Fitch Affirms Hanover County, Virginia's General Obligation Bonds at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'AAA' rating for Hanover, VA's (the county) $151.6 million general obligation (GO) bonds currently outstanding.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, backed by its full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The county demonstrates sound financial management by maintaining ample reserves, controlling expenditure growth, and performing conservative out-year financial planning.

SOLID SOCIOECONOMIC INDICATORS: Wealth levels are above average, and unemployment is low relative to the state and nation.

LOW DEBT BURDEN: The debt burden is low and is expected to remain so given the county's manageable issuance plans. Amortization is above average and debt service spending is affordable.

AFFORDABLE RETIREE COSTS: The county participates in the state-wide pension plan. Annual pension contributions are modest relative to the county's budget, and other post-employment liabilities are manageable.

CREDIT PROFILE

Located in central Virginia with a 2011 population of 100,342, Hanover County is 90 miles south of Washington D.C., and 15 minutes north of Richmond, VA.

SOLID SOCIOECONOMIC INDICATORS

The county continues to experience economic and population growth while maintaining policies designed to balance commercial development with the retention of rural areas. While much of the county is rural and is expected to remain so, commercial and residential development is occurring along the major transportation corridors, guided by a comprehensive plan which addresses schools, transportation, and communication infrastructure needs.

Economic indicators remain positive with high wealth levels, as measured by per capita money income and median household income. The unemployment rate for Hanover County was 5.3% as of September 2012, well below the state's (5.6%) and the nation's (7.6%) averages for the month. In fiscal years 2011 and 2012, employment growth outpaced labor force growth.

SOUND FINANCIAL PERFORMANCE

Fitch considers the county's financial management a credit strength, mitigating concerns raised by recent weakening of certain revenues. Although the county budgeted a $6.2 million draw from general fund balance in fiscal 2011, expenditure reductions throughout the year made the draw unnecessary. Fiscal 2011 ended with a net operating surplus (after transfers) of $9.8 million (5.3% of spending).

The fiscal 2011 unrestricted general fund balance totaled $46.6 million, or a healthy 25.2% of spending. The county's unassigned fund balance of $24.6 million (12.6% of revenues) remains above the county's fund balance policy requirement of 10% of total general fund revenues.

The fiscal 2012 budget included a $10.8 million general fund balance appropriation, of which the county used $1.7 million. Due to declines in assessed values, revenues came in approximately $4.2 million below budget. However, revenue declines were offset with expenditure savings.

To assist with managing resources during a time of fluctuating revenues, management utilized a revenue stabilization reserve which is included in the county's assigned fund balance. The county's fiscal 2012 unrestricted general fund balance totaled $45 million, or a still sound 23.5% of spending. The unassigned fund balance of $23.9 million remained above the policy minimum at 12.6% of revenues.

The county generates the majority of its revenue from property taxes (66% of fiscal year 2012 revenues). The county's tax rate is competitive at $0.81 per $100 of assessed value. The county has not raised its tax rate since 2004, providing a measure of financial flexibility going forward.

EXPECTATIONS FOR FISCAL 2013

The fiscal 2013 budget was adopted without a tax rate increase. Management included a $14.9 million fund balance appropriation, which will be used for county operations ($8.5 million) and school operations and projects ($6.4 million). Management expects to fully utilize the appropriated fund balance, reducing the unrestricted fund balance to a still healthy $31 million or 15% of budgeted fiscal 2013 spending. Unassigned fund balance is expected to remain above the policy minimum.

LOW DEBT LEVELS

Overall debt ratios are low at 1% of taxable assessed value and $1,537 per capita. Fiscal 2012 debt service totaled $19.8 million or a manageable 10% of spending. County debt levels should remain low given projected adherence to conservative debt affordability policies and the demonstrated willingness to defer capital projects to increase financial flexibility.

The fiscal year 2013-2017 county and school capital improvement plan totals $187.9 million of which $89.9 million is for county needs. The county assumes substantial use of pay-as-you-go financing to fund plan projects, with some borrowing likely in the later years of the plan. County debt amortizes at an above average rate, with more than 70% to be retired over the next 10 years.

AFFORDABLE RETIREE COSTS

The county participates in the statewide pension plan, the Virginia Retirement System (VRS). For fiscal 2012, the county's contribution was fully funded at $5.3 million, equal to a manageable 2.8% of spending. VRS reported a system-wide funded ratio of 72.4%, based on a 7.5% discount rate. Using Fitch's more conservative 7% discount rate assumption, VRS as a whole is funded at 68.7%, a level Fitch considers below adequate.

The county funds other post-employment benefits (OPEB) on a pay-as-you-go basis, which was equal to $696,000 or 0.4% of spending in fiscal 2012. The county's OPEB trust is fully funded with a balance of $247,000 as of June 30, 2012.

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 Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria and Related Research:

-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);

-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Leora Lipton, +1-212-908-0507
Analyst
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Leora Lipton, +1-212-908-0507
Analyst
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com