Fitch Rates Virginia College Building Auth's Educ Facil Revs 'AA+'

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to $331.245 million Virginia College Building Authority (VCBA), educational facilities revenue bonds (21st century college and equipment programs) series 2013A.

The bonds are expected to sell via competition on or about Sept. 17, 2013.

In addition, Fitch affirms the 'AA+' rating on outstanding VCBA educational facilities revenue bonds (21st Century College and Equipment Programs) and educational facilities revenue bonds (Public Higher Education Financing Program).

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority, payable from appropriated funds of the commonwealth's General Assembly.

KEY RATING DRIVERS

COMMONWEALTH APPROPRIATION OBLIGATION: Debt service is funded from direct payments made by the commonwealth of Virginia pursuant to a payment agreement, subject only to legislative appropriations, resulting in a rating one notch below Virginia's 'AAA' general obligation (GO) rating.

CONSERVATIVE COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). Revenue performance has improved considerably since the recession and deposits to the state's reserve fund are budgeted per policy during the current biennium, including a prepayment towards deposits required in the next biennium.

DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. Reductions in government sector employment over the next few years are likely as the federal government contracts.

BELOW-AVERAGE DEBT LEVELS: Virginia's debt ratios are in the lower-moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant.

PENSION FUNDING REFORMS: The funded status of Virginia's retirement system has declined in recent years, due in part to an underfunding of actuarially required contributions to the system. The commonwealth has adopted a series of pension reforms that are expected to result in increased contributions to the system and limit further growth in the state's pension liabilities in the coming years.

RATING SENSITIVITIES

The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked.

CREDIT PROFILE

The bonds are payable under a master indenture from amounts appropriated by the Virginia General Assembly, pursuant to a payment agreement. The bonds offered are the 29th parity series under the 1996 master indenture and will finance capital projects and equipment acquisition for the commonwealth's public higher education institutions. The projects have been legislatively approved and involve central commonwealth agencies, including the authority and the commonwealth's treasury board, which approves all bond issues payable from commonwealth appropriations. The higher education system has broad state support.

COMMONWEALTH FINANCES REMAIN SOUND

The commonwealth's 'AAA' rating reflects its substantial economic resources, conservative approach to financial operations which includes periodic revenue forecast updates, and lower-moderate debt levels. Economic and revenue performance has improved since the start of the 2010-2012 biennium, which began July 1, 2010 and continued through fiscal 2013 (the midway point of the current biennium). Revenue over-performance through fiscal 2012, combined with spending that was ultimately below budgeted levels, allowed the commonwealth to close the 2010-2012 biennium on June 30, 2012 with a surplus of $448.5 million.

The state made a $133 million RSF deposit in fiscal 2013, and an additional $245 million deposit is budgeted for fiscal 2014. Both deposits are required under constitutional provisions to dedicate a portion of annual tax revenue growth to the RSF. The legislature and governor also enacted a further $95 million prepayment towards RSF deposits required in the next biennium. Based on unaudited fiscal 2013 results, a $243 million deposit will be due in fiscal 2015. Following these deposits, the rainy day balance is expected to increase substantially from its current level of $440 million to $688 million at the end of the current biennium (June 30, 2014), and $938 million at the close of fiscal 2015.

Additionally, Fitch notes that $30 million is programmed for deposit to a Federal Action Contingency Fund (FACT) to address the risk of federal deficit reduction, with a further appropriation of $30 million contingent on attainment of a budget surplus during the current 2012-2014 biennium (which began on July 1, 2012 and spans fiscal years 2013 and 2014). Assuming $60 million is ultimately set aside in the FACT fund, when combined with the expected $688 million in the revenue stabilization fund, the commonwealth is projected to have $748 million, representing approximately 4.4% of forecasted fiscal 2014 revenues, in reserves by the close of the 2012-2014 biennium.

The amended budget for the 2012-2014 biennium provides for general fund spending of $35.1 billion over the two-year period, reflecting growth of 10.4% over amended 2010-2012 budgeted biennial spending. Revenue growth of 3.6% and 3.9% is reasonably projected for fiscal years 2013 and 2014, respectively. The amended budget includes the aforementioned reserve deposits as well as an early deposit of $95 million towards the required 2014-2016 biennium contributions; increased funding for the state's retirement system to partly address contribution savings taken during the downturn; growing Medicaid funding requirements; as well as additional support for K-12 education and higher education including $59 million to fund 2% raises for public school teachers; and $45 million to restore local aid reductions.

