Sept 13 - Fitch Ratings affirms the following ratings for the city of Gastonia, North Carolina (the city): --$38.8 million general obligation (GO) bonds at 'AA'; --$15.3 million limited obligation bonds (LOBs) at 'AA-'. The Rating Outlook is Stable. SECURITY The GO bonds are secured by the city's pledge of its faith, credit, and taxing power. The LOBs are payable from payments to be made by the city, subject to appropriation, pursuant to a Master Trust Agreement. The LOBs are additionally secured by a Deed of Trust granting a lien on four fire stations. KEY RATING DRIVERS ECONOMIC BASE EXPANSION: The city continues to diversify its traditional manufacturing base into the international, technology, high end manufacturing, and trade sectors. The city benefits from its proximity to downtown Charlotte. BELOW AVERAGE SOCIO-ECONOMIC METRICS: The city underperforms in wealth and employment metrics. Growth in these metrics has lagged national trends. HEALTHY FINANCIAL PROFILE: Prudent financial management underscores ample reserve levels, sound liquidity, and overall notable financial flexibility. POSITIVE DEBT PROFILE: Debt levels are moderately low and long-term obligations do not pressure the credit. LOBS APPROPRATION RISK: The 'AA-' rating on the LOBs reflects the city's general creditworthiness, the inherent appropriation risk, and the essentiality of the assets under the lien. CREDIT PROFILE CONTINUED ECONOMIC BASE DIVERSIFICATION Gastonia is located near the South Carolina border and benefits from its proximity to downtown Charlotte (GO bonds rated 'AAA', Outlook Stable by Fitch). The city has widened its economic base from the textile industry to other sectors, such as high end technology. Gastonia Technology Park has become increasingly international with the addition of Lanxess AG and REPI S.P.A., which are two companies with European roots. The city is working in conjunction with Gaston County on the possible expansion of the current Gastonia Technology Park as well as the development of a second technology park. RELATIVELY WEAK SOCIO-ECONOMIC METRICS The city's unemployment has consistently trended above that of the region and nation. In July 2012, the city's unemployment rate was 10.3% while the national unemployment rate was 8.6%. Fitch recognizes that diversifying an economic base will often lead to a transition period of increased unemployment. The city's 2010 median household income was about 80% and 90% of the national and state medians, respectively. The city's individual poverty rate was about 50% above national norm. Growth in these socio-economic metrics has also lagged national trends despite parallel population growth. FINANCIAL FLEXIBILITY AND HEALTHY RESERVES The city has consistently maintained ample reserves and retained financial flexibility. Unrestricted fund balance has steadily exceeded the city's prudent policy of 12%-15% of expenditures. Liquidity levels are solid. The city concluded fiscal 2011 with a $1 million surplus in the general fund, which is equal to 1.8% of expenditures and transfers out. The unrestricted fund balance, which is the sum of committed, assigned, and unassigned balance per GASB54, equaled a solid 14.4%. Including reserves required by state statute, which are primarily to offset accounts receivable, the available balance has decreased in recent years but remains strong at 28.8% of spending. In 2012, the city budgeted for a fund balance appropriation of $1.2 million. However, the utilization of this appropriation will likely be unnecessary. The city expects to increase unrestricted fund balance to 18% at the end of year, primarily due to $2.1 million in American Recovery and Reinvestment Act (ARRA) receivables being converted to cash. The fiscal 2013 general fund budget does not incorporate a fund balance appropriation. The budget benefits slightly from a projected 3% growth in property taxes, arising from a slight uptick in assessed value (AV). The city expects to continue to reduce expenditures by increasing operational efficiency, and Fitch believes there is ample flexibility should additional expenditure reductions be required. The city projects the unrestricted fund balance to remain at 2012 levels. MODERATELY LOW DEBT BURDEN AND MINIMAL CAPITAL PROJECTS NEEDS Overall debt equals 2.7% of market value and $1,918 per capita, and amortization is above average at 59% of principal retired within ten years. The city has no plans to issue more tax supported debt in the near future. The fiscal 2013 - fiscal 2017 capital improvement plan (CIP) has $19.2 million of expenditures of which $11.2 million is attributable to self-supporting enterprise funds. The city has identified sufficient resources to fully cover all of its tax supported capital projects in the near future without having to issue debt. Fitch does not expect the city's capital projects to pressure the credit. MANAGEABLE POST-EMPLOYMENT LONG-TERM OBLIGATIONS The city contributes to the state-wide Local Governmental Employees' Retirement System (LGERS), a cost-sharing multiple-employer defined benefit pension plan. The city administers a small single-employer (SE) defined benefit pension plan that provides supplemental retirement benefits for law enforcement and fire fighters. Pension contributions do not pressure city finances. The city's fiscal 2011 annual required contribution (ARC) for its SE plan equals 1.4% of spending and for LGERS equals 4.2% of spending. The unfunded actuarial accrued liability is 0.2% of taxable market value for the SE plan. Although funding of the state's major pension system has declined, it remains nearly fully funded at 95.4% as of Dec. 31, 2010. The city's fiscal 2011 ARC for other post-employment benefit (OPEB) was $3.6 million, which equals 5.8% of spending. In 2011, the city contributed $1 million for OPEB. Fitch does not expect post-employment obligations to pressure the credit. LIMITED OBLIGATIONS BONDS Debt service payments for the LOBs are subject to annual appropriation. As security for the bonds, the city delivers a deed of trust granting a lien on four fire stations which have a combined insured value of $9.3 million. Fitch considers these facilities to be essential and thus believes the city has sufficient incentive to appropriate. The city may also partly or wholly substitute other properties as security, provided that the remaining fire stations or the substitute property are worth 50% or more of principal outstanding. The conference center, which the LOBs partially finance, is not pledged as collateral. The city projects that the full cost of debt service can be met by existing hotel occupancy tax and municipal service district tax revenues, but these revenues are not pledged to the LOBs. While Fitch does not give these bonds self-supporting credit, it does recognize that the fiscal 2012 hotel occupancy tax revenues and the municipal service district tax revenues cover 1.11x of the 2012 LOBs debt service. Fitch also recognizes that these revenues shift some of the debt burden to non-residents.