Fitch Ratings has assigned an 'AA+' rating to Wilmington, NC's $24,905,000 limited obligation bonds (LOBs).

In addition, Fitch has affirmed the following ratings:

The city's Issuer Default Rating (IDR) at 'AAA';

Outstanding general obligation (GO) bonds at 'AAA';

Outstanding LOBs at 'AA+'.

The Rating Outlook is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Wilmington (NC) [General Government]

LT IDR

AAA

Affirmed

AAA

Wilmington (NC) /General Obligation - Unlimited Tax/1 LT

LT

AAA

Affirmed

AAA

Wilmington (NC) /Lease Obligations - Standard/1 LT

LT

AA+

Affirmed

AA+

Page

of 1

VIEW ADDITIONAL RATING DETAILS

The series 2023A LOBs are scheduled for a negotiated sale on or about April 26. The series 2023A LOB proceeds will be used pay the costs of street, sidewalk, parks and recreation improvements and the construction of a new fire station and sports complex.

SECURITY

The GO bonds are payable by the city's full faith, credit and unlimited taxing power.

The city's LOBs are payable from installment payments made by the city, equal to debt service, subject to annual appropriation. The bonds are also backed by a deed of trust on certain governmental facilities.

ANALYTICAL CONCLUSION

The 'AAA' IDR and GO rating reflects the city's continued robust financial profile, benefitting from significant revenue and expenditure flexibility, strong operating performance and high reserves. The city's long-term liability burden is low relative to personal income and is expected to remain so given its conservative debt management, affordable pension and other post-employment benefit liabilities.

The 'AA+' rating on the LOBs is one notch lower than the city's IDR and GO rating, reflecting the lesser long-term commitment to repayment, principally evidenced by the city's obligation to annually appropriate installment payments. Various governmental assets are subject to the LOB deed of trust and are subject to surrender by the city should it fail to make an installment payment.

Economic Resource Base

Wilmington is located in eastern North Carolina along the Cape Fear River, approximately 30 miles from the Atlantic Ocean. The city serves as the economic center for southeastern North Carolina and the county seat for New Hanover County and is home to the state's largest port. Business enterprises are diverse, while a large government and healthcare presence enhances economic stability. The 2021 Census population of 117,643 has increased approximately 10% from 2010, outpacing the rate of growth registered by the state and the nation during the same period.

KEY RATING DRIVERS

Revenue Framework: 'aaa'

Revenues are primarily derived from property tax revenues, for which the city retains considerable revenue raising ability with current tax rates well below the statutory limit. Fitch expects natural revenue growth absent policy action to outpace long-term expectations for national inflation supported by continued development, property appreciation and population gains.

Expenditure Framework: 'aa'

Expenditures are expected to increase marginally above revenue growth trends without policy changes due to increased services with an expanding population. Carrying costs are moderate with above average debt amortization, however the city's ability to control labor and benefits provides significant spending flexibility in the absence of collective bargaining.

Long-Term Liability Burden: 'aaa'

The city's long-term liability burden, composed of overall debt and net pension liabilities, is expected to remain moderately low relative to personal income, due to manageable debt issuance plans and continued economic growth. Pension liabilities are a modest component of the overall liability burden.

Operating Performance: 'aaa'

The city maintains very strong gap-closing capacity strengthened by its superior inherent budget flexibility, reflecting its high revenue raising authority and solid expenditure flexibility. Prudent budget management has contributed to the consistent maintenance of healthy reserve levels and positions the city to manage well throughout economic cycles.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Not applicable as the IDR is rated 'AAA'.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sustained increase in fixed-cost spending associated with debt service and employee retirement benefits to level that is notably greater than 20% of total governmental expenditures, contributing to a reduction in overall expenditure flexibility;

An increase in the long-term liability burden to a level sustained above 10% of personal income, due to a combination of additional debt issuance or changes in net pension liabilities, without a commensurate rise in personal income.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CURRENT DEVELOPMENTS

The city has consistently maintained a strong financial position. The city ended fiscal 2022 (June 30 year-end) with $53.1 million in unrestricted general fund reserves, equal to 53% of total spending. Fiscal 2022 results reflect a budgeted $8.0 million use of reserves to purchase a new administrative building. However, when including the restricted stabilization reserve of $18.9 million which is to primarily offset accounts receivables, Fitch estimates the total combined available general fund balance to be $71.9 million, or 52% of total spending.

Revenues (excluding transfers) outperformed the budget by $6.5 million in fiscal 2022 primarily due to increased ad valorem and sales tax revenues, and a $1.5 million in reimbursements from insurance and FEMA for Hurricane Florence (2018) and Hurricane Isaias (2020). General fund expenditures were $9.6 below the amended budget, due to continued impact of the pandemic which resulted in extended position vacancies and higher than expected turnover, and reduced discretionary spending.