Preliminary unaudited results for fiscal 2013 indicate a strong general fund surplus of $585 million, generated through a combination of revenues and expenditures performing ahead of budget. Revenues increased 4.8% year-over-year (yoy), versus the 3.6% forecast. Income tax revenues were a key driver with individual and fiduciary income taxes up 6.9% yoy. Sales and use tax revenues were also up 3.2% yoy, and total tax revenues increased 5.2% from fiscal 2012. Fitch anticipates federal sequestration will negatively affect the commonwealth's general fund revenues, primarily sales and income tax collections, given the state's exposure to federal government and government-related employment. While the full extent of any decline is unclear, Virginia maintains sound, and growing, reserve levels to offset revenue volatility.

BROAD ECONOMIC BASE

The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 by 3.2% and 0.1% in 2010, though this performance was less severe than national declines of 4.4% and 0.7% for 2009 and 2010, respectively. Virginia employment bottomed out in mid-2010, and 1.2% and 1.1% growth was recorded in 2011 and 2012, respectively. As of July 2013, yoy growth was 1.5%, just slightly below the 1.7% growth for the nation over the same period. Some employment losses associated with expected Federal government contraction are expected in the near-to-medium term given the significant federal and related private sector presence in the northern part of the state. While Fitch will continue to monitor the effects of this contraction, the agency believes the strength of the state's economy will allow it to absorb anticipated losses without significantly weakening Virginia's credit profile. Unemployment has historically been well below the national rate, and the 5.7% rate for July 2013 represents just 77% of the U.S. rate for the same month.

Personal income growth in Virginia has been strong through most of the last decade, typically exceeding that of the nation. After a 2.8% decline in 2009 (comparing favorably with the national decline of 4.8%), personal income grew for the next three years. Growth in 2010 of 4.1% and 5.4% in 2011 exceeded U.S. growth, while 3.2% growth in 2012 slightly trailed national growth of 3.5%. Quarterly data through 1Q'13 indicates personal income growth continues to slightly lag the national trend. Personal income per capita growth also lagged the national rate in 2012, but remains high at $47,082 or 110.3% of the U.S. average in 2012. Virginia ranks eighth among the states on this metric.

WELL-MANAGED DEBT PROFILE

The commonwealth's debt ratios are in the lower-moderate range and have grown slightly over the past fiscal year. As of June 30, 2013, net tax-supported debt totaled approximately $10.8 billion (preliminary, unaudited basis), equal to 2.8% of 2012 personal income. GO debt constitutes approximately 17% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued balances outstanding, and planned transportation borrowing is being expedited.

PENSION LIABILITIES

On a combined basis, the burden of the state's net tax-supported debt and unfunded pension obligations equals 4.7% of 2012 personal income, below the median for U.S. states rated by Fitch. The adjusted calculation includes only the state's portion of the total liability to the Virginia Retirement System (VRS). The system-wide funding of the VRS has declined in recent years in part due to underfunding of contributions, and the June 30, 2011 funded ratio was 69.9%, down from 84% funded on June 30, 2009. As of 2011, the system utilizes a 7% investment return assumption, in line with Fitch's standard adjustments to pension system liability calculations for other governments. While certain pension reforms were adopted in 2010, additional reforms addressing required contribution levels and various plan design changes have been adopted and are expected to limit further growth in the state's pension liabilities in the coming years.

TRANSPORTATION FUNDING CHANGES

During the 2013 legislative session, the general assembly adopted HB 2313, eliminating Virginia's fixed per-gallon motor fuels tax and replacing it primarily with various percentage-based consumption tax changes. The commonwealth projects the bill will add up to $3.5 billion in new transportation funding over the next five years and eliminate reliance on capital construction funds for basic roadway maintenance. Specifics include a new percentage-based sales tax on motor fuels, a larger share of an increased general sales and use tax, an increased tax on motor vehicle sales, and a registration fee surcharge for hybrid, alternative fuel and electric vehicles. The bill also increases the existing general sales and use tax allocation to education funding. These changes will affect both general fund and transportation-related funding, and Fitch will assess the credit effects as they are implemented.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from the Underwriter and IHS Global Insight.

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801990

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1 212-908-0575
Managing Director
or
Committee Chairperson
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Senior Director
or
Media Relations:
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elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1 212-908-0575
Managing Director
or
Committee Chairperson
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com