OREANDA-NEWS. Fitch Ratings has affirmed the following Winston-Salem, NC (the city) ratings:

--$126.2 million general obligation (GOs) bonds at 'AAA';

--$15.2 million limited obligation bonds (LOBs), series 2012A at 'AAA';

--$102.2 million LOBs, series 2010A, 2013A&B and 2014 B&C at 'AA+';

--$15.9 million certificates of participation (COPs), series 2006 A&B at 'AA+';

--$11 million special obligation bonds, series 2013 at 'AAA';

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

The Rating Outlook is Stable.

SECURITY

The GOs are supported by the city's full faith and credit and unlimited taxing power.

The LOBs series 2012A represent an absolute and unconditional contractual obligation of the city, not subject to annual appropriation.

The special obligation bonds are payable from a portion of the city's sales and use taxes.

The remaining LOBs and COPs are payable from lease payments, subject to annual appropriation, and a deed of trust against certain governmental assets of the city.

KEY RATING DRIVERS

The 'AAA' IDR reflects the city's low liability burden and manageable fixed carrying costs for debt service and retiree benefits, and Fitch's expectation that the city will maintain healthy financial flexibility throughout the economic cycle based on its strong revenue performance and control of operations, adequate ability to cut spending as needed, and ample reserve position.

The COP and LOB ratings are one notch lower than the IDR at 'AA+', reflecting the requirement for annual appropriations in support of lease payments.

Economic Resource Base

Winston-Salem is the seat of Forsyth County in northwestern North Carolina. A major economic and commercial center in the state and part of the growing 12-county Piedmont Triad region, the city has a 2015 population of 241,218 which is a 5% increase since 2010.

Revenue Framework: 'aaa' factor assessment

Revenue growth prospects are positive based on ongoing economic expansion. The city's diverse revenue base is led by property taxes, and tax rates are regionally competitive and well within the statutory cap, providing it with significant revenue-raising capacity.

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 long-term liability burden is moderate as a percentage of personal income. The city prudently manages its long-term liability burden through adherence to debt policies that ensure that debt remains affordable.

Operating Performance: 'aaa' factor assessment

The city's historical operating performance highlights its financial resilient. Reserves remained ample both during and after the most recent recession. Given the city's revenue and expenditure flexibility and strong reserves, the city is poised to maintain its financial strength in an economic downturn.

RATING SENSITIVITIES

REDUCTION OF FINANCIAL FLEXIBILITY: The IDR is sensitive to material change in the city's strong revenue-raising and expenditure flexibility and solid financial position, which Fitch expects the city to maintain throughout economic cycles.

DEDICATED TAX BOND DETERIORATION: Sharp and sustained declines in pledged revenues or leveraging of revenue streams beyond Fitch's expectations could lead to negative action on the dedicated tax bonds.

CREDIT PROFILE

Healthcare services, biotechnology, and higher education drive the local economy. Wake Forest Baptist Health (WFBH) and Novant hospitals are the second - and fourth-largest hospitals in the state, respectively, and are the city's top employers, with over 20,000 employees in aggregate. The Wake Forest Innovation Quarter (WFIQ), located in downtown Winston-Salem on 200 acres, is a mixed-use center and hub for innovation in biomedical and material sciences and information technology. WFIQ is home to more than 50 companies, four leading institutions (including Wake Forest University departments), almost 3,000 workers and 2,000 students. Wake Forest, Winston-Salem State University, NC School of Arts, and Forsyth Technical Community College are all located within city limits and have a combined total enrollment exceeding 20,000 students.

In addition, manufacturing continues to play a significant role in the economy (11% of employment) although it is no longer the city's primary source of jobs. Reynolds American, Inc. has a long history of operations in the city and is currently the largest manufacturer, employing around 3,000 workers.

Economic indicators for the city are mixed. Total employment has continued to increase but the annual percentage growth year-over year has declined over the past several years. Per capita income is approximately 19% below the U. S. average, but this figure may be somewhat impacted by the student population (approximately 8% of the city's population).

Assessed values (AVs) have seen some fluctuation in recent years. Following a revaluation in 2013 and state exclusion of proprietary software from the tax base, the AV declined by 8.8% in 2014. Values increased by less than 1% in 2015 and preliminary 2016 figures show a 2% increase to $20.36 billion. According to Zillow, homes values have increased over the past year although they remain about 93% of 2007/2008 values.

Revenue Framework

The revenue base is dominated by property and sales taxes at about 53% and 17%, respectively, of fiscal 2015 general fund revenues. Revenue performance is generally stable, with total revenues recording moderate declines in just two years of the recession due to weak sales and property tax revenue performance. Revenues have recovered solidly since the recession.

The city's general fund revenue growth has trended slightly above inflation and modestly below U. S. GDP growth.

The city maintains ample capacity under the statutory cap of $1.50 per $100 of AV given the fiscal 2017 tax rate of $.585. The city has increased the real property tax rate in four of the past five fiscal years to fund capital projects, to offset state tax legislative changes and to fund increased debt service costs.

Expenditure Framework

The city maintains sufficient expenditure flexibility while spending associated with fixed carrying costs remains affordable.

Given tight control over general fund spending, Fitch expects the natural pace of spending growth to be in line with expected revenue growth.

