to extinguish bond anticipation notes
previously issued to finance capital improvements and equipment
purchases.
The Rating Outlook is Stable.
SECURITY
The bonds are backed by the county's full faith and credit and
unlimited taxing authority.
KEY RATING DRIVERS
HEALTHY FINANCIAL PROFILE: Management's conservative budgeting
practices, recurring revenue increases and expenditure controls
support Mercer's recent growth in reserves to levels considered
adequate by Fitch.
BROAD AND DIVERSE ECONOMY: The county's diverse economy benefits
from the presence of major higher education and healthcare
institutions, as well as large pharmaceutical and financial
services companies. Princeton University, along with Rider and The
College of New Jersey, contribute to a well-educated work force and
provide for research facilities and expertise for area
businesses.
ABOVE-AVERAGE ECONOMIC INDICATORS: Income and employment metrics
are strong evidenced by high wealth indicators and unemployment
rates below state and national averages. Job growth has been
exceptionally strong recently compared to other New Jersey
counties.
MANAGEABLE DEBT AND CAPITAL NEEDS: Overall debt levels are
moderate and should remain so based on future borrowing and capital
needs and the rapid retirement of outstanding debt. Rising costs
associated with pension and healthcare are the drivers of spending
growth; however, the cost of servicing these long-term liabilities
in addition to debt is still considered moderate.
RATING SENSITIVITIES
STABLE FINANCIAL PERFORMANCE: The 'AA+' rating reflects Fitch's
expectation that economic and debt fundamentals will remain largely
stable and that the county will continue to manage its finances to
maintain structural balance and an adequate reserve cushion. The
rating is sensitive to performance outside of Fitch's stated
expectations.
CREDIT PROFILE
Mercer County is situated in the center of the state equidistant
between New York City and Philadelphia. The county has an estimated
2014 population of 370,414 which has grown 5.6% since 2000. The
capital city of Trenton and Hamilton Township account for just
under half of the county's population. The county's above-average
wealth levels reflect in part the several wealthy suburban
communities located within the county, including Princeton, West
Windsor, Hopewell and Pennington. Median household income registers
103% of the state and 139% of the national levels. Such levels are
skewed downward in part due to Trenton's below average wealth
levels (roughly 50% of state levels) and high poverty rate (26.5%
for 2013).
Unemployment as of November 2014 was 4.6% in the county down
notably from a high of 7.9% in 2010 and remains below state (5.6%)
and national (5.9%) levels. County employment growth recovered in
2012 rising 0.9%, and again in 2013 by 1.2% and 1.5% in 2014,
reflective of strong hiring in professional/business services and a
recovering real estate market. Additionally, the opening by Amazon
of a new warehouse in Robbinsville last year contributed to 1,400
new jobs. Overall employment growth in the Trenton-Ewing NJ
metropolitan statistical area (MSA) had the highest percentage
change year-over-year through November 2014 out of all MSAs in the
state according to IHS, Inc.
The county features a broad and diverse economic base with
representation from the higher education, health care,
pharmaceuticals, telecommunication and financial services sectors.
State government dominates Trenton's economy with the state
employing 22,500 employees or just over 10% of total 2014 county
employment. Other substantial employers include Princeton
University (6,011 employees), Bristol Myers Squibb (6,000), Capital
Health Systems (3200), and NJ Manufacturing Insurance Co.
(2,478).
The county has a large tax base of $42 billion on an equalized
basis in 2014 and equals a solid $114,000 per capita. The tax base
experienced moderate declines due to the housing downturn but is
projected to increase modestly in 2015 due to a rebound in housing
prices and some commercial development. Home prices throughout the
county are showing growth of 4.4% on a year-over-year basis through
December 2014 according to Zillow. The county's tax base is diverse
with the 10 largest taxpayers representing only 5% of 2013 taxable
value.
