NEW YORK--()--Fitch Ratings has affirmed an 'AA+' rating to the following general obligation (GO) bonds of the City of Hampton, Virginia's (the city):
--$279.4 million GO bonds.
The Rating Outlook is Stable.
The bonds are general obligations of the city for the payment of which the city's full faith and credit and unlimited taxing power are irrevocably pledged.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Financial management is sound, budgeting practices are conservative, and reserve levels are robust. The city has consistently maintained positive operating margins and achieved net surpluses in a challenging economic environment.
DIVERSIFICATION OF LOCAL ECONOMY: Healthcare, high-tech manufacturing, and retail have grown increasingly in the recent past and have helped to diversify the local economy away from its historical concentration in military.
AVERAGE ECONOMIC INDICATORS: The city's unemployment rate is on par with that of the nation. Wealth indicators are 10% below national averages.
MODERATE DEBT: Overall debt levels are moderate, and Fitch expects them to remain so given the city's affordable future debt plans and rapid amortization of outstanding principal. Pension and OPEB liabilities do not represent large cost pressures.
ROBUST RESERVE LEVELS
Hampton's fund balance levels remain very high with unrestricted fund balance (the sum of assigned, unassigned and committed fund balances under GASB 54) for fiscal 2011 of $98.1 million (33% of spending). Conservative budgeting practices coupled with expenditure controls have allowed the city to outperform its budget and in so doing positively augment fund balance levels. Robust reserves are supported by a highly liquid balance sheet. Cash and investments of $103.3 million cover liabilities 3.6 times (x) and operational expenses for approximately six months.
Net surpluses have been realized for at least the past eight fiscal years, during which period unreserved fund balance increased from $28.5 million (19.4% of spending) in fiscal 2004 to $56.6 million (19.6% of spending) in fiscal 2010. Reserve levels exceed the city's conservative unassigned fund balance policy of 10% of total general fund and school operating fund revenues.
The general fund budget, which remains structurally balanced, is not without certain operating pressures. Property taxes (approximately 50% of revenues) have experienced negative growth due to tax base declines. Fiscal 2012 assessed value (AV) of $11.1 billion is down 4.7% from a peak of $11.7 billion in fiscal 2010 and 2.9% year-over-year. The city cut the tax rate by $0.16 per $100 AV since fiscal 2007. Based on current values, this reduction in the millage rate equates to a loss of $16.9 million in recurring revenues, assuming a 95% collection rate. The current millage rate of $1.04 remains competitive for the region. Fitch notes that there is not a limit on millage rate increases in the state of Virginia.
To preserve its financial profile the city has instituted recurring spending cuts over the past several years. Expenditure reductions to date have been comprehensive, including a reduction in workforce, deferral of capital projects, merger of key departments, and privatization of public works services. Any further cost cutting measures would most likely lower service levels. The city's very large unrestricted fund balance levels serve to temper this inflexibility as they provide considerable financial flexibility. In addition, the city funds an increasingly large portion of pay-go capital, $14.9 million (5.1% of spending) in fiscal 2011, and Fitch considers this commitment another area of financial flexibility.
FISCAL 2012 BUDGET
The fiscal 2012 budget represents an approximate 7% increase over that of fiscal 2011. The millage rate will be held constant, and the only tax rate increase will be for cigarette taxes: a 15% increase to provide $0.3 million in funds for partial funding of staffing for a new fire station. Thus far in fiscal 2012, revenues and expenditures are performing to budget according to city management.
The budget includes $8.6 million (2.8% of budgeted spending) in appropriations of fund balance for capital and other one-time non-recurring expenses. Fitch believes reserves will remain more than adequate for the current rating category given the city's strong reserves and the structurally balanced nature of the general fund budget.
CONTINUED DIVERSIFICATION OF LOCAL ECONOMY
Hampton is located in the Hampton Roads region of southern Virginia. Government, specifically military, is a significant economic driver and employed approximately one-third of city residents in calendar year 2010, according to data collected by the Virginia Employment Commission. One of the area's military bases, Fort Monroe, closed this calendar year due to the base realignment and closure commission (BRAC) process. The base was subsequently declared a National Monument, which has the potential for tourism generation, in November 2011.