The city's expenditure flexibility is aided by the favorable workforce environment that prohibits labor contracts and gives management independent control of compensation and work rules. Carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefit (OPEB) actual contributions total a significant 21% of governmental spending, of which debt service accounts for 14%, but the city is expected to continue to amply manage these requirements. The city has continued to diligently fund the OPEB ARC with overfunding in most years contributing to the elevated carrying costs.

Long-Term Liability Burden

Debt levels are low with overall debt totaling 7.7% of personal income, including the sizable overlapping debt of Forsyth County (more than half of the total burden). Given the county's average amortization rate of 61% in 10 years and minimal future tax-supported debt issuance plans, debt ratios are currently expected to decline. The city does have a modest amount of variable rate debt outstanding ($14.3 million of about 4% of outstanding tax-supported debt) which is private placed with no put option, thus eliminating the need for liquidity support.

General employees are members of the North Carolina Local Government Employees' Retirement System (NCLGERS), and police officers are members of the city's Winston-Salem Police Officers' Retirement Fund (WSPORF). The state plan is fully funded and in 2013 the city issued $30.2 million in debt to stabilize its local WSPORF plan. According to fiscal 2015 actuarial results, the plan is 82% funded after Fitch's adjustment of the rate of return to 7% from 7.25%. The WSPORF plan was closed to police officers hired after Dec. 31, 2013. The city's officers' separation allowance plan is funded on an actuarial basis. The adjusted net pension liability is modest at $8.7 million and the total aggregate unfunded pension liability represents just 0.4% of personal income.

OPEB liabilities do not represent a significant cost pressure. At the close of fiscal 2015 the UAAL was reported at $49.6 million and the funded ratio was 49%.

Operating Performance

The city has historically maintained ample reserve levels and continued to do so during the last recession. The unrestricted general fund balance of $32 million was a healthy 18% of spending at year-end 2015. The city's reserve that is required by state statute, primarily to offset accounts receivable, is an additional source of financial flexibility and totaled $17 million in fiscal 2015. Additionally, the city maintains accessible reserves in the debt service fund that totals $13.8 million. In sum, available reserves totaled $66.6 million or 34% of spending for fiscal 2015.

An unaddressed moderate economic decline scenario shows an operating reserve cushion that Fitch judges to be well above the level needed for an 'aaa' financial resilience assessment given the city's superior revenue and spending control. The city demonstrated its financial resilience and strong budget management through the most recent recession by delaying capital and discretionary operational spending as well as reducing merit increases.

The city is projecting to close fiscal 2016 with better than budgeted operations. Estimated general fund operating results show essentially breakeven results with positive variances in fuel costs, utilities franchise sales tax, sales tax, and growth in residential housing which has increased permit and license revenues. The city does not expect to utilize the $2 million fund balance appropriation.

The fiscal 2017 $196.9 million adopted budget includes a two cent tax rate increase to address employee compensation, equipment replacement and facility maintenance. The budget increases the fund balance appropriation in the general fund from $2.9 million to $4.4 million, mainly to address a number of major maintenance needs and other one-time expenditures. Based on past operating performance, Fitch expects operations to be positive relative to budget.

Sales Tax Revenue Stream Details

Sales tax revenues accounts for approximately 85% of total revenues available to bondholders. Revenues have increased by an average annual rate of 3% from fiscal 2004-2015. Revenues have recovered strongly from recession-period declines and growth prospects are solid reflecting expectations for continued growth in the general economy. Year-date sales tax receipts for fiscal 2016 are 3%-4% above fiscal 2015.

Revenue Stream Sensitivity

Fiscal 2015 revenues available for bondholder repayment exceed $35 million or 9x maximum annual debt service (MADS). To evaluate the sensitivity of the dedicated revenue streams to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.

The pledged revenues are sensitive to local economic trends. Based upon revenue history back to fiscal 2004, Fitch's Analytical Sensitivity Tool (FAST) generates a low 3% decline in pledged revenues in a 1% GDP decline scenario. Pledged revenues could withstand 29.6x this decline and still cover MADS. The largest cumulative year decline was 14% from fiscal 2008 through 2011. The decline could recur 6.1x before revenues become insufficient to cover MADS.

Assuming issuance up to the 2x additional bonds test (ABT) the structure could tolerate a 55% decline in revenues before coverage would fall below 1.0x -- or a decline equal to 3.6x the largest actual decline in the review period or 16.7x the revenue sensitivity results. The city does not anticipate issuing additional parity indebtedness.

Revenue Stream Analytical Conclusion

The sales taxes are subject to amendment or repeal by the state or by county voters. Fitch believes this risk is remote given that the state recognizes that local governments rely on this source and the practical difficulties of effecting the required special election. In fiscal 2009, the state began the repeal of article 44 sales tax from counties in exchange for assuming the non-federal costs of Medicaid. In exchange the state makes an annual hold harmless payment to the municipalities within the county to offset the loss of the sales tax. The state is required to make this payment but the indenture was not revised to include the revenues as a pledged revenue source.

Further mitigating the risk is the city's covenant under the indenture to amend the definition of pledged funds to include a source of revenue other than ad valorem taxes sufficient to cover MADS at least 2.0x if existing pledged funds do not reach this level. During fiscal 2015, the city had approximately $51 million in available revenues or 13x MADs from revenues other than ad valorem taxes in the general fund.

Issuing Entity Exposure

Fitch's rating assumes additional leverage will be limited as the city relies on sales tax revenues in excess of debt service for general government operations and no stated additional leveraging plans. The rating is capped at the city's IDR.