Fitch upgrades Jefferson County, Alabama’s 2017, 2018 warrants

Fitch Ratings said Thursday it upgraded Jefferson County, Alabama’s Series 2018A general obligation refunding warrants, Series 2017 limited obligation refunding warrants and long-term issuer default rating to AA from AA-minus. The rating outlook is stable.

Fitch said its upgrade of the county’s IDR and GOs “reflects the removal of the asymmetric additional risk relating to potential general fund exposure to the county’s enterprise sewer system,” which has a standalone credit profile [SCP] of bbb with a stable outlook.

Removal of “asymmetric additional risk relating to the county’s exposure to its enterprise sewer system reflects the system’s recent restructuring of its outstanding debt, which has stabilized future debt service requirements at more manageable levels, reducing the risk of future general fund support for the enterprise,” Fitch said.

“The upgrade also reflects Fitch’s expectations for continued solid revenue growth and maintenance of strong reserves, which support the county’s high financial resilience,” according to the rating agency.

“The AA ratings reflect solid expenditure flexibility and a low level of long-term liabilities compared to the resource base. The county’s independent revenue-raising ability is limited,” Fitch said.

Jefferson County filed for Chapter 9 bankruptcy in November 2011 after defaulting on $3.14 billion of sewer debt. The largely variable-rate and auction-rate sewer debt portfolio and related swaps had become entangled in the larger 2008 financial crisis.

The county emerged from bankruptcy in December 2013, after issuing the $1.8 billion in 40-year sewer refunding warrants to write down $1.4 billion in related sewer debt. In 2017, the county returned to the bond market, selling $339 million of refunding revenue warrants in a refunding backed by a 1% local sales tax. In 2018, the county again tapped the market, selling GO refunding warrants in a deal that saw more than $800 million in orders from investors.

The Series 2018A warrants are general obligations of the county, backed by its full faith and credit. The 2017 warrants are limited obligations of the county payable from a first lien on a one-cent county-wide sales and use tax.

The county sold $2.24 billion of Series 2024 refunding revenue warrants on Jan. 10 to fully retire the 2013 debt.

Jefferson County is the economic center of the state of Alabama and the Birmingham metropolitan region. It had a 2022 estimated population of 665,409, slightly higher than in 2010.

“The metro economy has diversified over the past several decades from a focus on steel production to one based on a combination of health care, banking and professional services, retail trade and automotive industries,” Fitch said. “The University of Alabama at Birmingham (UAB) is the largest employer with over 23,000 employees and UAB’s medical school and hospital are a primary driver of the county’s growing health care sector.”

As of the end of fiscal 2022, the county had a $50.1 million general fund surplus that increased its available fund balance to $295.7 million. A primary driver of performance was county sales tax collections, which came in $9.4 million above budget, according to Fitch.

For fiscal 2023, the county estimates unaudited general fund revenues will be $25.1 million above budget, resulting in an expected $56 million increase to the fund balance. The county reports growth in ad valorem tax revenues, general sales tax collections, and simplified seller tax collections contributed to positive results, Fitch said.

The county’s fiscal 2024 operating budget totals roughly $1 billion, with the general fund budget totaling $250 million, up 8% from the fiscal 2023 budget.

On the revenue side the budget estimates a slight rise in property tax revenues due to tax base growth and increased sales tax collections. On the expense side, the budget expects inflationary spending pressures and employee raises.