CONSERVATIVE FISCAL MANAGEMENT LEADS TO SOUND FINANCIAL
PERFORMANCE
The county has a history of generally stable operating results
supported by careful expenditure management and consistent moderate
tax rate increases. The implementation of the state's new 2% tax
levy cap in fiscal 2011 created some budgeting challenges but
management has made adjustments to maintain service levels and
restore reserves to adequate levels. The 2% tax levy cap excludes
payments for debt service, capital improvements, healthcare cost
increases in excess of 2% from the prior year and pension costs.
Additionally, any new growth in the tax base is excluded from the
calculation and any unused portion of the levy can be carried
forward for three years. The state also passed a law in 2011 that
limits overall annual employee contract increases to 2% per year
which has helped the county control labor costs.
Fiscal 2013 results showed a $3.8 million (1.2% of spending)
operating surplus increasing fund balance to $20.1 million or 6.5%
of current fund spending. The positive results reflected in part
positive overall revenue variances and medical costs savings. The
county uses a cash/modified accrual basis of accounting in
accordance with state requirements as opposed to GAAP accounting.
The comparison of fund balance levels to those issuers who use GAAP
accounting is usually lower due to the typically larger current
fund expenditure base and the requirement to carryover unexpended
appropriation reserves for an additional year. Fund balance levels
have fluctuated from a high of 9% in 2008 to as low as 4.3% in 2008
when the recession occurred. Management has indicated its goal is
to maintain reserves at close to the 7% level to maintain
flexibility. The county maintains other reserve balances, although
with restricted purposes, including open space tax funds ($25
million at fiscal end 2014), as well as insurance ($3 million) and
capital reserves.
The original 2014 budget totaled $300 million and included a
2.9% tax levy increase. The tax levy generates approximately 85% of
current fund budgeted operating revenue. The high percentage of tax
revenues provide for better predictability and stability of
revenues each year. Property tax revenues are insulated from
declines in tax base valuation since the state's tax cap laws are
based on the prior year's levies allowing for tax rate adjustments
to remain revenue neutral. Tax collections for the county are
guaranteed as taxes are collected at the local levy and remitted in
full to the county on a quarterly basis. The budget appropriates
$12 million of fund balance, up from $10.6 million the prior year.
The county has a historical practice of using close to 50% of fund
balance to balance its budget but tends to not have to use it due
to conservative budget practices. Major expenditures include
employee salary, healthcare and pension costs. Management is
projecting a $1.5 million operating surplus which would increase
fund balance to $21.6 million or approximately 7% of spending.
MODERATE LONG-TERM LIABILITIES; RAPID DEBT AMORTIZATION
Overall debt metrics are moderate at 3.3% of market value and
$3,795 per capita. These ratios include county-guaranteed debt
issued by the Mercer County Improvement Authority. Debt
amortization is fast at approximately 72% over 10 years. Management
has indicated its expectation for additional debt is approximately
$20 million-$30 million per year for capital and maintenance costs
which is consistent with its history of past borrowings. Despite
the rapid payout of debt the county's carrying charges inclusive of
pension and other post-employment benefits (OPEB) remains
manageable accounting for an estimated 19% of spending.
All employees and retirees participate in the state administered
Police and Firemen's Retirement System (PFRS) or the Public
Employee's Retirement System (PERS). The funded status of the PFRS
and PERS was 74% and 77% respectively, as of June 30, 2013. Using
Fitch's conservative 7% investment rate of return, the funded
levels decline to an estimated 67% and 70%, respectively. The
county fully funds its pension contribution as required by the
state plans and paid a combined $14.4 million to the plans in 2013.
OPEB is offered through the state's plan and the county makes
pay-as-you-go payments as required by the state. The county paid
$7.8 million in 2013.
Additional information is available at
'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally
informed by information from Creditscope, University Financial
Associates, S&P/Case-Shiller Home Price Index, IHS Global
Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug.
2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978834
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Fitch RatingsPrimary AnalystKevin
DolanDirector+1-212-908-0538Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystBrendan
ScherAnalyst+1-212-908-0686orCommittee ChairpersonMichael
RinaldiSenior Director+1-212-908-0833orMedia Relations:Elizabeth
Fogerty, +1-212-908-0526 (New
York)elizabeth.fogerty@fitchratings.com