Fitch does not anticipate that the fort's closure will significantly diminish the military's economic role given the sector's large presence in the city and region. Growth of nearby Fort Eustis has helped mitigate job losses from Fort Monroe's closure. The city is also home to Langley Air Force Base, which serves as the Air Force's air combat command center.
The local economy continues to diversify with growth in high-tech manufacturing, healthcare, and education, however military presence continues to anchor the city's economy. The NASA Langley Research Center, located in Hampton, employs 1,900 civil servants and approximately 1,800 private contractors. NASA has recently embarked on a 15-year facility modernization program at its Langley Research Center for a total construction cost of approximately $250 million. One of the city's leading healthcare companies, Hampton University's Proton Therapy Institute (HUPTI), begun in 2005, is a $225 million research and treatment center that is the nation's eighth proton therapy facility and the only such facility in the state of Virginia.
The presence of the retail industry has similarly grown. Peninsula Town Center (PTC), a mixed-use retail and residential development, is the largest redevelopment project in the city's history with a total investment of $276 million. This project opened in March 2010 and has already made a positive impact on city finances. Hampton's sales, meals and lodging tax revenues have also increased due to activity at the Power Plant at Hampton Roads and the Hampton Roads Convention Center.
Economic indicators for the city are mixed. The city's unemployment rate has historically trended below that of the nation. For fiscal 2011, the city's unemployment rate increased year-over-year due to an increase in the city's labor force relative to its employment base. As of December 2011, the city's unemployment rate was 8.2% on par with the nation's 8.3% rate. Wealth indicators for the city are on average 10% below those of the nation and over 20% below those of the state.
MANAGEABLE DEBT BURDEN
Total debt includes moral obligation bonds of entities to which the city lends some support and equals a moderate $3,841 per capita and 4.6% of market value as of fiscal 2011. Fitch includes in these metrics a planned April 2012 GO issuance, as well as debt of redevelopment agencies. Fiscal 2011 debt service totaled a moderate 9.4% of general and debt service funds spending. Fiscal 2012, debt service expenditures are projected to modestly increase over the fiscal 2011 budget and to consume 9.5% spending. Debt backed by the city's moral obligation is largely self-supporting; however, the city would face significant financial pressures should its proportionate share of these debt obligations increase. The city does not have exposure to variable rate debt, derivative products, or short-term notes.
The 2011 - 2015 capital improvement plan (CIP) includes $160 million in general government and school projects. Over one-half of the CIP ($88 million equal to approximately one-fifth of total direct debt) is expected to be debt financed with the majority of bonds issued in the next two fiscal years. Fitch does not believe that the city's additional issuance plans will materially impact credit quality.
LOW OTHER LONG-TERM LIABILITIES
Pension costs are currently low as a percentage of spending. The city
belongs to two defined-benefit pension plans, Virginia Retirement System
(VRS) and the Hampton Employees' Retirement System (HERS). Employees
hired before fiscal 1985 are members of HERS; all those hired after
fiscal 1985 are members of VRS. The city has contributed 100% of the ARC
to both plans for at least the past three fiscal years. In fiscal 2011,
the city contributed $2.3 million (0.8% of spending) to HERS and $16.4
million (5.6% spending) to VRS. The city's HERS plan is funded at an
adequate 69.3%, as is the city's portion of the VRS at 73.2% (both are
calculated using an adjusted 7% return rate). Fitch notes that poor
funding may pressure future contributions.
OPEB benefits do not limit financial flexibility. The city funds its OPEB liability on a pay-as-you-go basis and has not taken any measures in the past to limit this liability. For fiscal 2011, the city contributed $2.4 million (0.8% of spending), equal to 34% of the $6.9 million ARC. Full funding of the ARC would consume 2.35% of spending.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax Supported Rating Criteria, this action was informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and Zillow.com.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria