July 2 - Fitch Ratings assigns the following rating to King County, Washington’s new debt issuances: --$101.1 million unlimited tax general obligation (ULTGO) refunding bonds, series 2012, rated ‘AAA’; --$41.4 million limited tax general obligation (LTGO) refunding bonds, series 2012C, rated ‘AA+'. The ULTGO bonds are scheduled to price the week of July 16, 2012, via competitive sale, and the LTGOs are scheduled to be sold via negotiation in late July. Proceeds will be used to refund outstanding debt for interest savings. In addition, Fitch affirms the following ratings: --$170.7 million outstanding ULTGO bonds at ‘AAA’; and --$1.6 billion outstanding LTGO bonds at ‘AA+'. The Rating Outlook is Stable. SECURITY The LTGO and ULTGO bonds are general obligations of the county, secured by an irrevocable full faith, credit, and resources pledge to levy an ad valorem tax sufficient (together with all other legally available monies) to pay debt service. The ad valorem tax pledge securing the LTGO bonds is constrained by property tax levy growth of 1% per year, plus new construction. KEY RATING DRIVERS RESILIENT ECONOMY: Despite a history of economic cyclicality and current pressure on its property and employment markets, King County has a sound economic base due to its role as a regional economic center, above-average wealth indicators, and strong taxable assessed value (TAV) per capita. SOUND FUND BALANCES: General fund balances declined significantly during the recent economic downturn but recovered much of their lost ground by the end of 2011 and remain sound. STRONG MANAGEMENT: The county’s strong management is evidenced by its commitment to long-term planning, council-adopted financial management policies, and low debt burden. LIMITS ON REVENUE GROWTH: The county is property tax dependent in a state with restrictive property tax levy growth limits and recent significant TAV declines. STRUCTURAL IMBALANCE: The county will be challenged to maintain current fund balance levels in the face of increasing costs and ongoing constraints on revenue growth. Failure to resolve this structural imbalance could create downward pressure on the county’s current ratings. CREDIT PROFILE DIVERSE BASE; SOME RECOVERY EVIDENT King County benefits from a diverse economy and tax base that encompasses almost 29% of the state’s population. The county includes the Pacific Northwest’s largest city, Seattle, and serves as a regional economic center. Wealth and income levels are well above national averages, and TAV is high at $171,000 per capita. While King County performed better than many regions nationally in the recent downturn, its economy continues to face challenges. Job losses continued during much of 2011, although modest but steady employment gains in the past year offer encouragement that a recovery is taking hold. Stabilization in home values will likely take much longer as quarterly single-family home values show persistent declines compared to prior year figures. County management projects a fourth consecutive year of TAV declines in 2013, a revision from earlier projections of a return to growth. Fitch recognizes the conservative nature of such projections but also notes the substantial cumulative loss of 19.6% of value since 2009 under this scenario. PROGRESS IN ADDRESSING STRUCTURAL IMBALANCE King County’s general fund has fared somewhat better than these economic indicators might suggest, with total revenues increasing at an average annual rate of 1.4% between 2006 and 2010. Average annual expenditure growth over this same period of 2.5% has outpaced rising revenues and challenged the county’s ability to maintain existing service levels. The county has deftly responded to this challenge with a series of labor concessions, including a hiring freeze and reductions in cost-of-living adjustments, as well as a concerted effort to reduce costs by 3% per year on an ongoing basis through efficiency improvements. This strategy responds to legal limits on growth in property tax, the general fund’s largest source of revenue, and is intended to address the structural imbalance between overall revenue and expenditure growth. Fitch acknowledges the county’s foresight in addressing this imbalance, but believes it will be difficult to sustain 3% annual savings over the long term. PRESSURED BUT STILL HEALTHY RESERVES Absent improvements to the general fund’s structural imbalance, King County may face increased pressure on fund balances. Between 2006 and 2010 the county reduced its unreserved general fund balance from 20% ($119.5 million) of general fund spending to a still healthy 11% ($71.6 million). Unaudited results for 2011 show a strengthened reserve position for the county, with unrestricted fund balance (the sum of committed, assigned, and unassigned fund balance per GASB 54) at 20% of general fund spending due to conservative budgeting, a planned increase in reserves and fund consolidation. LOW DEBT; MANAGEABLE PENSIONS The county’s debt burden remains low with net direct and overlapping debt at 2% of TAV. Amortization is quicker than average with 59% of net direct debt, excluding bond anticipation notes, repaid in 10 years. Pension liabilities are manageable and reflect historical strong funding levels for most state-sponsored plans. In addition, the county will benefit from recent revisions to state pensions, which are expected to reduce future employer contributions. Other post-employment benefit liabilities are relatively minor as most retirees must pay for the cost of their participation in the county’s group insurance plan.