The fiscal 2023 $130.4 million adopted general fund budget reflects a 5.5% decrease over the prior adopted budget and appropriates $11.1 million in reserves for one-time expenses and certain capital improvement projects. The general fund budget includes a 3.7% property tax rate increase to $0.3950, which includes $0.3237 dedicated to the General Fund and $0.0713 that is dedicated to the debt service fund, in accordance with the city's policy to fund multi-year capital projects utilizing a combination of 80% debt and 20% pay-as-you-go funding.

Based on year-to-date results, the city is projecting a $3 million increase to general fund balance at fiscal year-end 2023. General fund revenues are expected to be above the adopted budget, with sales tax revenues projected to exceed the budget by $5 million. General fund expenditures are also expected to be about $1 million above the budget, with vacancies and other operational savings.

CREDIT PROFILE

Economic Resource Base

Business enterprises in Wilmington are diverse, with a mix of high-tech manufacturing, telecommunications, transportation, film making/entertainment, higher education and tourism. City income levels trail the state and national average, while the poverty rate compare above the state and the nation.

Development projects have continued on a robust pace since the pandemic, with several development projects underway and planned, including redevelopment of the downtown riverfront area with mixed use projects, hotels, apartments, streets, sidewalks and park improvements. Continued infrastructure improvements and expansions at the Port of Wilmington and the Wilmington International Airport help to support additional port and airport activity.

Revenue Framework

The city benefits from a stable and diverse revenue stream, with property and sales tax revenues accounting for roughly 52% and 30% of fiscal 2022 general fund revenues, respectively. Sales tax revenues were not negatively affected by the coronavirus pandemic and related economic slow-down, benefitting from the November 2018 state legislation requiring the collection of sales taxes for online purchases and continued economic activity.

The city's adjusted general fund revenue growth modestly exceeded the national GDP for the 10-year period ending fiscal 2022, although Fitch considers this to be somewhat overstated due to the city's receipt of FEMA and insurance reimbursements in recent years related to Hurricane Florence and Hurricane Isaias recovery costs. Property and sales tax revenues have historically demonstrated good resilience, with stronger annual growth occurring in recent years.

The city's most recent property revaluation resulted in an estimated 40% increase in total assessed values for fiscal 2022 (revaluations occur every four years; prior revaluation occurred in 2018). Fitch believes the city's prospects for future revenue growth are solid, benefitting from population gains, development and property appreciation.

The city maintains ample capacity to raise revenues, with the fiscal 2023 tax rate of 39.50 cents per $100 assessed value well below the statutory cap of $1.50.

Expenditure Framework

The city provides a broad range of municipal services, including public safety, transportation, public improvements, culture and recreation. Public safety is the leading expenditure category, accounting for 49% of fiscal 2022 general fund expenditures.

Fitch expects the pace of spending will generally align with revenue growth, absent policy action, as increase in demand driven by the city's population gains should be met with similar tax base and revenue expansion.

Fitch views the city's expenditure flexibility to be solid. Carrying costs, composed of debt service, pension and OPEB contributions, were a moderately high 19% of fiscal 2022 governmental spending. Carrying costs are mostly composed of debt service, and Fitch expects them to remain generally stable given the city's capital funding strategy to dedicate a portion of its property tax rate to fund various capital projects, utilizing 80% of the dedicated tax rate to pay debt service and 20% for pay-go capital spending. Additional flexibility is derived from its independent legal control over workforce costs in the absence of collective bargaining.

Long-Term Liability Burden

Fitch estimates the city's long-term liability burden, composed largely of direct city debt and the overlapping debt obligations of New Hanover County, at 7% of personal income. The city's overall liability is expected to remain moderately low even with near-term debt planned, due to the city's above average principal amortization and expected growth in the resource base.

The majority of city employees participate in the statewide Local Government Employees Retirement System, a cost-sharing multiple employer plan with a ratio of assets to liabilities of 96%, or 90% using a Fitch adjusted 6% investment rate of return. Law enforcement officers receive additional pension benefits from a city administered single employer defined benefit plan. The combined ratio of pension assets to liabilities in fiscal 2022 was 89%, or 85% on a Fitch-adjusted basis; the combined net pension liability at year-end totaled $29 million, or $46 million on a Fitch-adjusted basis.

The city provides other post-employment benefits (OPEB) to employees hired before January 2011 and funds healthcare benefits to eligible retirees on a pay-go basis while maintaining $3.1 million from an irrevocable trust established in 2009. The current net OPEB liability approximates $39.0 million or roughly 1% of personal income in fiscal 2022.

Operating Performance

The city benefits from substantial gap-closing ability due to significant inherent budget flexibility and consistent maintenance of healthy level of reserves. The city has demonstrated solid management throughout economic cycles and Fitch believes the city would continue to budget conservatively and make the necessary expenditure reductions to maintain a satisfactory level of financial flexibility.

The city consistently demonstrates prudent financial management and conservative budgeting, positioning it to manage well throughout economic cycles. The city's general fund balance policy requires a minimum unassigned fund balance equal to 20%-25% of the current operating budget (revised from 15%-20% in fiscal 2018). Fitch anticipates reserve balances will remain healthy and that the city will take various budgetary actions to maintain compliance with its policy standard.

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

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Additional information is available on www.fitchratings.com

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