Fitch Affirms Jacksonville, NC's LOBs at 'A+'; Outlook Stable

Fitch Ratings has affirmed the following city of Jacksonville, North Carolina rating:

--Issuer Default Rating (IDR) at 'AA-'.

In addition, Fitch affirms the following rating:

--$23.1 million Jacksonville Public Facilities Corporation limited obligation bonds (LOBs), series 2012 at 'A+'.

The Rating Outlook is Stable

SECURITY

The LOBs are payable from installment payments to be made by the city, subject to annual appropriation, to the corporation in an amount equal to debt service. As additional security for the LOBs, the city has executed and delivered a deed of trust granting a lien on certain public safety facilities.

KEY RATING DRIVERS

The 'AA-' IDR reflects the city's economic concentration.

Economic Resource Base

The city of Jacksonville is located in Onslow County, along the New River just miles off of the Atlantic Coast. The city is home to Marine Corps Base Camp Lejeune and Marine Corps Air Station New River. The city's population, at 69,047 in 2014, fluctuates with deployment of resident military personnel and the U.S. census estimates the population is down 1.6% since 2010. The military remains the most significant employment sector at over 14% of the city's employment base and a major source of economic activity.

Revenue Framework: 'aa' factor assessment

The city's independent legal ability to raise property taxes is substantial and has contributed to revenue growth which has tracked just below national GDP growth. The city's organic revenue growth prospects are more limited.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to be roughly in line with revenue growth and the city retains solid ability to cut spending through economic cycles as they have done in the past.

Long-Term Liability Burden: 'aaa' factor assessment

The city's burden is low due to the very small pension liability and manageable debt levels.

Operating Performance: 'aaa' factor assessment

Financial reserves are very healthy and benefit from the city's exceptional gap closing ability.

RATING SENSITIVITIES

High Economic Concentration: The rating is sensitive to fundamental changes in activity at Marine Corps Base Camp Lejeune and New River Air Station, which anchor the city economy. A non-cyclical decline in activity at these facilities could have significant negative impacts on city finances and lead to downward rating action.

CREDIT PROFILE

Military Presence Dominates Local Economy

The city exhibits below-average wealth indicators at the per capita and household levels, and unemployment remains above state and national averages. According to the U.S. census estimates through 2014, city personal income has decreased four out of the last five years, opposite the trends at the state and national level which show increases each year.

The economic base is heavily concentrated in the military. Camp Lejeune, located in Jacksonville and the largest employer in the city, is the largest Marine Corps installation on the east coast. It was established in 1942 as the primary training facility for the Marine Corps. Current base duty assignment is estimated at 36,000 for Camp Lejeune and 7,200 for New River Air Station. Combined this is down 7,500 (nearly 20%) since 2007 at the height of active duty soldiers at the bases during the Iraq war. Fitch expects the current discussion of potential base realignment and closure (BRAC) will not threaten Camp Lejeune, which has benefitted from previous BRAC consolidations.

Revenue Framework

Property and sales tax revenues comprise 50% and 25% of general fund revenues, respectively. The city maintains healthy capacity with a tax rate of $0.642 under North Carolina's statutory cap of $1.50 per $100 assessed value (AV).

The city's historical revenue growth has been ahead of inflation and nearly at the rate of national GDP, partially due to policy action by the city to raise tax rates. The city's organic general fund revenue growth appears slower based on the underlying growth of the economy which relies heavily on Camp Lejeune operations.

The city's tax base increased throughout the recession due to new construction and the city's lagging five year revaluation cycle until the 7% decline hit the tax base in the fiscal 2015 reassessment. The city increased the property tax rate by 20% for fiscal 2015, an amount that more than offset the decline in assessed value from the revaluation. The rate increase also offsets the $2 million annual decline in sales tax revenues stemming from the county's adjustment of the sales tax distribution formula in 2014. Sales tax revenues peaked in 2012 at 30% of general fund revenues and are now just under 25%, though taxable sales in the county are growing and year-to-date results are coming in ahead of budget in fiscal 2016.

Expenditure Framework

Public safety is the largest spending category in the city with nearly 50% of spending, followed by debt service at 13%.

Spending has grown at roughly the same pace as revenues in the past, and Fitch expects it to do so going forward.

Fixed carrying costs including actuarially required pension, debt and OPEB actual costs are manageable at 14.7% of governmental spending. The city maintains a favorable workforce environment including the ability to control expenditures through downsizing, hiring freezes and postponement of capital spending, among other measures.

Long-Term Liability Burden

The city's long-term liability burden is primarily debt driven and is very low at 2.7% of personal income, and are expected to remain so given the city's modest debt plans and above average amortization (65% of principal retired in 10 years). The city's defined benefit pension liabilities are very limited. Most of the city's employees participate in the Local Governmental Employees' Retirement System (LGERS), a cost-sharing multi-employer plan administered by the state that reported as over 100% funded as of the last valuation for fiscal 2015 at a 7.25% investment return assumption. The city also participates in a much smaller single-employer pension plan for law enforcement officers which reported an unfunded liability that totaled less than 0.1% of market value.

The city's resource base, as measured by total personal income, is shrinking from both declining income metrics and population contraction and is highly susceptible to the military economic concentration; nevertheless, the liability burden is very low for this rating category.

Operating Performance

The city's strong financial resilience stems from significant flexibility in aspects of both the revenue and expenditure framework. The city maintains a contingency plan for downsizing during a downturn that Fitch expects would be implemented in order to maintain satisfactory reserves during fiscal stress. The city has shown the willingness to increase property taxes as needed in the past.

The city budgets conservatively, does not defer pension or OPEB spending, and performed well through the last recession by matching recurring expenditures with recurring revenues to produce operating surpluses.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

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